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The real impact of e-commerce on retail

Altierre Corporation, June 2018

Its commonly held that E-Commerce today is a shade under 10% of total U.S. retail sales (Fig. 1). While strictly true, this does not begin to express the real impact on E-Commerce on most retail businesses. To see that, you must break down retail sales into appropriate categories and look at the impact of E-Commerce on each.

Figure 1) Retail and E-Commerce Year-Over-Year Sales Growth Rate (Left) and E-Commerce Retail Sales as Percent of Total Retail Sales (Right); Recessions are Shown in Grey (https://fred.stlouisfed.org/)

U.S. Retail sales is best categorized by using the North American Industry Classification System (NAICS) that the Federal statistical agencies use in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy (Fig. 2).

 

Figure 2) 2017 Retail Sales in Billions of U.S. Dollars By NAICS Category; Total = $5,075B

GAFO = General Merchandise,Apparel and Accessories,Furniture and Other Sales

https://www.census.gov/retail/index.html

While overall E-Commerce was 9.5% of total retail in the first quarter of 2018, the E-Commerce penetration as a function of NAICS category varied significantly. Take Gasoline Stations as an extreme example, where E-Commerce as a percent of total gasoline sales is zero. A less extreme example is Food & Beverage Stores sales, which is primarily made up of Grocery Store sales. E-Commerce sales as a percent of Food & Beverage Stores sales was approximately 1.7% in the US. For Motor Vehicle & Parts sales, the second largest category, E-Commerce sales was approximately 3.5% of the total1.

What’s the punchline? By breaking out retail sales by category and then calculating the percent of E-Commerce sales for each category, the most highly penetrated category in 2017 was GAFO approximately 26%, roughly one in four dollars (Figure 3). In the first quarter of 2018 that percentage had increased to 28%. Now you’re probably asking: “What in the world is GAFO?”, and “Who cares?”. GAFO is the NAICS category that encompasses retailers that deal in the following set of goods: 1) general merchandise retailers, 2) furniture & home furnishings, 3) electronics & appliances, 4) clothing & accessories, 5) sporting goods, hobby, book, and music, and 6) office supply, stationery, and gift stores. In other words, it’s the first thing we think of when we hear the words department store retail.

Figure 3) GAFO and E-Commerce Year-Over-Year Sales Growth Rate (Left) and E-Commerce GAFO Retail Sales as Percent of Total GAFO Retail Sales (Right); Recessions are Shown in Grey

(https://fred.stlouisfed.org/, Statista, Author Calculations)

 

See the problem? A headline number of 9.5%, can be thrown around casually, and would suggest that if you’re a conventional retailer, while things aren’t great, there is more than enough time to respond. But when that percentage is 28% and growing rapidly, which is the case for department store-type retailers, the sense of urgency needs to be completely different. While the annual growth rate of GAFO has been approximately 2.5% for the past several years, E-Commerce has grown at approximately 10% annualized; 4 times the GAFO growth rate. If the current relative growth rate continues, one in three department store dollars will be spent on-line by 2020.

If department store retailers were simply shifting sales from their Brick & Mortar stores to their E-Commerce sites, the change of channel could be managed by shifting priorities and investment strategies. But an additional threat is that one retailer, Amazon, had approximately 20%, one in five dollars, of total US E-commerce sales in the fourth quarter of 20172. And, Amazon is growing at a faster rate thanthe overall retail industry. Therefore, it can’t be business as usual or tweaking strategy around the edges for Brick & Mortar department store retailers. A chart of store openings and closing between 2006 and 2016 clearly shows the impact of the changing retail landscape (Figure 4). With Amazon’s purchase of Whole Foods in 2017, grocery retailers are on notice. Will grocers, for which on-line sales was only 1.7% in 2017, suffer the same fate as department stores retailers in the near future?

Figure 4) Differences in Open Store Counts 2016 vs. 2006

(“Digitally Engaged Food Shopper” Nielsen March 2018)

The challenge to all retailers is multi-dimensional. It involves differentiation in merchandising strategy, customer store experience, and customer omni-channel experience as well as navigating the demands of operational excellence. While there is currently a great deal of technology experimentation in the retail world, the focus needs to be maintained on the customer. Customers expect value, guidance, and a seamless transition between their on-line and in-store experience. They prefer personalized promotions and when they take the time to go into a store they expect to find what they are looking for to be in stock and to not have to wait to checkout when making a purchase.

Retailers are working hard to determine the optimal combination of technologies to meet these customer expectations. Having the right data and being able to extract actionable insights from that data is an integral part of that equation. While retailers have a great deal of useful data when their customers shops on their E-Commerce site (by the way almost one in four shoppers begin researching their product purchase on Amazon’s website), they are almost blind once that same customer steps into their physical store. The combination of Electronic Shelf Label (ESL) and In-Store Locationing technology coupled to advanced analytics addresses this problem. ESLs enable stores to offer customers personalized promotions, product reviews, advice, and product bundling at the exact product location by linking to a store’s E-Commerce site. They also enable the store to ensure that their E-Commerce and In-Store pricing is consistent by enabling dynamic pricing. When linked to a store’s POS system, the retailer will also know when a customer showed interest in a specific product and chose not to purchase it, so that retailer can follow-up on-line if appropriate. When coupled to an In-Store Locationing system customers can also be guided to the product they are searching for and retailers can even measure customer dwell times. This provides a rich dataset, that can stand alone in terms of providing actionable insights to further improve a customer’s in-store experience. When in-store data set is combined with a retailer’s E-commerce data set, both in generalized terms and for a specific customer, the ability to further service customers and increase operational effectiveness is enhanced.

Until recently, the narrative for retailers has exclusively been about eCommerce cannibalization and how a store network is anachronistic – an impediment to growth. Surely Amazon must be insane to be opening physical stores. Didn’t they kill book retailers? So why open physical stores? Increasingly, retailers are once more viewing their stores as assets, not simply as a means to sell to customers, but as a destination, an experience. For physical stores to compete with online retail there are three key areas which the in-store experience must incorporate.

  • Navigation
  • Individualization
  • Breadth of Offering

Navigating a well designed eCommerce site is simplicity itself, tools like visual search and voice search make locating items simple and easy, Altierre’s platform offers the same simplicity for in-store navigation with an augmented reality application that can leverage the same techniques as eCommerce in a physical store through our partner Sirqul.

Individualization on an eCommerce site is simple, as most sites either cookie the shopper or require a login. Altierre’s connected store platform enables the same individualization to be delivered to a shopper on their mobile device. Altierre’s partner, Eversight, can provide intelligent, individualized recommendations which are delivered to the shopper via a loyalty asset leveraging location intelligence and NFC capabilities integrated into Altierre’s ESL.

The NFC capability native to Altierre’s ESL also provides a direct point of connection to inventory and items which may not be physically located in the store – fully enabling shoppers to leverage the omni-channel options available from the launchpad of the physical store.

As retail evolves, shoppers seek richer experiences, deeper connections to retailers and brands, and a dialogue which informs them about products and services which interest them. The ability to provide this dialogue with shoppers directly in the aisle – enabling retailers to bring relevant content to shoppers could well be the difference between the retailers who thrive in the future and those who fail.

 

1The breakout of E-Commerce sales was calculated by combining Tables 4  (U.S. Retail Trade Sale – Total and E-Commerce) and 5 (U.S. Electronic Shopping and Mail-Order Houses – Total and E-commerce Sales by Merchandise Line) from the US Census Bureau database. Since 2017 data isn’t available yet, the 2017 breakout was estimated by extrapolating from 2012 – 2016 historical trends.

2Amazon’s 2017 sales are often reported to be ~44% of US E-Commerce and ~4% of total US retail sales. Strictly speaking this figure is derived from an apples and oranges comparison since it includes Amazon’s web services revenue ($17.5M) and international revenue ($54.3M). Correcting for that, Amazon’s 2017 US retail sales (which only include approximately four months of Whole Foods revenue) was ~1.4% of US retail sales and assuming that a relatively small percentage of Whole Food’s 2017 sales were E-Commerce, ~16% of US E-Commerce retail sales; ~20% in Q4 2017. While these are still very large numbers, they are much

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