June 28, 2016
Sometimes, amid the potpourri of skyrocketing absolute numbers on e-commerce, we forget to look at the bigger picture and ask a question: what part of total retail sales does e-commerce actually make? With all the hype and development of solutions around online shopping and payments, the US Census Bureau recently shed some light on the state of the industry and estimated e-commerce sales in the US to make up 7.8% of total retail sales in the country in Q1 2016. Not such an eye-popping number, isn’t it?
The good part, although, is that e-commerce demonstrates a steady growth almost every quarter since 2007. Between 2007 and 2016, e-commerce sales have tripled in absolute numbers hitting $92.8 billion in the first quarter of this year.
Overall, the retail industry seemed to be underperforming in Q1 2016 in comparison to the previous quarter with total sales shrinking by 0.2%. However, on YoY basis, total sales in retail have grown by 2.2% and reached $1.18 trillion.
With a dip after the 2008 crisis, the retail industry has been steadily gaining sales. Although e-commerce comprises quite a limited part of total retail, as the industry grows, the e-commerce landscape is transforming and growing.
Given the pace of tech development in recent years and changing consumer habits, the growth may be accelerated in the coming years. Mobile is perceived to be a major driver in retail as a third of global online transactions are estimated to be on mobile now. Moreover, the vital necessity to turn to mobile shopping experience is also supported by the fact that by the end of 2021, 90% of mobile data traffic is expected to be from smartphones.
However, for retailers to be able to leverage the trend, it’s important to focus efforts on developing superior digital experience with seamless checkout options. In particular, touch-based checkout has been the focus recently and believed to have a significant impact on sales.
Touch payments are leveraging impulsive purchasing behavior and are able to drop sales cycles from 103 to 17 seconds. Frictionless payments opportunity has a significant impact on the outcome as the complicated process of typing in personal and financial data is a big turn-off for customers.
But however fast the growth of e-commerce goes, the most recent study from USPS suggests that 20% of retail purchases are searched and made in stores + 14% searched online but made in stores + 8% searched both online and in stores but made in stores. At the end, in-store purchases comprise 42% of all purchases regardless of where the search started. Although it's less than half, the value of those purchases is significantly higher than the value of online purchases if we were to combine it with the US Census Bureau’s data.
Image source: USPS
Physical stores remain an important force in retail regardless of a fierce competition because the desire to experience the product before purchase remains unchanged for certain categories. However, it is also estimated that in-store purchases have been declining in the past couple years – USPS suggests that store-only purchases declined from 22% to 20% from 2015. The trend will probably remain if brick-and-mortar does not find a way to redefine retail using some of the modern technologies (like VR).
As Howard Meier, CCIM, a vice president and commercial broker at Hummingbird Real Estate Brokerage in Toronto, fairly noted, "People still want to touch and see the products they want. Retailers have to create newer experiences." At the end, online will not drive brick-and-mortar pit of business, they will create a junction of forces to drive sales.
"Online and retail are supplementing each other," said Tanner Laverty, CCIM, Managing Broker for Laverty Chacon Commercial Real Estate in San Francisco. "These are totally new concepts that will add to the absorption of traditional retail spaces. You will have segmentations within the market, where one retail aspect of Amazon might just sell computers. And with newer FAA regulatory legislation for drone use for deliveries being introduced, you will start to see even more changes."