You are forgiven for assuming the future is bleak for traditional retailers with large numbers of brick and mortar stores. It seems that almost every day there is negative news of retailers filing for bankruptcy and closing stores – the phrase “Retail Apocalypse” even has its own Wikipedia entry.
The conventional wisdom is that even the continued secular growth of ecommerce will not save traditional retailers, as Amazon took approximately 46% of U.S. ecommerce growth in 2016. The situation seems dire: through June of this year at least 17 national retail chains have declared bankruptcy, and Business Insider counted 29 that are closing more than 6,300 stores.
If you only read the headlines, the situation looks dire. But as is frequently the case, reality is more nuanced than the headlines.
To better understand the reality of the situation, start with ecommerce, where sales grew 16% in the second quarter of 2017, according to the U.S. Department of Commerce, the fastest pace since the third quarter of 2012.
Among a group of 11 of the largest traditional U.S.-based brick and mortar retailers (Bed, Bath & Beyond; Best Buy; Dick’s Sporting Goods; The Home Depot; JCPenney; Kohl’s; Lowe’s; Macy’s; Nordstrom; Target; Walmart), nine reported online sales growth that outpaced total ecommerce; the other two reported online sales grew by double digits. Four retailers (Walmart; Lowe’s; Target; Best Buy) even grew online sales at a more rapid pace than Amazon, which was up 27% in the second quarter.
So online growth is strong, but how about in stores? Surprisingly, offline retail is not all carnage. Among the retailers named above, only four of them, who happen to be in the general merchandise or home category, experienced a decline in same-store-sales in the second quarter.
Declining same-store-sales is clearly a bad thing, but shifting investment into ecommerce and closing stores to help free up capital to do so makes good business sense.
There are similarities in the omnichannel playbook across a diverse group of traditional retailers, with a focus on aligning physical stores with the ecommerce channel, investing in private brands, and aggressively expanding product assortment.
Omnichannel Investments are Paying Off
Retailers have invested in omnichannel initiatives for years, with the goal being to drive consumer traffic into stores and, at least before the Whole Foods acquisition, provide delivery options that even Amazon lacked.
It looks like these investments are beginning to pay off, with significant unit volume now being fulfilled by stores and/or picked up in stores by consumers. In its second quarter 2017 earnings call, Target said 40% of its online unit volume was fulfilled from stores. By the end of 2017, the company expects to be fulfilling orders from 1,400 of its 1,800 U.S. stores.
The picture is similar at Kohl’s, where 31% of online orders were either picked up in store or shipped from store. Impressive as that is, the prize for the “king of omnichannel” might go to Best Buy, where approximately 50% of unit volume was picked up in store or shipped from store in the second quarter of 2017.
Private Brands Offer Differentiation from Amazon
Retailers have created differentiated product offerings with private label brands for years. This strategy has only grown in importance, because these items are not available through other retailers, Amazon included. Four of the 11 retailers we analyzed specifically mentioned private brands as growth drivers during the second quarter of 2017. Private brands have been especially successful at Target, where the Cat & Jack clothing line is a now a $2 billion annual revenue business.
Extended Assortments Give Consumers What They Want
Robert W. Baird estimated in mid-2016 that between Amazon’s first-party retail operation and third-party marketplace it was offering more than 400 million products for sale. Walmart recently disclosed it offers 67 million items online. It’s no coincidence that two of the largest and fastest growing e-tailers have two of the largest product assortments.
At CommerceHub, part of our focus is on the use of virtual inventory and drop shipping. Through our research we estimate that on average, increases in product assortment accounts for approximately 70% of a retailer’s online gross merchandise value (GMV) growth. In addition, across our network of retailers we have observed a 12% increase in GMV for every 10% growth in the number of unique products sold.
The success of Amazon, Walmart and others shows that assortment expansion drives revenue growth, and retailers are using multiple strategies to do so. With such a strong correlation between assortment expansion and revenue growth, the only question for retailers is how to fulfill orders. For many, drop shipping presents the most capital efficient way to add products without large incremental investments in inventory or warehouse operations.
This is not to say that traditional retailers are in the clear. They face life-and-death challenges restructuring their businesses to succeed in a world increasingly dominated by ecommerce. But by differentiating from Amazon, using expanded product assortments enabled by innovative technologies and leveraging stores as delivery assets, retailers can satisfy consumers and take their own share of the growing ecommerce pie.
Erik Morton is Vice President of Strategy and Corporate Development for CommerceHub