Is E-commerce eating retail?

There’s no doubt that digital technology is transforming the retail industry all over the world. Digital gadgets are changing how customers discover, decide, purchase, receive, use, and return products. More and more customer interactions are taking place entirely online. Over the past 15 years, e-commerce sales have grown to about 5% of total retail sales (excluding gasoline and food services) and about 10% of top 30 product categories.

But though the e-commerce growth rate is impressive, it has slowed from about 28% per year in the early 2000 to less than half that rate today. If the trend continues, e-commerce sales will increase from 10% of top 30 categories to about 16% by 2030 — higher in some (such as music) and lower in other (such as food) industries. While 16% is a significant number, it does not exactly result in the end of physical stores.

The current hyperbole that e-commerce is going to eat retail businesses also misses the mark in other significant ways:

  • About half of those e-commerce sales are actually going to retailers with physical stores. Brick and mortar retailers still control between 945% and 98% of total retail sales. Several large store-based retailers (including Apple and Walmart are growing their e-commerce sales even faster than Amazon.
  • It’s more and more difficult to distinguish e-commerce sales from others. Imagine that a customer goes to a Walmart store, learns that the product is out of stock, and uses her smartphone to order the product from another Walmart outlet, which ships it to her home the same day. Is that an e-commerce sale or a physical one?
  • Online only retailers don’t have the economic advantages that many observers ascribe to them. Analyzing the profitability of public e-commerce retailers, including the mighty Amazon, it was found that e-commerce’s pricing advantages mostly stem from unsustainably lower profit margins rather than from lower costs. The information technology, distribution centers, shipping, and returns processing required by e-commerce companies can actually cost as much as running physical stores.

All of these issues point to one conclusion: Dual channel retailers — those that seamlessly integrate the best of both digital and physical worlds at each step of the customer experience — are likely to enjoy significant advantages over retailers that try to pursue either one alone or both independently. For dual channel retailers, websites and mobile apps are not just e-commerce ordering vehicles, they are front doors to the stores. Now a days, stores are not just showrooms, they are digitally-enabled inspiration sites, testing labs, purchase points, instantaneous pickup places, help desks, shipping centers, and return locations.

Stores don’t necessarily need as much foot traffic as they have had in the past to succeed. If 20% of their sales are shipments from online orders to nearby customers, they are still valuable. That’s why so many companies that began as pure e-commerce plays have added physical stores.

As research has found, these principles apply far beyond retailing. In most industries, digital technologies are transforming physical businesses rather than annihilating them. Indeed, the fusion of digital and physical innovations — we call them “Digical” — creates opportunities that most businesses have barely begun to tap. A Digical experience is what consumers want and have come to expect. A Digical strategy, when well executed, almost always outperforms competitors and turbocharges profitable growth. Retailers may be on the front line of these changes, but no company can afford to ignore them.

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