The traditional retail industry is currently in a state of decline, especially when it comes to major brick-and-mortar retailers of electronics, clothing, and other consumer discretionary items. E-commerce is a significant factor of this decline in the industry. Among e-commerce’s victims are many giant retailers like Macy’s, J.C. Penney, Victoria’s Secret, and Gap. This decline in sales and profitability has dire implications for the industry and its leaders if changes are not implemented.
The Rise of E-Commerce
Brick-and-mortar stores have seen large declines in foot traffic in recent years. Consumer preferences have changed, and the market is saturated. Retailers maintain far too many physical locations and see far too little foot traffic. The upkeep of so many locations is debilitating, especially when they are not generating profits for the company. Macy’s will be closing one hundred of its department stores over the next few years. Large online retailers like Amazon have been wildly successful. With innumerable items and services offered, fast shipping, video streaming, and even more, Amazon covers all bases. Moreover, Amazon recently penetrated the brick-and-mortar market as well with its Amazon Go venture, a new physical store that uses advanced technology to eliminate traditional register checkout.
With sales revenues dropping, retailers are either closing store locations or being pushed out of or leaving the market due to severe losses. Nonetheless, with e-commerce on the rise, retail barriers to entry are dropping. Without having to maintain storefronts and a brick-and-mortar distribution network, huge capital costs are essentially eliminated for those looking to enter the market as wholly online retailers.
The Fall of Brick-and-Mortar
Traditional department store retail is slowly becoming a thing of the past. Longtime industry leaders and smaller retailers have to consider completely converting their platforms. Currently, most retailers have large brick-and-mortar foundations with small online presences. To remain competitive, financial analysts and consultants have recommended shifting to a larger online presence with a smaller brick-and-mortar one. This would mean closing thousands of stores nationwide, which would have large-scale implications for unemployment in the U.S. Hundreds of thousands of people could lose their jobs in the coming years. Macy’s plans to cut ten thousand jobs in the next few years in combination with its closing of one hundred stores. Consumption and expenditure will decrease as unemployment rises. Nonetheless, if these major retailers do not adapt to cut high capital costs and end up failing, unemployment could potentially skyrocket at a fast-pace if the industry collapses. This S&P Global chart depicts the increase in retail defaults below:
S&P expects this number to grow in the coming years. The rise of e-commerce has greatly contributed to the shift in consumer preferences and rise in retail defaults. RadioShack, Sports Authority, and American Apparel are perfect examples of large brick-and-mortar retailers who have failed in recent years. Internationally, domestic imports and exports would take a hit as many international retailers lose revenues or fail. If retailers do not adapt, the declines and defaults that ensue would adversely affect GDP and economic growth in the United States.
The retail industry needs to reevaluate its business structure, namely the issues surrounding its brick-and-mortar saturation. Having so many stores with such decreasing foot traffic will only lead to even greater economic losses as the e-tailers continue to grow and expand. Advisory and investment firms including GlassRatner and Jefferies both advise retailers to increase their digital footprints and reduce their brick-and-mortar base. To attempt to keep up with massive online retailers like Amazon, this transition needs to happen as soon as possible.
- Micro: revenues dropping à firms closing stores/leaving market; rise of e-commerce reducing capital costs and increasing profits for some à lower capital costs = easier entry to market
- Macro: closing physical stores increases unemployment à less household spending as unemployment rises; GDP decreases as companies go out of business
- Economic theory: reduction of physical capital will reduce economic losses created by lack of sales in brick and mortar stores.
- Analysis: performed analysis on certain major players in the industry and determined how hundreds of thousands would be jobless in the coming years as they close brick-and-mortar stores
- National/International situation: decline of retail companies reduces domestic imports/exports, but the rise of e-commerce spurs international trade because of its ease