Thursday, September 29 2022

One of the most prevalent narratives from the retail industry is the belief that the growth of online shopping has been massively accelerated by the pandemic. Set your WABAC machine to Spring 2020 and you’ll find dozens of references on how we experienced “10 years of growth in just 3 months”. Even with the great (and easily predictable) moderation that occurred later that year, the “great acceleration” scenario persists to this day.

There is only one small problem: it is simply not true. On average, e-commerce penetration is only slightly higher than we would expect if the pandemic had not happened. And as fun as it might be to call bulls*** on people who are paid to know better, the much bigger problem is that if you bought into that mistake, you might well have done the exact opposite of what that you should have.

Facts are stubborn things

You don’t need to be a statistician to fit a trend line to the featured chart of US Census Bureau data featured in last week’s Wall Street Journal article on Buyers Returning to Physical Retail. My fellow Forbes contributor Jason Goldberg calculated that ‘out-of-store’ sales (a decent indicator of ‘e-commerce’) were up about 35% from two years ago when the Covid crisis first hit. That’s significant growth to be sure. But considering that the compound annual growth rate for e-commerce has been around 15% over the past decade, that’s not even a year of acceleration.

The future will not be fairly distributed

The importance of online shopping (and its potential for future growth) is often radically different depending on the product category. For example, eMarketer estimates place the online share of total food spending at around 5%, clothing and accessories at almost 40%, and books, music and videos at almost 70%. Averages for such a diverse industry can be misleading.

And it is clear that hardware acceleration has occurred. BOPIS, curbside pickup and many other digital technologies have been more widely adopted than they otherwise would have been. Online grocery and food delivery probably accelerated in growth by 2-3 years (but let’s see where we are in 12 months).

What is “e-commerce” anyway?

Even if the material downturn in online shopping turns out to be temporary – or you operate in a category with significantly above-average e-commerce penetration and/or growth prospects – the implications of a continues require a much more nuanced perspective.

As I’ve been pointing out for years, we often get things wrong when it comes to e-commerce. What we commonly call “e-commerce” (and what is reported as online shopping revenue) simply reflects how the order is placed. It tells us nothing directly about how the demand was generated, how the order was fulfilled, and what assets and capabilities are critical to creating competitive advantage.

You’re probably doing it wrong

The big problem with buying into the “everything goes faster online” narrative is that it more often than not leads to the conclusion that brick and mortar will become increasingly unnecessary. And why would you want to invest in a depreciating asset? Why in the name of God would you open stores? Why wouldn’t you rather invest aggressively in pure e-commerce brands and regional e-commerce distribution centers?

While many brick-and-mortar businesses are becoming irrelevant – I’m looking at you JC Penney – many are actually becoming more relevant and important. One of the best examples is Target

which makes about 20% of its sales online, but makes about 95% of its physical sales.

As we discuss on this week’s episode of the Remarkable Retail podcast, before the pandemic (and despite all the nonsense of the retail apocalypse), Target doubled down on its stores, viewing them as the hub of a well-harmonized customer experience. Despite the surge in e-commerce, Target doubled again earlier this year, announcing even more investments in stores and related technology to support its industry-leading omnichannel capabilities. Challenging the “software eats retail” narrative has led to dramatic results: Target stock has grown nearly 350% over 5 years.

Your mileage will vary

It is highly likely that what is earmarked as “e-commerce” revenue will grow at a much faster rate than sales recorded at a physical store in the future. It is possible that an exogenous factor and/or a bold new technology will drastically change the slope of penetration on the part of e-commerce in the future. Whatever new disruption occurs will almost certainly affect different categories of retailers and individual businesses disproportionately. Agility and embracing a culture of experimentation will be key.

But even more critical is being able to separate the signal from the noise. In the end, often what seems true is anything but.


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