Mix and match Shopping evolves as stores learn from online
In SA, online retailer even reverses trend to open actual stores
● Some bricks-and-mortar stores are beginning to find their feet again, according to reports from the US that suggest the decimation of physical retailers over the past few years may be stalling.
Well-known brands like Toys R Us and Borders Books no longer exist, and icons such as Macy’s are downsizing dramatically.
Last year a record 9.7-million m² of space was closed in the US, according to commercial real estate company CoStar Group, and some believe store closures this year may exceed this. This trend is also evident in the UK, where a number of big retailers have gone into administration or are slashing store sizes.
Charles Allen, a retail research analyst at Bloomberg Intelligence, said store closures across the US were still happening “although maybe some of the large high-profile announcements are not happening any more. Perhaps more importantly, store openings have almost completely stopped. This means that the effect of closures is perhaps greater than previously as there is nothing filling the space.”
But there are signs things are shifting as physical stores respond to changing consumer behaviour by integrating the online shopping experience with an in-store one.
“Stores that have learnt how to match the ease and instant gratification of e-commerce shopping are flourishing, while those that have failed to evolve are in bankruptcy or on the brink,” said an article in the New York Times this month.
Many successful stores are now a cross between a fast-food drive-through and a hotel concierge, it said.
Department store Target’s shoppers, for instance, can order sunscreen or a shirt on their phone, head to the parking lot and have these products brought to their car. Nord- strom lets customers in some stores return items by dropping them into a box and walking out with no need to discuss this with anyone. And Walmart is employing 25,000 “personal shoppers” who will buy the goods that are ordered and bring them to the car.
“In recent weeks, all three retailers reported stronger-than-expected sales growth for the quarter. Traffic to Target’s stores and online sites grew at its fastest pace since the company began keeping a record a decade ago,” said the article.
The New York Times said the pace of closings has slowed as companies’ most unprofitable stores have been closed and some companies closed shop. According to Coresight Research, a retail analysis and advisory company, by this time last year nearly 5,700 stores had closed across the US; so far this year, about 4,480 have closed.
“But the stronger players are capitalising on the industry’s failures. Target said it was picking up new toy customers since the liquidation of Toys R Us.”
The Wall Street Journal reported that companies are rethinking the mantra that the future is digital, “and pouring money into actual brick-and-mortar stores”.
Target committed $7bn (R104bn) last year to invest in a plan that involved remodelling 600 stores and opening a new small-store format. Now shopper traffic to Target stores is growing faster than it has in more than a decade. The number of shoppers visiting Target stores jumped 3.7% in the most recent quarter, said a Reuters report.
At the other end of the spectrum is the jeweller Tiffany’s, which is investing as much as $250m in the 78-year-old flagship store in Manhattan.
“Why? Because the bulk of America’s retail is still done the old-fashioned way. Target has consistently increased online sales, but e-commerce represents less than 6% of its revenues. Online sales are closer to 7% at Home Depot but under 4% at Walmart,” said the Wall Street Journal.
“The fading relevance of one-time icons like Kmart, RadioShack and Toys R Us has taught executives that starving stores of investment is a recipe for obsolescence.
“Retailers are smart to better integrate the physical shopping experience with people’s online habits, but now is not the time to give
up on making stores better,” it said.
PwC’s annual Consumer Insights survey shows store investments are justified, as more respondents are visiting physical stores at least once a week, up from 36% in 2014 to 44% this year. This is not to undermine the unrelenting growth of e-commerce, which over the past three years has expanded to an average yearly growth of $40bn, up from $30bn a year between 2010 and 2014.
The South African context is different. Not only do many South Africans like to hang out at shopping centres because of security concerns elsewhere, there’s lack of faith in the postal service, which makes some reluctant to use online services.
Evan Walker, fund manager at 36ONE Asset Management, said: “I still think much of the retail environment will still be challenging for retailers over the next few years.” Growth in online sales still outpaces store growth, while the better-performing retailers are growing at 3%- 4%.
The difference between SA and the US is that it employs 2.5-million more people a year while SA loses 100,000 jobs, he said.
The dollar is strong against the rand “and the US has put millions of people back to work in the past four years, and the economy is pumping with confidence”.
Many local operators have failed to innovate. But Dis-Chem is rolling out smallerformat stores of between 350m² and 650m² in smaller, local convenience shopping centres. Edcon is closing its Red Square and Boardmans brands and will consolidate them within its Edgars brand.
Atiyyah Vawda, a retail analyst at Avior Capital, said operating margins were lower for US retailers due to higher online penetration.
“The US is closer to high single digits while South African operating margins are still in the teens and for some above the teens, depending who you’re looking at. In SA we have a different dynamic; credit is a big driver of revenue, trading densities have not been impacted by online penetration and operating costs per square metre are lower.”
Apparel retailers are actively managing their space growth in SA, even though online penetration remains low at 2% of total sales.
“Having an overly broad network and underperforming stores doesn’t make sense; it weighs on returns and profitability.”
Vawda said retailers have cut back on capital expenditure programmes in this country due to a challenging operating environment, while there’s been a shift in spending away from stores to digital around the world. “It’s a blend of optimal mix between offline and online. Research proves that if a consumer buys online and then returns it instore, there’s a good chance they will buy another product. On average about 20% of people who return make another purchase.”
In some instances it’s the new digital players that are moving into stores. Amazon, which fundamentally changed global retailing with its online sales model, has opened cashier-free stores and bought bricks-andmortar retail business Whole Foods.
Locally, online homeware company Yuppiechef is opening its fourth store next month at the V&A Waterfront in Cape Town, following the opening of its first outlet in October last year.
Owner Andrew Smith said they realised they were missing out on a huge portion of people who didn’t shop online.
“We think the future of retail is not online or offline, it’s a mixture of both.
“We’re overwhelmingly online but there’s a lot of growth from opening stores. It contributes overall to the health of the business. Some people like to see they’re buying from a credible source, especially the big-ticket items. We’re trying to bring the two worlds together.”
Allen said retailers in general were having to invest in stores that remain open “as it is a way of keeping consumers coming to the shops. There is little reason to go to an unattractive shop in preference to shopping online.”
In the US, online penetration of nonfood, nonpetrol, non-car-dealer retail is close to 20%, so store-based retailers have had to reconsider the economics of how to run stores.
“I am sure that South African retailers will have to consider the level of investment they need to build their online presence, and what their future store opening plans may be,” he said.
In SA the low average transaction size online meant stores would remain a primary channel for longer.
We think the future of retail is not online or offline, it’s a mixture of both Andrew Smith
Owner of Yuppiechef