- Online retail is relentlessly taking share in many specialty retail categories, resulting in total dollars available to physical retailers stagnating or even declining. This is starting to put intense pressure on their top lines.
- Physical retailers are very highly leveraged and often have narrow profit margins. Material declines in their top lines make them unprofitable and quickly bankrupt.
- Online retail will benefit greatly from the elimination of their physical competition and their growth should accelerate.
“Retail chains are a fundamentally implausible economic structure if there’s a viable alternative,” he says. “You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20 to 30 percent in revenues. It just doesn’t make any sense for all this stuff to sit on shelves. There is fundamentally a better model.”
“Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice,” he says. “We’re still pre-death of retail, and we’re already seeing a huge wave of growth. The best in class are going to get better and better. We view this as a long term opportunity.”
Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.
Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows.
Shoppers like Sara Rhein see little reason to spend much time in brick-and-mortar stores. “I love to shop, but since having three kids the mall is the biggest waste of time I can think of,” said Ms. Rhein, 37 years old, who works at a Washington nonprofit. “My weekends are one long to-do list, so I’ve gravitated to online retailers that make it easy for me to shop without having to go into the store.”
“These retailers are fighting an uphill battle,” said Cowen & Co. analyst Faye Landes. “If people don’t come to your stores, it reduces the possibility shoppers will buy anything.”
“It’s been a pretty tough environment,” said Brian Lazorishak, portfolio manager at Chase Investment Counsel, which manages about $460 million in Charlottesville, Va. “The news seems like it’s going to continue in that direction.”
Thursday brought a stark example. Shares of electronics retailer Best Buy Co. BBY , the third-biggest gainer on the S&P 500 in 2013, tumbled 29%, wiping out more than $3 billion in market value. The merchant’s strategy of deep price cuts failed to boost sales last month, hitting profit.
As of Jan 17th: Best Buy Stock Price loses ~40% value in 2 Days i.e. goes from 37$ on Jan 15 to $24 on Jan 17