It’s no surprise that we’re doing more and more of our shopping online. There’s an unmistakable upward trend in the share of retail sales that are made through the internet. What is remarkable, however, is the still HUGE potential for growth. In 2015, e-commerce accounted for just 7.3% of U.S. retail sales. That means 93% of sales are still made through traditional brick-and-mortar channels. In the chart below, you can see that e-commerce is just a tiny sliver of total sales. And that means there is lots of room for growth.
Total e-commerce retail sales have risen every year since 2000 (including during the Great Recession when total retail sales fell). In 2000, e-commerce totaled $27.6 billion, or just under 1% of total retail spending. Fifteen years later, it reached $342 billion, a twelvefold increase. And it continues to rise. Over the last five years, the annual growth rate for e-commerce has been 15.0%, compared to 3.6% for traditional retail.
As e-commerce continues to account for a greater market share, significant consequences could be in store for brick-and-mortar retail. The percent of sales attributable to e-commerce is rising in every retail category, with the top categories for online purchases being electronics, media, and clothing. Amazon is the largest online retailer, accounting for 14% of all e-commerce in North America. Globally, companies like Alibaba and JD.com are gaining ground as international consumers change their purchasing habits. In the U.S., the growing role of e-commerce has resulted in hundreds of store closures. Barnes and Noble, Staples, GameStop, The Gap, and JCPenney are among some of the many retailers that have been forced to shutter stores in recent years.
As e-commerce continues to grow, will we still need all the physical retail space that we have built in our communities? Have we reached peak retail space?
In order to answer that question, I’ve done a few back-of-the-envelope calculations based on retail sales data from the U.S. Census. It’s important to note that the growth figures mentioned previously are presented in nominal terms. After adjusting for inflation, the compound annual growth rate between 2000 and 2015 for all retail sales was 0.9%. This means that, on average, overall retail growth has been quite slow over the past decade and a half, increasing by less than 1% per year. Projecting sales forward to 2020 using this same growth rate, total retail sales can be expected to grow from about $4.7 trillion to $4.9 trillion (in 2015 dollars).
E-commerce, by contrast, has been growing rapidly, with growth of 15.7% per year between 2000 and 2015. Projecting this forward, e-commerce could grow from $342 billion to $710 billion by 2020. But the vast majority of this growth would come at the expense of traditional retail, since gains in retail overall will be slight. While this means e-commerce would grow by $368 billion—effectively doubling as a percentage of total retail sales from 7.3% to 14.5%—the flipside is that traditional retail would have to fall (in real terms) by $157 billion. You can see this trajectory in the following chart.
So have we hit peak retail space? If brick-and-mortar retail sales are a good proxy for retail physical space requirements, the answer may be yes. In real terms, traditional retail sales did actually fall very slightly between 2014 and 2015. In fact, traditional retail sales are still below their pre-recession peak, and may never surpass those levels. Could this be the beginning of an accelerating decline?
How Retailers Are Adapting
Some retailers have already begun to adapt to what could be an inevitable shift away from physical stores. In response to lackluster sales, innovative retailers are undertaking efforts to jumpstart customer interest in brick and mortar. For example, cross-channel retailing has gained ground. In the cross-channel model, a customer might browse and research a product online, and then visit the store to purchase that product in person. Retailers have developed mobile apps to make this a more seamless process and enhance the customer experience.
Some retailers offer the option of using self-checkout apps, which enable the customer to scan products with their mobile devices as they shop in a physical store and check out electronically, eliminating the need to stand in line. Other apps offer on-demand customer service, through which customers can get more information on products through their mobile devices as they shop. These sorts of apps are expected to grow in popularity as retailers seek to enhance the physical store experience and appeal to tech-savvy shoppers.
Other retailers are repurposing brick-and-mortar stores into “powerful media points from which retailers can articulate their brand story, excite consumers about products and then funnel their purchase to any number of channels, devices, and distributors.” The goal of these “experiential retailers” is to deliver a memorable experience to consumers, rather than entice the customer to purchase the product at that very moment in the physical store. The thinking goes that customers will then seek out the products they “experienced” through other retail channels, including online. These repurposed stores will be more open and gallery-like, instead of being filled with shelves, and will offer space for in-store media and customer interaction with products.
New revenue models for retail will also gain traction. Instead of generating revenue solely from moving product, retailers will charge vendors an upfront fee based on the volume of positive exposure they bring to the products they represent in-store. In this model, the retailer does not lose out if the customer ends up purchasing the product through an online channel, but still capitalizes on the value it adds to the selling process.
What Peak Retail Space Means for Our Communities
The e-commerce transition has huge impacts for economic development. First of all, communities heavily reliant on traditional retail models for jobs and tax base will need to diversify their economies. Retail store workers will be replaced by “picker packers,” who work in distribution centers and are responsible for pulling, packing, and shipping products, as well as delivery people responsible for transporting products to consumers. Whereas retail stores are widespread and serve limited market areas based on distances that consumers are willing to travel, distribution centers are few and far between, since they serve much broader geographic areas. This means that jobs associated with retail will become geographically more concentrated, meaning that some communities will gain distribution center jobs at the expense of brick-and-mortar retail jobs in other communities with less of a logistical advantage.
The rise of e-commerce also means an abundance of vacant retail space that will need to be repurposed. Whether it’s big-box shells, shopping malls, or downtown storefronts, all of this retail square footage simply will not be needed. Many communities are already facing this challenge, and some have devised innovative solutions to retrofit old retail spaces for uses ranging from medical facilities to civic buildings, and office space to even housing.
Retail development has undergone many transformations over the last century, but it’s always required physical space. That’s no longer the case, and it’s fundamentally changing the economy and physical landscape of our communities. Indeed, it seems that peak retail space may have already been reached.