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Matt M. Casey
New data from the U.S. Census Bureau shows that the modern love affair with point-and-click purchases is growing. Meanwhile, catalogs are dwindling, retail storefronts are sagging and a former mainstay of the American job market is on a serious decline.
The story isn’t consistent across sectors. Some portions of the economy continue to resist the internet’s invitation—though that may be changing as you read this.
We took a deep dive through data released by the Census department as well as other related data to investigate what’s happening with e-commerce in America, and what that means for American citizens. Here’s what we found.
Consumers still buy most of their products in person, but e-commerce has made serious inroads. According to combined figures for retail and catalog sales (which includes online catalogs), consumers spent 13.5 percent of their product dollars online in 2016.
If the current ecommerce trends continue, online purchases should account for nearly 17 percent of all consumer product purchases in 2018—and could dominate some sub-markets. Online purchases accounted for 32 percent of hobby purchases in 2016, which includes books, toys, sporting goods and musical instrument.
That’s a big change from e-commerce accounting for less than 2 percent of consumer purchases in 1999, and the rapid change has corresponded with big shifts in the retail landscape.
While internet shopping makes life easier by allowing consumers to order anything they want from the comfort of their couch (and pajamas), all major economic changes have victims. As Amazon and other major online retailers rose, they left behind the ruins of brick-and-mortar retail chains, such as Borders, Blockbuster and—more recently—Toys R’ Us.
More legacy retailers may topple in time. While Macy’s stock has recovered by roughly 50 percent since the start of 2018, the company’s June high of $40 per share is dwarfed by its 2015 high of $72 per share. Meanwhile, shares of Sears (which also owns K-Mart) have been under $4 per share since December 2017. The former retail behemoth has been brought low enough to partner with Amazon as the world’s largest online retailer moves into the auto-repair space.
While analysts and commentators argue that each of these companies have struggled due to corporate leadership rather than e-commerce, e-commerce is undeniably part of their strain.
As brick-and-mortar retailers die or scale back, their fall has had a brutal impact on shopping malls.
Mark Cohen, a professor at Columbia Business School and the former CEO of several retail brands including Sears Canada, told us in an interview that the U.S. has about 230 top-tier malls that are “not only surviving, but thriving.”
Outside of that top tier, though, many struggle.
Credit Suisse reported in 2017 that it expected as many as a quarter of the nation’s 1,211 malls to close by 2022. Many already have. In one particularly ironic case, Amazon bought and demolished a Cleveland area mall to replace it with a fulfillment center. This trend has meaningfully devalued shares of Simon Property Group, which owns more than 130 malls.
Today’s failing malls, Cohen said, typically lost market share to newer or better malls before internet shopping became a major factor. They eked out meager earnings on the strength of just one or two anchor retailers and a small collection of specialty shops. But the internet age has forced anchor stores to scale back, triggering closures at already-weak malls.
The owners of some malls have tried to reinvent their properties as “lifestyle malls,” Cohen said, by installing gyms or rock climbing walls. “Some of these secondary malls are pulling this off, but very few, because it requires a substantial amount of investment.” Cohen told us. Other malls have rented space to call centers, emergency medical clinics, nursing homes or community colleges.
“For the most part, they’re basically slowly going out of business,” Cohen said. “A shopping mall with an increasing amount of vacancies increasingly starts to look like an empty restaurant, which is a place many people don’t want to go.”
As landlords collect less rent, they’re less willing to invest in basic maintenance such as lawn care or replacing broken lights in the parking lot.
“The mall takes on a ‘don’t go there’ characteristic,” Cohen said. Then it closes and becomes a blot on the landscape, damaging the local economy and making the local community desperate for something—anything—to replace it.
While the damage has been most visible at malls, the rise of e-commerce has correlated with softness in retail property writ-large.
The National Association of Insurance Commissioners reported in 2017 that roughly 10 percent of all retail properties had been left vacant between 2009 and 2016. Data published by National Real Estate Investor shows that commercial real estate valuations are leveling off—particularly in central business districts, and data from PNC Real Estate Research shows that the U.S. has cumulatively had more store closures than openings since the beginning of 2015.
While it appears that the U.S. is poised to continue losing physical retail locations for the foreseeable future, the worst may be over. Effective closures in 2018 are down by 41 percent when compared to 2017, according to JLL a Chicago-based investment management company focusing on the real estate sector.
Retail turmoil has changed the mix of physical stores consumers have access to. According to data from the U.S. Bureau of Labor Statistics, the number of retail stores in the U.S. crashed beginning in 2008. While retail shops have recovered since 2011, they still have not reached the number counted in 2001, the earliest year the BLS had data for. The recovery has also been uneven across sectors.
The number of food and beverage stores in 2017 had increased by about 4 percent compared to 2001 while the number of restaurants grew by 33 percent. The number of general merchandise stores like WalMart had increased by more than 45 percent. Every other kind of retailer saw its sector shrink—and some of them sharply. Electronics stores, furniture stores, book, sports and hobby stores and miscellaneous goods stores have all seen their numbers decrease by at least 15 percent.
That trend is likely to continue—and possibly accelerate—according to data published by JLL. In a March 2018 presentation, the company said that it expected more restaurants (1328) and dollar stores (1645) to open in 2018 than every other kind of store combined.
At 841, apparel stores had the most closures. While that shouldn’t be surprising (the fashion industry is notoriously volatile), they’re not being replaced. Apparel store closures outstripped openings by 53 percent.
As they struggle to stay relevant, retail brands have integrated their online and in-person presences to offer customers more flexibility. Macy’s and other stores have introduced what they call “click and collect,” which lets customers buy products online and then pick them up at a nearby store just hours later.
In essence, Cohen said, these retailers use their stores as a fulfillment network. But it’s unclear how much the practice helps their bottom line, if at all.
Click and collect is ”enormously expensive,” he said because it “flies entirely in the face of how the store’s organized.” The store pays labor costs for a worker to first move products to the display floor, and then for another worker to squirrel them away in a side room.
Stores hope click and collect customers buy something else during their visit, Cohen said, but it’s unclear how often that happens. Retail brands have been cryptic about the success of these programs, he said, but it’s worth noting that Macy’s shuttered 68 stores in 2017 and will close another 11 in 2018.
Fast food franchises have also joined the “click and collect” trend. Starbucks introduced on-the-go mobile ordering in 2015, allowing customers to order and pay online before visiting the store briefly to pick up their coffee. Dunkin Donuts introduced a similar option through their DD Perks app in 2016, and McDonald’s followed the trend in 2017.
Some brands, including Nike, Birchbox and Kanye West, have made physical stores into events in and of themselves. Pop-up shops offer exclusive items in a specific place for a short time.
Pop-ups offer a great opportunity for new businesses to express and establish their brands, Cohen said, but they also represent another symptom of an ailing retail ecosystem. The stores typically pop up in long-dormant retail spaces, and Cohen said landlords sharply discount pop-up rent—and may even offer the space for free.
“The bain of landlords existence is an empty store,” Cohen said.
Ironically, eBay, Amazon, Etsy and other internet retailers have all opened flashy pop-up shops in prime locations. So, the very brands that have created the weakness in retail real estate have found a way to directly benefit from it.
While e-commerce has most visibly impacted the retail landscape, online platforms continue to encroach on all aspects of the economy.
According to the Census report, nearly 65 percent of manufacturing orders were handled online in 2016, up from 18 percent in 1999. At $3.5 trillion in shipments in 2016, manufacturing-based e-commerce actually dwarfs retail e-commerce.
The sector has taken to e-commerce in part due to the nature of its business relationships. When business-to-business customers order the same things at regular intervals, the advantage to humans handling transactions diminishes quickly. The change has also largely been invisible to consumers, who typically only see finished products.
As we get closer to consumers, e-commerce becomes less prevalent. E-commerce accounted for 46.2 percent of the sales made by manufacturers' sales branches and offices, and 27.2 percent of total sales for all other merchant wholesalers. In 2016, most products on store shelves still got there through something other than an e-commerce platform.
The service sector of the economy remains the surprisingly resilient to e-commerce encroachment. According to Census data, just 4.2 percent of sales of services were conducted through ecommerce based platforms.
However, certain service sectors have been more receptive to online platforms than others. E-commerce-based platforms have made significant inroads into the air transportation sector and the travel arrangement and reservation sector.
Despite the prevalence of WebMD and other websites focused on health and wellness, the health and wellness sector has resisted the sway of e-commerce.
Even in the catalog channel, only 23% of drugs, health aids, and beauty aids were purchased online in 2016, according to Census data—and that’s while purchases of health-related products grew across all channels.
That disconnect has attracted the attention of tech start-ups as well as tech-giants. In August 2017, Amazon introduced a line of pharmacy basics including ibuprofen, laxatives and allergy medications. The introduction sparked skittishness among investors in pharmacy chains Rite-Aid, Walgreens and CVS, who feared that Amazon might get into the prescription drug game next.
That skittishness was appropriate. On June 28, 2018, Amazon bought PillPack for just under a billion dollars. The Boston-based startup pre-sorts and packages pills—including prescription drugs and vitamins—into a roll of plastic packets. When it’s time for their next dose, the customer pulls out the next bag, tears it open and takes the pills. When it’s time for a refill, PillPack bills the insurance company and makes the delivery.
And PillPack isn’t alone in the space. The New York City-based startup Capsule also delivers prescription drugs to customers’ homes and automatically handles refills with both doctors and insurance companies. While Capsule hasn’t been bought out by a bigger company, it is growing; the company has more than tripled its staff since 2016, according to LinkedIn data.
In addition to making it easier for consumers to get the products they want, e-commerce may be having a bigger and more diffuse impact on day-to-day life: keeping prices low.
A 2017 paper published by the International Monetary Fund concluded that internet sales took the wind out of inflation over the short term—though the authors were not sure how the internet would impact inflation over the long term.
The effects that lead to this are complicated and interwoven, but boil down to two major points:
While low inflation is great for shoppers, it’s not always great for workers. Retail jobs are drying up as stores close or just cut costs. The trend is so bad that the number of people working retail in New York City clothing stores has fallen four years in a row. That decline is especially notable considering the city’s population grew by 5.5 percent between 2010 and 2017.
Ecommerce trends have changed all of our lives in ways both big and small. It has kept product prices from creeping up, but it has also weakened sectors that the American economy has long relied on.
At present, the trend shows no sign of stopping. Even as Amazon opens physical stores, the need for traditional, small-box retail continues to erode. The likely result appears to be a world with fewer malls, fewer boutiques and more WalMarts, Dollar Stores and Restaurants.
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About the Author
Matt M. Casey is a data scientist and an award-winning journalist. His credits include The Boston Globe, WAMU in Washington, MentalFloss.com and GEEK Magazine. As a data scientist, he builds data pipelines, recommendation engines and anomaly-detection systems for startups in New York City.