Analyzing the Jurassic Moment in Retail

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Analyzing the Jurassic Moment in Retail

By Joe Skorupa - 05/15/2017

Retail has entered a reset moment, a time of big winners and bigger losers. For big losers, and there are many, the moment feels like the cataclysmic event that ended the Jurassic Period's reign of the dinosaur.

However, unlike the dinosaur's mass extinction (technically called the Cretaceous-Paleogene extinction), which occurred 66 million years ago, there has been no single asteroid or comet that has smashed into the retail landscape. Instead, a series of cumulative impacts is occurring, each with the power to shatter retail’s suddenly fragile equilibrium.


The fact that retail is going through a reboot is clear when we read about large numbers of retailers with dysfunctional business models missing forecasts, closing stores and going out of business. Why is this happening now outside of an economic downturn? Why are so many iconic brands running out of options during what can only be described as a period of broad-based economic expansion? The problem is the cumulative effect of the following powerful forces of change:  

  1. Digital commerce is booming year over year, something it has been relentlessly doing for the past 15 years. By 2020 digital commerce will double as a percentage of total global retail sales. It’s not just that Amazon and Alibaba and others are becoming powerful behemoths, which is true. The problem is that market share is moving away from traditional retailers. The high levels of year-over-year digital growth will slow down from their peak of more than 25% as recently as 2015, but digital growth will remain in the high teens through 2020, according to projections from eMarketer. However, even as digital commerce sales slow down, their share of overall retail revenue will continue to grow. Between 2015 and 2020 the share will double to roughly 15% globally. This trend is not new. What is shocking is how many retailers have been slow to make the necessary adjustment.
  2. Digital commerce is unprofitable. As traditional retailers shift sales to digital channels, they discover there is less profit per sale. To quote the president and CEO of eBay David Wenig during an interview at ShopTalk: “There are only five profitable e-commerce players who are delivering real value to their stakeholders.” The ugly truth is that store sales are profitable. Digital sales, on the other hand, are not profitable (or only rarely). Retailers with brick-and-mortar stores need to revise their financial model from top to bottom to adjust to an increasing percentage of sales moving into the less profitable digital realm.
  3. Store closures this year are on pace to eclipse the number that took place during the depth of the Great Recession in 2009. Store closures in themselves are not bad things. In fact, when expansion outpaces demand, as has occurred in the U.S. and UK, a re-balancing is to be expected. Also, it should be noted that some retailers are actually opening stores. However, overall, according to data compiled by Fung Global Retail, the number of store closings are expected to nearly double the number of store openings for the first time since the Great Recession. This is putting pressure on struggling retailers, especially apparel retailers, to pull the plug on brick-and- mortar stores. In many boardroom meetings retailers have to justify why it makes sound financial sense to continue selling through physical stores.
  4. Roughly a third of all shopping malls will close in the U.S. and many more will transition into mixed business/entertainment complexes, according to business analyst Jan Kniffen of CNBC. The ones that survive will not be as reliant on retail revenue as they once were and will not be as retail friendly. Retailers report that shopping mall operators are currently exerting pressure to pay for centralized infrastructure and WiFi whether they use it or not. Of course, retailers prefer negotiating their own agreements, but malls today are changing the rules. Also, many malls are installing traffic counting technology so they don’t have to rely on retailers for recording the number of shoppers. The goal is to control the relationship with the shopper and disintermediate retailers. Why would mall operators take these steps? As one retailer put it, “They have fear in their eyes.”

There other meteors crashing into the retail landscape, including disruptive technologies (i.e. conversational commerce using Amazon Alexa, Apple Siri and Google Home), the shifting buying patterns of Gen Z and Millennials (as well as other digital-savvy shoppers), and global retailers displacing the once secure position held by American retailers. 

Time of Permanent Change

However, the real takeaway from the current meteor shower is that it comes at a time of sustained economic expansion. Today’s economic landscape is characterized by high consumer confidence, growing GDP, stock market gains, rising real estate values, and a continued growth trend for the overall retail industry.

So, times are good, right? They are if you are on the right side of the mega-shifts. They are bad if you are on the wrong side and, it is worth noting, bad is a relative term ranging from challenging to disastrous.

There will be no comforting return to normal after this meteor shower. A re-balancing is occurring and a new ecosystem will emerge where newcomers and nimble retailers will have a clear edge over dinosaurs too slow moving to make the shift.

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