Are E-Commerce sales driven by a particular retail segment?

Posted On Wednesday, 20 July 2011 02:00 Published by
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There have been increasing fears that e-commerce retail sales are taking away from store sales at retail centers. As yet, there is no concrete evidence that this is occurring

But perhaps we can identify where the risks lie for certain retailers—and thus certain retail centers—by determining what is driving online sales. Consumers flocking to the internet, replacing their store purchases with online purchases would represent a downside risk to the consumer recovery's benefit to retail centers; identifying any such factors that could derail or slow the recovery, is important.

It is no secret that e-commerce sales have been growing significantly since the consumer recovery began in late 2009. Tracking electronic shopping and sales by mail order houses (as an indicator of non-store sales) on a monthly basis has shown growth to be in the double digits since the 2009 holiday shopping season. As a subset of this category, e-commerce sales include only those sales that were transacted online. With more and more retailers joining the online community for the first time or expanding their online practices, the threat of online sales taking sales from brick and mortar stores is becoming greater. If the effect is hitting certain retailers or segments harder than others, by breaking down e-commerce sales (e-commerce), we may discover a driver behind this growth.

According to the Census Bureau, e-commerce sales have recorded double-digit growth (a similar trend to the electronic shopping and mail order houses sales) since the fourth quarter of 2009, which was the point from which the consumer recovery slowly took shape. Accounting for almost 6% of core retail sales, e-commerce's share has been growing fairly consistently and rapidly since 1999; during the recent recovery, the share has gone from 5% to 5.6%, proving that e-commerce sales are a forced to be reckoned with. It is not surprising that e-commerce sales has shown such strength during the recovery; with deep discounts and free shipping and now high gas prices, consumers are looking to the internet to get the best deals and save themselves the trip to their local retail center. 
  
Perhaps the choice to shop online versus heading to a local retail center is having a greater effect on one retail segment than on the others. We have hypothesized that necessity-spending retailers (i.e. grocers) are less affected by the surge in e-commerce sales than are discretionary retailers (e.g. clothing shops). In order to determine whether our hypothesis is correct, we are using the Census Bureau's time series of e-commerce sales broken out by merchandise line, which was published in their annual E-Stats report. Without counting years of sporadic shocks of growth in the necessities sector (2004) and in the housing sector (2005), overall e-commerce growth is determined mostly by changes in discretionary spending online. Comprising clothing, books and music, computer (hardware and software), sporting goods and office supplies sales, discretionary sales were not only the driving force behind e-commerce sales changes, but they also remained positive even as the recession hit. Due to the lag in the time series reporting, we have yet to see whether this trend continued through the recovery, but given the longevity of the trend, we expect that discretionary sales will continue to account for most of the changes in e-commerce sales. 

If discretionary sales are driving e-commerce sales, that e-commerce sales have been growing at a double-digit year-over-year pace may be having a negative impact on offline discretionary sales. Although the relationship between e-commerce discretionary sales and brick-and-mortar discretionary sales has yet to be determined, it is hard to ignore how different their trends are, when it comes to their share of core retail sales. After a slight dip in 2008, e-commerce's share of core sales has been growing, while overall discretionary's share of core retail sales has been trending down since 2008; it has flattened out in recent quarters, but remains well below what it was prior to the recession. Again, we cannot claim that online discretionary sales are pulling from brick and mortar discretionary sales, but the two opposing trends in the graph above may hint at this being true.

What does this mean for retail centers, then?

Both malls (in combination with lifestyle centers) and power centers (retail center types which may have a discretionary component) have witnessed declines in availability rates, compared to both the first quarter and one year ago. Availability rates remain high in these centers, but the substantial growth in e-commerce sales does not seem to be derailing the national recovery for these center types. That said, according to the International Council of Shopping Centers (ICSC), books and apparel stores made up a significant portion of the announced store closings in the first quarter of 2011, with retailers such as Charming Shoppes, Borders, and Max Rave announcing over 200 store closings.

And although they have announced a number of store openings, apparel retailers such as Gap and Old Navy are expected to close more stores than they open. On a national scale, retail centers are not seeing direct effects on fundamentals, but for states with higher incidences of internet access, such as Washington, Utah, Oregon, Connecticut, Colorado and Massachusetts (according to the Census Bureau), the threat on malls and power centers may be higher. With e-commerce sales expected to continue to grow, its drivers and its effects cannot be ignored.


Publisher: CBRE
Source: CBRETWR

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