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THE U.S. ONLINE RETAIL FORECAST
Just consider how many times this year you’ve read or heard the phrase “declining mall traffic” in the business media. This increasingly common refrain is backed by evidence; Prodco Analytics has consistently reported traffic declines at shopping centers in the mid-single digits year over year ("YOY") for the better part of the last two years, with the trend worsening in 2016. Quite simply, Americans are making fewer trips to shopping centers, particularly malls, as online shopping continues to get more convenient and popular. The transition of store-based retail chains into omni-channel merchants over the last decade has contributed greatly to this phenomenon. Omni-channel retailers collectively account for most online sales today, with many regional and national retailers today generating at least 10 percent of their sales online. (Total online sales account for nearly 12 percent of U.S. retail sales, excluding auto and gas.)
The success of the online channel has likely contributed to slackening store traffic. Omni-channel retailers will all say they view and operate their two (or three) selling channels as one interconnected business, and that may be so, but it’s hard to ignore the reality that many retailers have merely maintained their market share and have little else to show for these herculean efforts except a vastly more complex entity to operate in a hypercompetitive marketplace.
The announcement this summer that Macy’s will be closing 100 stores by 2017 — or 15 percent of its full-line department store base — is a significant event in several respects.
Most noteworthy is the scale of these store closings — such a large reduction in footprint in one swoop by a financially sound national retailer is virtually unprecedented. (These announced closings come after nearly 40 Macy’s store closures
were completed in the first half of 2016.) To the extent these designated stores serve as mall anchors, their shuttering will have a larger ripple effect on those shopping venues, as mall owners will be challenged to timely reconfigure and re-let these very large boxes to multiple new tenants in those spaces.
That is starting to change as store closing programs become more aggressive. Last year Gap Stores announced it would close nearly 25 percent
THE U.S. ONLINE RETAIL FORECAST
Omni-Channel Retailing Challenged By Its Success
After years of premature and wildly errant predictions about the “death of stores”
caused by online sales, we’ve come to a point where even a mild version of this
scenario is dismissed as hyperbole. That’s unfortunate because we are now
witnessing a shift to online sales that is impacting the physical retail landscape on a
scale that can no longer be considered immaterial. These changes are gradual and
cumulative, which tends to obscure their corrosive effect.
2
Until recently, store closing
initiatives by healthy retail
chains could best be
described as nibbling around
the edges. Underperforming
stores were closed, usually
as their leases expired, but
rarely have these cumulative
closings accounted for more
than a very small percentage
of a chain’s store base.
THE U.S. ONLINE RETAIL FORECASTTHe U.S. ONLINE RETAIL FORECAST
of its namesake stores in response to years of persistent underperformance. This past year many other non-distressed specialty chains, including Barnes & Noble, Children’s Place, A&F, American Eagle Outfitters, Pier One, Ralph Lauren and Chico’s have announced planned store closings that are more aggressive than those in years past. None of these other planned closings is on the scale of Macy’s or Gap Stores, but cumulatively they, along with store closings by retailers in Chapter 11 (the recent liquidation of The Sports Authority and partial liquidation of Aeropostale alone will shutter nearly 1,000 stores), inevitably take a toll on vulnerable shopping centers in less desirable locales — potentially setting off a spiral of vacancies as some shoppers avoid venues with too many dark storefronts.
Furthermore, it’s certainly possible that Macy’s decision to go big with store closings, and particularly Wall Street’s immediately favorable response to this decision, could encourage other major retailers to likewise consider bolder moves as investors’ increasingly view robust store closings as a laudable strategic decision to drive returns rather than evidence of weakness or a reactionary response. Macy’s bold decision is also an acknowledgment that the success of the online channel is changing the equation that omni-channel retailers use to evaluate store performance. Macy’s indicated that its stores to be closed were profitable—they were not money losers but smaller, marginal performers whose low return on investment (“ROI”) couldn’t justify an ongoing
commitment and investment when much of their underlying real estate could be sold or otherwise monetized. Especially noteworthy, Macy’s expects to retain nearly 25 percent of its sales from these stores to be closed, primarily through its online site. Such a high sales retention rate, combined with the store expense savings of these closings, lowers the threshold for these decisions or, conversely, raises the bar for marginal stores to justify their existence. If Macy’s were not so successful with its online business, it likely would have been less aggressive in closing stores, as it expects $300 million of sales will stay in its coffers despite these closings.
Earlier this year we wrote (see Omni Channel for Retailers: It’s a Rocky Road to ROI) that without such drastic measures, omni-channel retailers risked seeing their sizeable investments in online become just an added cost of doing business rather than a legitimate driver of enterprise ROI. Return on investment has been declining for most large retailers since 2014 due at least partially to hefty omni-channel investments, all-consuming integration efforts and related gross margin compression. Macy’s apparently sees it that way too given its decision to go with a smaller footprint. Others might follow as they become convinced that their online shop will mitigate the business impact of a smaller store presence. We expect that other large chains will study their move closely and consider its relevance to their own business. Going forward, store closings of 10 percent or more of a chain’s physical
store base by major omni-channel retailers wouldn’t strike us as excessive or surprising. Get used to it.
U.S. Online Sales: How Large is the Pie and Who is Getting the Slices?Online retail sales will approach $400 billion this year and continue to grow at a low double-digit rate (YOY) compared to approximately two to three percent for store-based sales. In fact, online retail sales growth has accelerated slightly in the past year to just over 14 percent, defying an expectation that its growth trajectory would soon slow. That’s the good news. The bad news is that Amazon.com continues to take a disproportionate and growing share of these sales despite the success that omni-channel retailers have achieved to date.
Amazon’s dominance of online retailing shows no sign of letting up as it expands and extends its product reach in apparel, grocery and other consumer staples. Millions continue to sign-up each year for its Prime program, whose members are now conservatively estimated to top 50 million globally. Amazon’s second Prime 3
In short, this means that
for each marginal sales
dollar that migrates away
from stores to the online
channel today, only about
68 cents stays within the
traditional retail
ecosystem.
THE U.S. ONLINE RETAIL FORECAST
$400AMZN's share of annual online sales growth
AMZN's share of total annual online sales
0%
5%
10%
15%
20%
25%
30%
35%
$150
$0
$50
$100
$200
$250
$300
$350
in billions
EXHIBIT 1
U.S. Online Retail Sales vs. Amazon
20
05
20
06
200
7
20
08
20
09
2010
20
11
20
12
20
13
20
14
20
15
2016
Source: U.S. Census Bureau and SEC filings, last twelve month (“LTM”) basis.
Day came and went in July without the same fanfare of its inaugural event a year earlier, but it was wildly more successful, with U.S. orders up 50 percent over 2015 according to the company, which called it “the biggest day ever for Amazon.” Analysts estimate its Prime Day sales rivaled those of Black Friday, but, more important, it added legions of new Prime members who, in short time, will become faithful Amazon shoppers.
Our estimate of Amazon’s domestic market share of U.S. online sales is 20 percent (Exhibit 1), excluding third party sales it fulfills, which by some estimates are nearly as large as
its own retail sales. (Amazon doesn’t book third party sales as revenue nor does it disclose their dollar value.) This merits repeating: Amazon’s share of U.S. online sales when third party sales are also included is probably close to 40 percent. More impressively — and more alarming for omni-channel retailers — Amazon’s domestic sales growth has accelerated since late 2014, and at 26 percent (YOY), is more than twice the growth rate of total online sales, excluding Amazon (Exhibit 2).
Arguably, it alone is responsible for the acceleration of total online sales growth in the last year since online sales growth,
excluding Amazon has leveled off near 13 percent (Exhibit 2). Collectively, online sales by omni-channel retailers are growing at a healthy rate, but aren’t accelerating and, therefore, they continue to lose market share. That means Amazon is taking 32 cents of every additional sales dollar that leaves stores and shifts to an online channel (again, this excludes third party sales.) There’s little reason to expect any reversal of these established trends despite the best efforts of traditional retailers to tame the beast.
4
AMZN North America Sales ($)
Rest of U.S. E-commerce Sales ($)
AMZN Share of Online Sales Growth (%)
AMZN Share of Online Sales (%)
THE U.S. ONLINE RETAIL FORECAST
5
EXHIBIT 2
U.S. Online Retail Sales Growth
YOY Growth percent AMZN North America Sales
-6%
0%
6%
12%
18%
24%
30%
36%
42%
48%
1Q2005
3Q2005
1Q2006
3Q2006
1Q2007
3Q2007
1Q2008
3Q2008
1Q2009
3Q2009
1Q2010
3Q2010
1Q2011
3Q2011
1Q2012
3Q2012
1Q2013
3Q2013
1Q2014
3Q2014
1Q2015
3Q2015
1Q2016
20
05
20
06
20
07
20
08
20
09
2010
20
11
20
12
2013
20
14
20
15
2016
YOY Growth percent U.S. E-commerce Sales Excl. AMZN
FTI Consulting’s U.S. Online Sales ForecastWe expect U.S. online sales to reach $395 billion this year, $436 billion in 2017 and $562 billion by 2020 (Exhibit 3). Our model anticipates that online market share will eventually top out at nearly 25 percent if the low penetration category of grocery is excluded (or 20 percent including grocery). This represents a near doubling of online market share over the next decade or a compound annual growth rate ("CAGR") of eight percent.
Online market share varies greatly by product category and always will. The early mover categories, such as books, music and computers, are mature and enjoy huge online market share, but are not large product categories. The bulk of online sales dollars today come from what we call the medium penetration categories, consisting of apparel and accessories, consumer electronics, home furnishings, sporting goods and toy and hobby. Each of these categories already enjoys online market share in the mid teen to low 20 percent range. Their ultimate ceilings are higher than the overall ceiling and are closer to 30 to 35 percent in our model.
Perhaps the most surprising category of the last year or two is home goods and furnishings, which have achieved a near 20 percent online market share by our estimates.
Like apparel, home furnishings are a “high touch” category that might have been expected to be a hard sell online, but have instead defied early skepticism.
The tremendous success of Wayfair, an online-only seller of furniture and home furnishings that has scaled up to $3 billion of sales in just five years, has lit a fire under all large competitors in the sector that were slow to ramp up their online businesses and are now scrambling fast to do so.
Yes, online sales growth
will slow — it must — as
online shopping eventually
approaches its maximum
potential audience and
more consumers reach
saturation levels for their
online shopping needs.
Source: U.S. Census Bureau and SEC filings, LTM basis.
Indeed, if online retailing
has provided us with one
genuine surprise over the
last decade, it is
consumers’ acceptance
and use of the channel for
products that seemed to
be ill suited for it.
THE U.S. ONLINE RETAIL FORECAST
6
0%
5%
10%
15%
20%
25%
30%
$0
$100
$200
$300
$400
$500
$600
$700
$800
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
in billions
EXHIBIT 3
U.S. Online Retail Sales Forecast
Online Retail Sales ($)
Beware a Pyrrhic VictoryOnline retailing has been an unambiguous boon for consumers over the last decade, providing many shopping benefits at little or no cost to them as retailers continue to pick up that tab — which has become sizeable. Whether it’s lower online prices, mobile shopping apps and coupons, free shipping, generous return policies or last mile coverage, consumers have been wooed and spoiled by technology-enabled conveniences that they have been conditioned to expect for free and forever — much to the chagrin of retailers who likely never imagined all these “giveaways” would continue
indefinitely at their expense. Retailers — omni-channel and online-only — have been hugely successful at building a 21st century shopping channel that consumers have embraced with few reservations. There’s every reason to expect this migration to the online channel will continue at a healthy clip. The ongoing challenge for large retailers is to meet the many demands of the omni-channel imperative without eroding the profitability of the enterprise. Otherwise, it is a hollow and costly victory.
Source: U.S. Census Bureau and SEC filings.
Online Market Share ex. Grocery (%)
Online Market Share (%)
THE U.S. ONLINE RETAIL FORECAST
7
Appendix: Our Forecast Model of U.S. Online Sales and Market Share The general model that best describes consumer adoption of the internet for shopping is the logistic growth curve, commonly known as the S-curve due to its resemblance to the shape of that letter, which is used to depict many natural and social phenomena. The S-curve inherently recognizes that unbounded growth cannot persist indefinitely because resource limitations, saturation or other inhibiting factors will inevitability cause growth to slow and finally taper off. The S-curve plots this progression over time. It is a generalized model that can take on many forms, and can be as varied as the shape of the letter S itself; stretched and elongated (slow adoption) or sharp and upright (fast adoption). Regardless of its particular shape, every S-curve exhibits two distinct growth phases that are symmetrical about the curve’s inflection point, that is, the middle of the S where its concavity changes.
Our online forecast model is derived from imposing the best fitting logistic curve on actual online sales figures by product category. The U.S. Census Bureau has published online retail sales estimates in about a dozen product categories since 1999. From these time series data, we estimate online market share for these categories since inception. We then derive an appropriate S-curve equation for each of these market share and use these equations to project online sales and market share in the years ahead. These online sales forecasts by product category are then aggregated to derive our bottom-up forecast.
THE U.S. ONLINE RETAIL FORECAST
About FTI ConsultingFTI Consulting, Inc., is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring.
www.fticonsulting.com ©2016 FTI Consulting, Inc. All rights reserved.
Authors
Christa Hart Senior Managing Director Retail & Consumer Products +1 212 499 3619 [email protected]
John Yozzo Managing DirectorCorporate Finance & Restructuring +1 212 499 3624 [email protected]
fticonsulting.com/retail
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.