From Bricks to Clicks - A Retail Evolution
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October 2014
From Bricks to Clicks
A Retail Evolution
Traditional retailers are stepping up their e-commerce efforts,
in part by investing in better online systems and distribution
networks, to make shopping more convenient for their consumers.
Leigh N. Todd, CFA
Managing Director However, they’re also benefiting from technological innovation.
From Bricks to Clicks: A Retail Evolution
Introduction Although online shopping may seem ubiquitous, the market
still has plenty of room to grow. In 2013, e-commerce
Over the past several years, retailers’ views on the Web and made up only 9% of total retail sales, excluding autos and
e-commerce have dramatically shifted: What managements grocery, but it has been gaining more than 100 basis points
once considered a threat is now seen as an opportunity, of market share in every quarter since the start of last year.1
as more businesses capitalize on the robust growth of (See Exhibits 1 and 2.)
online sales.
Exhibit 1: Pace of E-Commerce SharePace
Growth
of E-Commerce Share Growth
140
120
100
80
(bp y/y)
60
40
20
0
-20
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
Source: Stifel, U.S. Census Bureau
Exhibit 2: Portion of Retail Sales Growth, Attribution to E-Commerce (LTM Basis)
Portion of Retail Sales Growth, Attribution to E-Commerce (LTM basis)
ex-Autos & Grocery (ex-Autos and Grocery)
60%
50%
40%
30%
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20%
10%
0%
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
Note: Gap in chart represents non-meaningful data due to total retail sales declines. Source: Stifel, U.S. Census Bureau
2
From Bricks to Clicks: A Retail Evolution
Historically, most retailers relied on new store openings and consumer electronics, books and nutritional supplements
increased sales in existing locations to fuel sales growth. are commonly sold on the Web, for example, perishable and
Now, they are focusing on driving sales through their own dry goods as well as pharmacies and over-the-counter drugs
websites as well as in stores. have not fared as well, according to an August 2014 report
from Goldman Sachs.3
Making the Leap to Online
Exhibit 4: E-Commerce Penetration by Sector, 2013
At this point, Web-only retailers are still dominating the
market, as their sales continue to grow slightly faster than Retail Category Online Penetration
online sales of traditional retailers. According to International Consumer Electronics 33.7%
Strategy & Investment Group, LLC, sales of Web-only re Books 25.5%
tailers grew 21% in 2013, compared with 16% growth in Pet Supplies 18.0%
online sales for retail chains.2 However, as shown by Exhibit Nutritional Supplements 15.4%
3, that spread is beginning to narrow, as bricks-and-mortar Accessories 17.0%
retailers step up their e-commerce efforts. Footwear 16.0%
Office Supplies 10.1%
Traditional retailers with historically strong catalog sales Apparel 9.0%
— such as Restoration Hardware, Williams-Sonoma and Beauty 6.1%
Urban Outfitters — generally have had the most successful Athletic Equipment 5.9%
transition to online sales, as many of their customers were Jewelry 4.6%
already accustomed to buying their products without visiting Furniture 4.6%
a store. Home Décor 4.6%
Home Improvement 4.6%
Other retail concepts have encountered significant challenges Auto Parts 1.6%
in extending their growth online, as their business models do OTC Drugs 1.2%
not lend themselves easily to Web shopping. For example, Pharmacy 1.2%
shoppers have been relatively reluctant to order online Pet Food 1.2%
from luxury jeweler Tiffany & Co., given the higher prices Dry Goods (food & non-food) 0.4%
of the items and the personal nature of the purchase. The Perishable Goods 0.4%
same has held true for TJX Cos., parent company of T.J. Source: comScore, Internet Retailer, BEA, AIAA, SGMA, Euromonitor, Goldman Sachs
Maxx, Marshalls and HomeGoods, because its emphasis on Global Investment Research
off-price shopping as a treasure hunt has been difficult to However, for most others in the retail industry, online is
translate online. crucial to growing total sales, as e-commerce added hundreds
of basis points to many retailers’ total same-store-sales
Not every retail category has successfully made the growth in 2013. Same-store-sales growth is an important
transition to online sales, as shown in Exhibit 4. While metric for retailers, as improving the productivity of the
Exhibit 3: E-Commerce Update
Online Sales $MM
2006 2007 2008 2009 2010 2011 2012 2013
Web Only Retailer $18,785 $25,395 $34,037 $41,744 $55,212 $70,708 $87,557 $105,854
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% Change YoY 35% 34% 23% 32% 28% 24% 21%
Retail Chain $29,163 $33,996 $46,677 $50,756 $58,320 $67,888 $77,892 $89,986
% Change YoY 17% 37% 9% 15% 16% 15% 16%
Catalog/Call Center $7,379 $10,364 $16,116 $17,017 $19,123 $21,600 $23,565 $25,264
% Change YoY 40% 55% 6% 12% 13% 9% 7%
Consumer Brand Mfr. $11,737 $11,505 $14,685 $16,289 $19,432 $24,691 $30,655 $34,500
% Change YoY -2% 28% 11% 19% 27% 24% 13%
Top 500 $67,064 $81,261 $111,516 $125,805 $152,088 $184,887 $219,668 $255,605
% Change YoY 21% 37% 13% 21% 22% 19% 16%
Source: Company Data, Internet Retailer, ISI Group LLC
3From Bricks to Clicks: A Retail Evolution
existing store base can significantly boost profits. In 2013, To bolster their positioning, many retailers are now offering
several large retailers, including Macy’s, Wal-Mart and Dick’s consumers the ability to shop seamlessly online and in store
Sporting Goods, reported negative same-store sales in their through various capabilities, such as “shop online/pick up
physical locations, but positive total same-store sales for in store,” “shop online/get delivered from store” and “shop
the year, driven solely by the strength of their online sales. online in store.” By doing so, bricks-and-mortar retailers
(See Exhibit 5.) are beginning to replicate online experiences, giving their
customers a way to buy when they want and what they want
Exhibit 5: Growth in “Core” Retail Sales in the quickest way possible.
“Core” Retail Sales This approach will allow traditional retailers to remain current
“Core” Retail Sales
ex-e-commerce with younger consumers. For example, one luxury retailer
% YoY % YoY is equipping its store associates with iPads and iPhones to
1Q10 2.2 1.3 facilitate in-store ordering, opening the entire inventory in
2Q10 3.3 2.4 its system to consumers at all times. Retailers’ proximity to
3Q10 3.5 2.5 consumers through national store footprints and attractive
4Q10 4.8 3.6 online experiences offer the best of both worlds: the appeal
1Q11 4.7 3.5 of local store support and the convenience of shopping
2Q11 5.1 4.0 online.
3Q11 5.9 5.2
4Q11 5.0 3.8 This hasn’t been lost on online-only retailers, as they have
1Q12 7.2 6.4 also tried to bring more convenience to customers. For
2Q12 3.6 2.6 example, one Web-based retailing giant has been testing
3Q12 3.0 1.8 lockers in various convenience stores and drugstores, and it
4Q12 3.4 2.2 continues to open numerous distribution centers every year
1Q13 2.4 1.0 to shorten the distance between their inventory and their
2Q13 4.2 2.8 customers’ homes.
3Q13 4.9 3.6
4Q13 3.7 2.2 The Retailers’ Response – and How They Benefit
1Q14 1.7 0.1
E-commerce increasingly drives retail growth. In order to boost growth in online spending, many retailers
“Core” retail sales ex-e-commerce were flat in 1Q14. have been shifting capital expenditures away from new stores
Note: Excluding e-commerce, growth in “core” retail sales sometimes tracks low
and toward online investments. They have been investing
enough to virtually guarantee deleverage. Source: Census Bureau, Goldman Sachs heavily in technology and distribution to ensure a smooth
Global Investment Research
shopping experience through linking store inventory with
Catering to Customers online offerings, ensuring delivery times that are comparable
with online-only retailers and providing Web platforms with
Although they are making strides online, traditional retailers quick search and checkout capabilities. As shown in Exhibit
are still viewing their existing physical footprints as a 6, technology and distribution are capturing a rising share of
competitive advantage. Catchphrases such as “omni-channel” specialty retailers’ capital expenditures.
are dominating retail conferences and business plans, as
companies integrate their online presence with their physical Such technological advances have enabled retailers to
stores to provide their customers with a seamless shopping monitor their inventory across all platforms, including stores
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experience, attempting to offer an optimal combination of and online-distribution centers, with the ultimate goal of
convenience, service, selection and value. fulfilling all orders from the most cost-effective source.
For example, a consumer in a Chicago suburb may place
An increasing number of shoppers take advantage of the an online order for a swimsuit in August, and the retailer’s
Internet to research items and inform their buying decisions, closest store may have one such item left. It would be more
regardless of whether their actual purchases occur online or cost-effective to ship the swimsuit from that store than to
in a store. A recent iProspect survey of affluent consumers send it from the retailer’s online-distribution center in Texas.
aged 21 to 74 reported that a full 76% of respondents In addition to gaining the potential benefit of lower shipping
research online before buying.4 costs, retailers may also avoid an in-store markdown on the
item, which dents its profit.
4From Bricks to Clicks: A Retail Evolution
Exhibit 6: Specialty Retail – Capex Spending The cost of an online sale is different than the cost of an in-
% store sale, but it is difficult to assign all costs appropriately.
100 Many retailers use websites as marketing vehicles, used by
9 7 7 7 6 8
90
16
consumers to pre-shop and compare prices and offerings. A
12 15 22
80 21 23 sale may ultimately occur in a store, but the customer may
70 16 16 15 never have visited the store if not for the website. In addition,
16 16 Other the cost of an in-store sale tends to be more fixed, including
60 19
DC the rent paid for the location, the labor costs associated with
50
IT store operations and utility costs. Once these fixed costs
40
Stores
are paid, the profit flow-through on an in-store sale is high.
30 63 62 63
55 56
50 Conversely, an online sale has more variable costs, primarily
20 shipping, so it can appear to be a lower-profit sale.
10
0 As online and in-store retail continue to merge, it will become
2009 2010 2011 2012 2013 2014 more difficult to assign costs to each channel; instead, costs
Note: 2014 is estimated. IT and distribution centers capture more capex dollars. will be accounted as total costs to operate an efficient multi-
Source: Company data, Morgan Stanley research
channel retail company. The fixed costs of store operations
Even though many of these channel-agnostic initiatives can be lowered through smaller store sizes. For example,
are nascent, retailers have witnessed significant behavioral an office-products chain has downsized 40 of its stores to
changes and sales opportunities through allowing customers 12,000 square feet from a company average of 22,000, and it
to choose how a product is delivered or picked up. For managed to retain 95% of its sales.9
example, one large department-store chain has been rolling
out an initiative that enables customers to buy items online Advertising is also adjusting to tech-savvy consumers, as
and pick them up in stores, which has eliminated shipping more ad spending moves online. For example, the aforemen-
costs and actually increasing order sizes. During the test tioned home-improvement retailer has slashed its spending
period, shoppers spent, on average, 125% of the original on print ads by 60% since 2010; while print now makes up
order amount when they picked up the product in stores.5 10% of the company’s ad spending this year, digital now ac-
Another national apparel retailer launched a similar program, counts for 36%.10
allowing customers to reserve products online and pick them
up in store; in the first month after its launch, customers Winners and Losers
made about 500,000 reservations.6 Another example of
blurred lines between store locations and online is a luxury As consumers evolve, retailers must evolve with them.
retailer’s ownership of an online flash-sale website. When Retailers that are investing in technology and building online
customers of that website want to return a purchase, they do capabilities that can shift with consumer behavior will benefit
so at the retailer’s physical stores approximately 75% of the most. Those that have already garnered consumers’ trust
time — giving them an opportunity to buy something else — with e-commerce representing more than 10% of their
while they’re there.7 total sales — have a leg up on the competition. The best-
positioned retailers no longer view online and in-store as two
And it’s not just clothing and accessories: Consumer different channels, but recognize the importance each has
behavior has changed across all types of retailers. In the for the other, as consumers do not consider the two channels
second quarter of 2014, a third of all online orders at a mutually exclusive. Retailers need to optimize the number
large home-improvement retailer were picked up in stores, of their stores to satisfy customer needs, while recognizing
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and the company estimates that 25% of people who pick up that fewer locations are needed as more purchases are
items in stores end up buying more than what they ordered made online.
online.8 The retailer is now beginning to test a program
that allows web purchases to be delivered from a store. By In this constantly changing landscape, retailers that can
fulfilling online orders and accepting online returns, a store balance in-store and online investments while providing
can actually boost its total sales and profitability, as there are consumers with convenience, service and price will gain
fewer markdowns and more store traffic. market share and continue to thrive. For those without
a significant portion of sales coming from online, future
positioning will be crucial in determining whether they can
ever catch up.
5From Bricks to Clicks: A Retail Evolution
End Notes
1. David A. Schick, Taylor G. LaBarr, CFA, and Raymond L. Stochel, “A Brave New Omni-Channel World, Our Scorecard (Don’t be the Frog),”
Stifel Financial Corp., Feb. 24, 2014.
2. Greg Melich, “Which Retailers Grow Fastest In eCommerce?” International Strategy & Investment Group, LLC
3. Matthew J. Fassler, Heath P. Terry, CFA, Taposh Bari, CFA, Lindsay Drucker Mann, CFA, Stephen Grambling, CFA, Debra Schwartz and
Chandni Luthra, “dotCommerce: e-Commerce ascendant and transcendent: implications for retail,” Goldman Sachs Group Inc., Aug. 1, 2014.
4. Katie Evans, “Affluent consumers shop online – even if they buy in stores,” Internet Retailer, Sept. 24, 2014. http://www.internetretailer.
com/2014/09/24/affluent-consumers-shop-onlineeven-if-they-buy-stores
5. Sarah Mahoney, “Macy’s Focused on Mobile, Gen Y, Private Label,” MediaPost, Sept. 3, 2014. http://www.mediapost.com/publications/
article/233422/macys-focused-on-mobile-gen-y-private-label.html?edition=75810
6. Sapna Maheshwari, “Customers Can Now Use the Web to Reserve Clothes at Every Gap and Banana Republic Store,” BuzzFeed News, May
21, 2014. http://www.buzzfeed.com/sapna/customers-can-now-use-the-web-to-reserve-clothes-at-every-ga#11efwsh
7. Nordstrom Q2 2014 Earnings Call, Aug. 14, 2014.
8. Shelly Banjo and Michael Calia, “Home Depot’s Earnings Driven by Big-Ticket Items,” The Wall Street Journal, Aug. 19, 2014. http://online.wsj.
com/articles/home-depot-raises-outlook-after-earnings-rise-1408443787
9. Staples Second-Quarter Earnings Conference Call, Aug. 20, 2014.
10. Banjo, Calia.
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6About the Author
Leigh N. Todd, CFA
Managing Director
Leigh is a Senior Equity Research Analyst on The Boston
Company’s Global Research Team, covering the consumer sector.
Before joining The Boston Company, Leigh was a member of
the US Large Capitalization Portfolio Management Team at State
Street Global Advisors in the Global Fundamental Strategies Group. Prior to that, she was a
member of the Small and Mid Capitalization Investment Team, where she was responsible for
the technology, consumer staples and transportation sectors.
She holds a BS in Economics from Lehigh University. She holds the Chartered Financial
Analyst designation and is a member of both the Association for Investment Management and
Research and the Boston Security Analysts Society.
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