The repeated warning for the past five years has been that a retail apocalypse was upon us and that physical stores were now obsolete. The facts simply do not bear this dismal prediction out. In fact, a close look at the basics of good merchandising shows that brick-and-mortar stores are alive and well, but there are dark ominous clouds over many of the online retailers who do not have a physical store presence. 

Let me refer to the home improvement retail industry, which is my area of expertise. There are literally millions of products that could be offered to the homeowner and contractors for home improvement. However, an omni-channel retailer like The Home Depot will stock less than 40,000 unique items [SKU’s] in the store. These items are distilled into an assortment of the best sellers. This allows direct purchasing and efficient transportation in truckload shipments. 
Today, between 80% to 85% of those products are selected in the store by the customer and then taken home in the car or truck of those customers. In effect, this is free labor.

Now, let’s look at the online retailer. The whole premise of the retail apocalypse was that without brick-and-mortar stores, the online retailer would have lower cost and be the low-cost supplier. However, look at the incredible demand for warehousing to support the online industry. We know that as demand increases, so does cost. The online retailer now has had to make huge investments in the very brick-and-mortar assets they were supposedly avoiding. Then, add the need for better technology to keep up with the many advances in the digital world. 

More capital investment is required for systems and expenses in digital operating expertise. This is only the start of online problems. Now the products need to be shipped to the customer and the cost of individual shipments to customers compared to truckload shipments to stores is a comparison of different universes. What is happening to freight cost for individual shipments? Once again, we see the proliferation of e-commerce companies increasing demand but supply being offered by a few major carriers like UPS and FedEx. The result is skyrocketing costs.

What about all those people working in fulfillment warehouses? The going wage today is in the $15-20 per hour wage scale. This is significantly higher than the traditional physical store wage rate. Furthermore, there have been more people hired to do warehouse fulfillment than there has been reduction in the physical store workforces. Therefore, labor cost is to the online retailer’s disadvantage. Paid labor and transportation costs have replaced much of the free labor and transportation previously performed by the customers. 

One of the advantages of online retailers is that they often offer a wider range of products than the physical stores. We call this the “long tail” of e-commerce. However, these are the slower selling items which can result in tying up working capital in very slow turning merchandise, which results in a poor gross margin return on investment.

The final straw is the cost of acquiring a customer. Online retailers must constantly promote to keep eyes on their brands. The problem is that as so many companies rush into the online business, it is harder and harder to be heard above the noise. The doors to promote are controlled by a small oligopoly of advertising platforms. Once again, we see that increased demand creates pricing power and the Googles of the world understand this well. 

The CPM for Facebook is 33% higher than pre-pandemic 2019. Instagram is 23% higher and so is Google. Therefore, we see pure online retailers like Allbirds and Warby Parker opening stores. Retail locations provide less expensive brand awareness than the escalating price of advertising.

Amazon has created an expectation of better value that online retailers increasingly struggle to achieve. Even Amazon is transitioning from being an e-commerce product retailer to their marketplace strategy of putting that onus on the independent online retailer. 

Chain Store Age lists just a few of the many retailers with aggressive plans for new stores in 2021. This includes such retailers as Aldi [100], Dollar Tree [600], Five Below [180], Dollar General [1,050], and TJMax [98]. The list goes on and on. Retail Apocalypse? I don’t think so.

The stock market is tending to offer higher price/earnings ratios to pure online retailers compared to omnichannel retailers. Many investors are still buying into the retail apocalypse scenario. There will be a day of reckoning and the omnichannel retailer will prove to be the more productive retail format.

Jim Inglis is president of Inglis Retailing and the author of Breakthrough Retailing: How a Bleeding Orange Culture Can Change Everything.