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CRE Finance World, Summer 2014

The growth rate of e-commerce sales has far outstripped total retail sales since 2000. Both total sales and e-commerce sales growth turned negative briefly during the Great Recession but they resumed growth in 2009. Average year over year sales growth reported on a quarterly basis since Q4 2009 was 16.37% for e-commerce retail sales and 5.43% for total retail sales. Howard Esaki of S&P estimated that if web sales grow at an annual rate of 15% over the next 10 years, while brick-and-mortar sales grow at 3% a year, the e-commerce share of total sales will rise from 6% to 16%29. Chart 9 Quarterly Growth Rate Source: Retail Indicators Branch, U.S. Census Bureau E-commerce has changed US shopping patterns. According to ShopperTrak, store visitations have declined approximately 38% since 2007. The number of unique shoppers has remained relatively stable over the past decade; however, there has been a decline in the number of stores a shopper visits. In 2007, shoppers typically visited 4.5 to 5.0 stores per trip. In 2012 the number was closer to 3.0 stores per trip. This is a result of shoppers first viewing items online and then going to specific stores. Although, this results in higher conversion rates, it also results in less mall foot traffic30. This will impact spontaneous purchases as well as ancillary visits. For example, the decision to patronize a fast food restaurant in a mall food court often depends on the potential patron being in the mall visiting other stores. CRE Finance World Summer 2014 32 Retailers Impacted by E-Commerce Retail sectors impacted most decidedly by e-commerce include books, video, music, electronics, toys, and office supplies. The goods often do not require an in-person inspection prior to purchase. Accordingly, retailers such as Best Buy, Radio Shack, Toys R Us, Staples, Office Depot, and Barnes and Noble have been impacted. These commodity retailers are vulnerable to showrooming and easy price comparison. Best Buy reported a decline in same-store sales in the U.S. of 1.2% for the quarter ended Feb. 1 2014. In contrast Best Buy’s online sales rose 26% during the same time period. The firm expects negative total sales growth for the first half of 2014. This was despite focusing on price matching to compete with Amazon. Ultimately, one can price match from a mobile device and press the order button a lot easier than going to Best Buy’s physical store and hoping the item they want is in stock. Pricematch will ultimately fail as a competitive tool for bricks and mortar retail31. Indeed 25% of electronic, computer, appliance, and office supply purchases were made online in 2013, according to Kantar Retail32. On March 4, 2014, RadioShack announced that it planned on closing as many as 1,100 stores or about 20% of their total. This represents another electronics retailer impacted by e-commerce. Other retailers are trying to compete by becoming more of an e-commerce retailer themselves. Staples is the second largest online retailer after Amazon33. They also announced a plan to close up to 225 retail stores in North America by the end of 2015. It is conceivable that retailers such as Staples will abandon many of their physical stores and move mostly online. Indeed, as reported by Staples Chief Executive Officer Ron Sargent, nearly half of Staples sales are currently generated online. He also indicated that they would be aggressively reducing the size of their stores. Office Depot completed the purchase of Office Max in November 2013 Inc. and also plans to reduce the amount of retail space leased. Retailers will continue to operate, but the demand for retail real estate will be diminished. Perhaps no retailer has done a better job of excelling in both online and physical store sales than Apple. Its leading in-store sales of $6,050 per square foot are twice that of the second most successful retailer and three to six times higher than the next eight34. At the same time Apple is the third largest online merchant after Amazon and Staples35. Although Apple has unique products, its success is an example of how a retailer can effectively integrate internet and high-service physical retail. Challenges Confronting US Retail Properties


CRE Finance World, Summer 2014
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