E-Commerce: The Foe of Retail Sales
Through the growth of technology and specifically the internet, we’ve seen a complete shift in the way products are sold in the 21st century. The Internet has established a morale with this generation that favors convenience and instant gratification. The days of going to the mall to shop around at different stores are becoming less popular as the years pass. People enjoy the comfort and accessibility of shopping from their living room couch. E-Commerce sales have increased gradually every year since 2007. In 2007, 5.1% of sales were made via the Internet. In 2018, we saw this number jump up to a staggering 14.3% of sales with a total revenue of over $517 billion occurring online (Ali). The latest examples of the E-commerce takeoff can be seen in the recent announcements of store closings from Walgreens and Barney’s. In this case, it showed the negative effects that E-commerce can have on select businesses. Both popular retail stores felt the pressure of the online shopping growth and announced large scale store closings. The stores could no longer challenge the beast of the Internet and they were forced to downsize their operations.
2019 has not been a warm year thus far for Walgreens (NASDAQ: WBA). The pharmaceutical and wholesale retailer entered 2019 on a rough note after Robert Jones, a Goldman Sachs analyst, announced that they’d be downgrading the stock to a sell stock. This announcement led to a 19.3% decrease in their stock value in December 2018 alone. Since then, news has not been much better. In 2019, their stock value has decreased approximately 22%, which led the Walgreens management team to make a change (Symington). On August 5, Walgreens announced in a report that they would be closing 200 stores nationwide. They claimed that the reasoning behind the move was to be “more efficient in their operations.” Phil Caruso, Walgreens spokesman, stated, “we are undertaking a transformational cost management program to accelerate the ongoing transformation of our business, enable investments in key areas and become a more efficient enterprise.” Walgreens announced that they would be closing about 3% of their 9,560 stores. The move is expected to save Walgreens approximately $1.5 billion annually by 2022 (LaVito).
Luxury retailer, Barney’s, also announced on Tuesday, August 6th, that they will be closing stores. Unlike Walgreens, however, Barney’s announced that they would be filing for bankruptcy and thus were forced to close the stores. They essentially had no other choice. They currently have over $200 million worth of debt, and they were able to secure a loan of $75 million in order to survive long enough to find a buyer for their operations. Barney’s stated that the main reason for their lack of profitability has been their inefficiencies with regard to online shoppers. CEO Daniella Vitale came out with a statement saying, “Like many in our industry, Barney’s New York's financial position has been dramatically impacted by the challenging retail environment and rent structures that are excessively high relative to market demand.” The two main issues that can be drawn from this statement are increasing rent prices and outdated sales techniques. The rent prices are clearly an issue, as their trademark Madison Avenue location saw a major hike going from $16 million all the way up to $30 million (Picchi). Regarding their outdated sales techniques, real estate mogul, Joseph Aquino put it best saying, “We are in the phase where a lot of younger shoppers don't want to go the high street. They sit around and buy online and that's what we (retailers) are fighting against.” It appears Barney’s lack of ability to assimilate themselves into the online shopping market has led them to rock bottom. They plan on officially closing fifteen of their stores, leaving them with just seven remaining (Chapman).
What this means?
Barney’s and Walgreens may be the beginning of a trend for retail marketplaces. Based on the historic cycles, it seems unlikely that the market will keep up the rapid pace that it has right now. As a result, real estate may be an increasingly popular investment in the coming years as it is seen as a much safer option for investors. If E-commerce continues to grow at its current pace, box store owners may opt to close their stores and sell their properties in order to maximize profits.
Walgreens and Barney’s should make their best efforts to increase their online sales production. They should reinvest the money they are saving on their reduced number of stores in the company’s online advertising. They should try to build their online shopping platforms to adjust to the trends of the consumer spending habits. If they can achieve this, their decisions to eliminate the stores will ultimately equal bigger profits. Regardless of what they do with the money, the company’s earnings reports will be closely watched by companies interested in following suit. If they show growth after the downsizing, look for more companies to follow the lead of these chains.
Of course, for every loser, there is a winner. In terms of E-commerce it is no secret that Amazon has established a seemingly untouchable niche. Other than Amazon, shipping companies such as UPS can expect to see major gains as demands for their services become paramount. In 2019 alone, UPS has seen their stock price jump over 19%. Companies such as FedEx and Deutsche Post will look to make similar gains as the popularity of online shopping continues to grow.
Ali, Fareeha. “A Decade in Review: Ecommerce Sales vs. Retail Sales for 2007-2018.” Digital Commerce 360, www.digitalcommerce360.com/article/e-commerce-sales-retail-sales-ten-year-review/.
Chapman, Michelle. “Barneys Seeks Bankruptcy Protection, Closes Most Stores.” ABC News, ABC News Network, 6 Aug. 2019, abcnews.go.com/Business/wireStory/barneys-york-files-ch-11-bankruptcy-protection-64799774.
LaVito, Angelica. “Walgreens to Close 200 US Stores.” CNBC, CNBC, 7 Aug. 2019, www.cnbc.com/2019/08/06/walgreens-to-close-200-stores-in-us.html.
Picchi, Aimee. “Luxury Retailer Barneys New York Files for Bankruptcy.” CBS News, CBS Interactive, 6 Aug. 2019, www.cbsnews.com/news/barneys-bankruptcy-luxury-retailer-files-for-bankruptcy-announces-will-close-15-stores-2019-08-06/.
Symington, Steve. “Why Walgreens Stock Fell 19.3% in December.” The Motley Fool, The Motley Fool, 9 Jan. 2019, www.fool.com/investing/2019/01/09/why-walgreens-stock-fell-193-in-december.aspx.