The coronavirus pandemic has accelerated the online shopping trend while store closures have increased among bricks-and-mortar retailers, pushing already-struggling companies into bankruptcy. Anita Bruinsma, Consumer Discretionary Analyst, TD Asset Management, shares her take on the implications for retailers coming out of the crisis.
Here to share her take on the e-commerce landscape is Anita Bruinsma, Consumer Discretionary Analyst with TD Asset Management. Anita, in your analysis, you highlight the significant differences in sales growth for online versus in-store, and more importantly, the net effect on total sales. Walk us through this chart and tell us what is the data showing.
- So this data is US retail sales as provided by the US Census Bureau. And we look at this data every quarter, and in the second quarter of this year, we got some pretty exciting data because, as you mentioned, we've seen a dramatic shift between in-store to online.
So normally, we would see in-store sales growing at about 2% per year while e-commerce would grow at about 15% per year, but what we saw in the second quarter was that in-store sales fell by about 10% while e-commerce rose by a dramatic 45% on a year over year basis, and netting in a result of about a 3 and 1/2 percent decline in total retail sales. And, of course, this was due to the fact that many stores were closed and a lot of people were staying home.
- What role has e-commerce being playing during the pandemic?
- E-commerce, I think, has played a really and is playing a really important role during the pandemic for two reasons. The first is that people have been able to have essential goods delivered to them. So people who maybe shouldn't go to stores or who were nervous about going out in public were able to have these goods delivered.
For example, we've seen a massive increase in the demand for online grocery sales during this time, and I think that's been a real lifeline for a lot of people. Another example would be Amazon, who's played a role here. Now, early in the pandemic, Amazon prioritized the delivery of essential goods over nonessential goods.
So if you're ordering food or necessities for your home, you were still getting those things delivered to you pretty quickly, whereas something more discretionary in nature was certainly taking longer. And I think if this pandemic had happened 10 or 15 years ago before e-commerce was so developed, it would've been a lot harder for people.
Now, the second important role that e-commerce has played through this has been to stem the decline in retail sales. So the sales done online have been able to make up for about half of the dollar sales that were lost in store, and this is pretty significant.
I think it's important to differentiate between a recession and a pandemic. During a recession, people pull back on their retail spending purposefully. But in the pandemic, it was very different. It was more a question of access and not actually being able to go out to the store.
And so e-commerce stepped in and played that role where we were able to continue to buy the things that we maybe wouldn't have been able to go out and buy if we couldn't order it online, and so I think e-commerce has really helped to stem a more dramatic decline in retail sales overall.
- So given the importance of e-commerce in our lives, what does this mean for the retail environment going forward?
- Well, there are a lot of implications for the retail environment as a result of the pandemic. So the first one is this growth in e-commerce. So e-commerce has been growing in importance in our lives for the past decade, but in the second quarter, it really leapfrogged ahead.
So last year, about 11% of what North Americans bought was bought online, and this number jumped up to 16% in the second quarter. And I think a lot of these online spending habits are going to be sticky. We have a whole cohort of people who have never tried e-commerce before and have discovered how convenient it is and how much they love it.
And, of course, retailers are also getting better at the e-commerce experience, so I think e-commerce penetration will be maintained at a higher level going forward. The second implication is around store closures, and I guess this is related to the first.
Over the past decade or so, we've been talking about how e-commerce has led to a decline in the number of physical stores, particularly in North America, and this leap up in e-commerce penetration is only accelerating those store closures.
And, in fact, since the start of the pandemic, we've had a number of retailers who have filed for Chapter 11 bankruptcy protection. Companies like JC Penney and GNC, that nutrition company, and in Canada, Reitmans and all those have filed for Chapter 11 and stores are announcing these closures.
So I think this is going to continue because retailers are facing a double whammy right now, whereas we have this higher online penetration, less in-store traffic coupled with a consumer who is weakening with higher unemployment and a reduction of government benefits going forward.
- Anita, you talked about some of those companies that have been struggling through the pandemic. Who are some of the winners during the pandemic and what's the outlook for the industry going forward?
- There have definitely been winners through this pandemic, and I would put them in two categories. The first category I would say is those retailers that were in the right product category. So products have been doing well are home decor, home improvement, consumer electronics, and athletic wear, for example.
So companies that have benefited would be Home Depot and Lowe's, Wayfair, Nike, Lululemon, Best Buy, these companies are all doing quite well. The other category of companies that have done well are those that had a strong e-commerce presence coming into this.
So Amazon, of course, has done well, but also Walmart and Target are companies that have also been able to deliver through e-commerce through this period. So for investors, of course, our job is to look for those companies that are best positioned during the pandemic, but we're also looking for those companies who are going to emerge from this crisis even stronger.
- Anita, thank you very much for your insights and analysis.
- You're welcome, Tony.