eCommerce Coming Back to Earth
An interesting statistic emerged this week. Amazon reported its numbers for Q1. They reflected a double-digit gain (+17.1%) for growth in their physical stores, Amazon Go and Amazon Fresh. Online sales, however, fell -3.3% during this same period. Certainly, the accelerated rollout of their “Just Walk Out” technology and expansion of the Amazon Fresh concept have played some role in spiking physical sales. But this is really reflective simply of the growing return to normalcy.
Overall eCommerce sales in March increased annually by just 2.6%. This is the lowest amount of growth recorded by the overall sector since December 2018 and among the lowest year-over-year growth metrics recorded for eCommerce. Since 2000, the only times these numbers have turned negative have been during recessions (2001 and 2009), but they actually may do that in the coming months as consumers not only return to pre-pandemic shopping patterns but also as inflation increasingly impacts shopping behavior.
This was bound to happen for every category of retail that benefited during the pandemic and no other category benefited as much as eCommerce. Whereas eCommerce growth had been averaging in the low teens in the years before the pandemic, those numbers skyrocketed once the US enacted shutdowns. According to the Commerce Department, eCommerce accounted for $66.9 billion in total sales as of February 2020 (our benchmark for the pre-pandemic norm). By January 2021, they had neared $91.0 billion. In fact, if you look at where they stood as of last month ($102.9 billion), they stood a whopping 53.7% over pre-pandemic levels.
Of course, accounting for nearly half of all eCommerce activity in the US (directly and via their marketplace), no company benefited as much as Amazon. They went from a $999.96 billion total valuation in January 2020 to a peak value of $1.88 trillion as of July 2021. Those numbers are coming back to earth as pandemic-era market frothiness is getting back to reality. But they still place Amazon within the top five most valuable companies on earth.
That said, we are already seeing a few retail categories that dominated during the pandemic coming back to earth. Sporting goods, which at one point (June 2021) had posted an amazing 154.2% annual
growth figure, closed March out in the red to the tune of -5.6% (year-over-year). Consumer electronics, which surged in 2020/2021 with demand for more home office equipment, was down -10.0% with the last set of data. And, while remaining in positive territory (though just barely), furniture and furnishing stores were up just 0.3% while building materials/hardware/DIY stores were up only 0.7% in March. All of these categories remain up double digits compared to where they stood in February 2020, but those numbers are starting to sharply drop both because consumers are resuming more normalized shopping behaviors and because inflation is starting to take and edge off of spending.
The most telling category for sales growth has been gas stations, which aren’t just posting annual growth of 36.6%, but where sales are up a whopping 49.7% over pre-pandemic levels and pricing. The longer these figures remain elevated, the more sharply all other categories will be coming back to earth.
None of this is to say, however, that eCommerce will be giving back all, or even most, of its pandemic gains. But, for physical retail, it is critical to note that we are now reaching a place where the disruption is likely to diminish for most categories. Few retail categories have been left unimpacted by eCommerce. Some, like books, music and media now see over 80% of sales coming digitally. Further significant market penetration for this category is possible, but not very likely. Likewise, a decade ago less than 3% of all apparel was sold online. Before the pandemic, it was roughly one-third. Now it is roughly 45%. The real question physical retailers need to ask is how much higher can it go? Will we become a world where 80% of apparel is sold online? 70%? 50%?
The reality is that the pandemic eCommerce surge has likely moved digital retail much closer to a place where growth rates will normalize. Before CoVid, overall retail sales for the previous 20 years had averaged in the 3% range, while eCommerce sales growth typically grew at five times that rate. These numbers are going to start to track a lot closer to one another. Meanwhile, if eCommerce growth is normalizing, it follows that disruption in the physical retail space will also significantly lessen… at least the kind of disruption that marked most of the past 15 years with retailers needing to downsize their physical footprint while upsizing their eCommerce platforms. This was at the heart of all the “retail apocalypse” headlines. But the record closures and bankruptcies of 2020, despite all their pain, accelerated that extended trend of rightsizing. No doubt there are still a few categories (drug stores, for example) where eCommerce disruption has not fully taken place. And there are certainly many chains and categories where more rightsizing needs to occur. But, by and large, the one upside of the past few years is that the era of retail apocalypse… at least, as defined by eCommerce disruption, is arguably over.
See you next week.
Garrick
