Can E-Commerce Regain Its Momentum?

With a big boost from inflation, e-commerce sales revenue in the US exceeded $1 trillion for the first time in 2022. But a far more reliable metric of its growth rate—the e-commerce share of overall retail sales—appears to be stalled between 14% and 15%.

Direct-to-consumer sales exploded during the lockdowns of the pandemic. At one point in 2020, US consumers were buying an estimated 70% of their groceries online. E-commerce sales as a percentage of total retail sales surged to a peak of 16.4% in Q2 2020, up from pre-pandemic levels that hovered around 14%.

“The e-commerce share of retail was growing at about 1% per year prior to the pandemic, but the surge in 2020 pulled forward growth by about three years. What we have seen since that initial surge is a leveling off in terms of the penetration rate,” James Bohnaker, Senior Economist, Cushman & Wakefield, says.

By the end of 2020, the e-commerce share of retail was 15.1%; at the end of 2021, it was 14.6%; at the end of 2022 it was 14.7%.

In 2023, projecting the post-pandemic growth trajectory of the e-commerce share of retail has become a bit of a parlor game: the prognostications are all over the map.

HAS E-COMMERCE REACHED ITS SATURATION POINT?

“Now that the normalization to pre-pandemic trends has mostly played out, e-commerce will begin to gradually re-accelerate, but at slower growth rates than seen prior to the pandemic,” Bohnaker told us.

Bohnaker thinks the “saturation point” for direct-to-consumer is a 20% share of retail—and he believes it will take several years to get there. “The share should approach 20% by the end of this decade,” he said.

JLL’s expert also is expecting a slow slog for e-commerce growth. “There’s certainly more room for e-commerce to grow, however it’s unlikely to happen in such a dramatic fashion as we saw in 2020,” James Cook, JLL’s Head of Research, says.

“The percentage of e-commerce as a share of retail sales has returned to a slow growth mode. I would expect it to inch up to 15% over the next year and a half,” he said.

Brandon Isner, CBRE’s Head of Retail Research for the Americas, is much more bullish on the potential growth curve for the e-commerce share of retail.

“Our latest data suggests that, overall, the e-commerce share of total retail will grow to 29.3% by 2030,” Isner said. “Consumer preference is the primary factor, as we have more agility and choice than ever before.”

Mark Masinter, Newmark’s Chairman of Global Retail, isn’t buying that prediction. “I don’t see direct-to-consumer ever getting to 30% [share of retail],” Masinter says. “From everything I’m observing with the brands that we’re involved with, direct-to-consumer sales will peak in the high teens to 20%.”

“E-commerce is just too expensive,” Masinter explained. “The cost of customer acquisition and last-mile delivery are far more expensive than opening a store. Bricks and mortar is still the best play to acquire a customer.”

Cook agrees that the cost of shipping is the primary hurdle to rapid expansion of e-commerce. “In order for ecommerce to make long-term dramatic leaps, there would also have to be dramatic drops in the cost of last-mile delivery,” he said.

“For retail categories like grocery, it’s quite expensive to make delivery cost effective and profitable. Over time, advances in technology could create new efficiencies. But for the near-term, daily needs categories will be areas where e-commerce has the lowest penetration,” Cook said.

Isner is betting that the rise of “m-commerce” will fuel the growth of online market penetration. He believes mobile commerce—online sales on social media platforms by shoppers using mobile phones—will become the dominant form of e-commerce within the next three years.

“M-commerce is the present and future of e-commerce,” Isner said. “The convenience of being able to connect to a retailer’s supply chain network while having coffee at an outdoor café is truly a benefit to the consumer. Retailers who aren’t strategizing how they will cultivate this activity for their business will be left behind.”

Colliers is projecting that what it calls the “global social commerce industry”—embraced by Gen Z and amplified by influencers—will grow three times as fast as traditional e-commerce in the next three years, from a 2021 estimate of $492 billion to $1.2 trillion in 2025.

“Social commerce has the potential to reach a broad audience, but its effectiveness will depend on the specific platform, target audience and marketing strategy [that is] used,” Nicole Larson, Manager, National Retail Research, Colliers, says.

Cook agrees that social media platforms like TikTok and Instagram are “incredibly powerful” marketing tools but notes that the cost of customer acquisition will be a hurdle.

“Unfortunately, for online retailers, the cost of new customer acquisition on a social media platform can be quite high. Having a bricks-and-mortar store in a high-traffic area is often cheaper in terms of customer acquisition,” he said.

OMNICHANNEL EVOLVING INTO OPTICHANNEL

The prevailing view during the pandemic—that bricks-and-mortar retail was in a battle for survival against e-commerce—has given way in the post-pandemic economy to an understanding that the most successful retailers are those who optimize all of their sales channels.

“We are finally beyond the theory that e-commerce and brick-and-mortar retail are at war with each other. In reality, they work together to make each other better,” Isner told us.

“If you’re going to succeed in the retail business, you must be great at both [bricks-and-mortar and e-commerce],” Masinter said. “If one works well and not the other, you’re going to lose customers.”

“The retail industry’s future will involve a mix of online and in-person shopping. We expect retailers to focus on the ‘optichannel’ approach versus ominchannel—optimizing all channels in play,” Larson said.

“By combining the convenience of online shopping with the personal touch of in-store experiences, retailers can provide a more comprehensive shopping experience for their customers,” she said. “It’s all about flexibility for the consumer.”

Cook agrees that the best strategy for any retail brand is a combined approach across all platforms, including online and social media marketing combined with a “reasonable” bricks-and-mortar store strategy.

The combined approach is shaping retailers’ decisions about optimizing store footprints. The post-pandemic model is somewhat smaller than a big-box outlet—with a significant portion of the footprint reserved for in-store fulfillment of online orders.

“It is a rare retail store today that does not do some form of click-and-collect,” Cook told us. “In the future, such a store will be even rarer.”

“Any store that does a moderate amount of pickup activity needs to have a significant amount of square footage devoted to storing, staging and pickup,” he said. “Many chains are still determining what the perfect store size will be. I expect that we won’t see stores get significantly smaller on average in the future.”

New store formats also are offering more space for a deeper merchandise assortment. “These new store formats will have brands focusing on tailoring their products and marketing strategies to specific local markets,” Larson said.

E-commerce buying patterns also are determining where retailers are putting their bricks-and-mortar stores: Abercrombie & Fitch recently closed its flagship store at Chicago’s Water Tower Place on Michigan Avenue, opting to open a smaller store in suburban Lakeview—the brand’s busiest ZIP code for e-commerce in Illinois.

According to Masinter, which omnichannel customers use when they make their retail purchases will depend on evolving buying patterns influenced by personal dynamics shaped during the pandemic.

“Commodities are purchased online. Clothing, gifts, specialty items—when you’re having a dinner party and you need to see the produce and the proteins—that’s when you’ll go to the store,” he said.

While the pandemic temporarily made online grocery shopping a necessity, most consumers still prefer shopping for groceries in-store, Larson said.

“Consumers’ shopping habits online and offline differ when buying groceries,” she said. “Online shoppers are relatively habitual and less adventurous. They’re more likely to lean toward popular brands or those they regularly consume. Relatively few [online shoppers] seek out new products.”

DIGITAL NATIVE RETAIL: CAUGHT IN A CROSSFIRE

The tables have turned on digital native retail brands that thrived during the pandemic. The digital native brands that emerged and blossomed during the pandemic now are caught in a crossfire of headwinds that are threatening the survival of many of them.

A survey last year conducted by Ipsos for Publicis Sapient and Salesforce revealed that pure-play e-retailers are twice as likely as bricks-and-mortar retailers to be unprofitable.

As many as a dozen digital native brands may be on the verge of filing for bankruptcy, like Forma Brands—an umbrella for cosmetics brands Morphe, Bad Habit, Jaclyn Cosmetics and Playa Beauty—which filed for Chapter 11 protection in January.

The beauty brand company, which is carrying nearly $900 million in debt, is finalizing an acquisition by its lenders that will provide $33 million for a takeover of its online platforms and wholesale operations.

Digital native brands have been racing to open bricks-and-mortar outlets as the fastest path to profitability. But as capital for physical store openings increasingly gets harder to find, the path to profitability for digital native brands now is being cut off at a time when they need it the most.

“The problem is these brands often have little in-house real estate knowledge,” Cook said. “That’s why the growing number of turnkey retail platforms makes a lot of sense for these brands.”