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Everything You Know About the Internet Killing Retail May Be Wrong

By Daniel B. Kline – Updated Apr 4, 2017 at 2:25PM

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Many retailers are fighting the wrong battle.

Conventional wisdom says physical retail is slowly dying as online stores take more market share. That logic appeared to be proven true by the string of negative earnings reports in which various chains said their Q4 and holiday sales were down, or at least disappointing.

But just because many people believe something, and some evidence suggests it's true, does not mean it actually is. Deloitte Consulting Chief Retail Innovation Officer Kasey M. Lobaugh, speaking at the ShopTalk conference in Las Vegas last month, said that conventional wisdom is wrong. He showed data that makes a strong case for his company's contention that brick-and-mortar sales are actually growing, just not at many of the traditional market leaders.

Women holding shopping bags, walking away from the camera.

Sales at physical stores were actually up this holiday season. Image source: Getty Images.

What is happening in retail?

"Heading into the holidays there was optimism," Lobaugh said. "We had income levels that were strong. Really, we had all the signs that were pointing to a very strong holiday."

Deloitte, he said, expected total retail sales to rise 4% during the holiday period and that was what actually happened. He also said that online sales (which are roughly 18% of the total) were up about 12% while brick-and-mortar sales rose 2.3%. The perception that physical retail was down overall, he said, was fueled by so many big players reporting disappointing Q4 results.

"The idea that brick-and-mortar sales were up 2.3% should cause you to scratch your head and ask what's really going on?" Lobaugh said. "Let's take on this idea of conventional wisdom. If you follow the simplistic view of the industry, there's this idea that says 'sales are shifting from brick-and-mortar to online.' "

In reality, he said, during the holiday season both channels -- physical and digital retail -- grew by about $12 billion each in sales. The reason the big-box stores got hurt -- specifically companies like Sears Holdings and Macy's, but also many others -- is that they are losing share, not just to digital players, but to smaller, more nimble physical ones.

Without naming names, Lobaugh said that discounters, and even some big-box stores, are growing. Retailers reporting growth in those categories in the last year include Five Below, which saw a 20% increase in 2016 sales; the TJX Companies (Marshalls, T.J. Maxx, HomeGoods), which increased sales 7% in 2016; Home Depot, which posted a 6.9% full-year jump;and Dollar General, which had a nearly 8% net sales gain in 2016.

Wait, traditional retail is not dying?

In an email interview with The Motley Fool, conducted after his ShopTalk presentation, Lobaugh reiterated the fact that U.S. brick-and-mortar retail grew roughly on par with online retail in absolute dollars.

"So, what has changed? Since 2009, volatility of sales in the retail industry has increased 250%," Lobaugh wrote. "At the same time, the industry has fragmented, with the top 25 traditional retailers losing 0.9% of their combined market share, or over $40 billion in concentrated market share."

It's a phenomenon Lobaugh called "death by a thousand paper cuts," in both his email and his presentation. Consumers, he wrote, have shifted their shopping habits, and online is growing, but brick-and-mortar is not shrinking, although many retailers are. 

"While some may position the issue in retail as one of online vs. brick-and-mortar, our data shows that the issue is a more complicated blend of volatility and fragmentation of market share from a market where the barriers to entry have dropped and new competitors have flooded the market and stolen share," he wrote.

What should retailers do?

Large retailers like Sears, Kmart, and Macy's may have lost sight of what evolving customers actually want. That could also be true of the other big-box stores and mall retailers that struggled over the holiday season. A top-notch digital experience is part of what shoppers want, as evidenced by the quick growth of that category, but there is still a place in the market for real-world stores.

One example Lobaugh shared during his presentation is that many physical retailers have shifted focus to luring in millennials, roughly those age 20 to age 35. That group, he acknowledged, will someday be dominant in terms of buying power but currently has $600 billion in buying power while baby boomers have $2.3 trillion. Focusing on the younger group may pay off in the long run, but for now it has opened doors for smaller physical and digital players to take share, he said.

Lobaugh closed his talk by showing that the retailers growing the most had highly differentiated products and user experiences. He explained that to succeed, retailers -- both digital and physical ones -- need to create a brand rapport. That means delivering a highly personalized experience that's different for each customer.

"If I think about a customer or a segment, I should be able to present to them within their context an experience that matters most," he said. "My selection of products and services that I present to you may be very different than what I present to another customer."

In many ways, Lobaugh's talk, and the research backing it up, show that many retailers are fighting the wrong battle. They are trying to take on e-commerce players when they should be trying to build better relationships across digital and physical channels with their customers.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Five Below and Home Depot. The Motley Fool has a disclosure policy.

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