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2018 Looks Good for Retail, but Not for Traditional Retailers

By Daniel B. Kline – Updated Feb 12, 2018 at 4:09PM

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Sales are going to rise, but the gains won't be evenly distributed.

Call 2017 the year average people grew familiar with the phrase "retail apocalypse." Whether it was seeing a Macy's close, watching Sears Holdings shut down Sears and Kmart stores, or seeing empty spots pop up in your local mall, the changes in the brick-and-mortar retail world were highly visible.

Those store closings, bankruptcies, and near-bankruptcies did not happen because consumers are spending less money. Retail sales, which includes non-store sales, discounters, department stores, online sales, grocery stores, specialty stores, and auto parts and accessories stores, but exclude sales at automotive dealers, gasoline stations, and restaurants, actually rose by 3.9% in 2017 to $3.53 trillion.

That increase should repeat in 2018 with the National Retail Federation (NRF) projecting that retail industry sales will grow between 3.8 and 4.4% over 2017. Higher sales, however, do not mean that the devastation will stop for traditional physical retailers. In fact, for chains that have not adapted to an omnichannel world where consumers can buy and return what they want from wherever they are, the pain is only likely to get worse.

A woman carrying shopping bags is holding a phone.

More shopping is moving to digital channels. Image source: Getty Images.

What's happening? 

The 2017 numbers, which are based on the United States Census Bureau's preliminary estimate actually exceeded NRF's prediction which was for growth between 3.2% and 3.8%. Despite the slightly higher number the retail world still saw significant upheavals because the growth of digital sales outpaced the growth of brick-and-mortar sales.

That's expected to happen in 2018 as well. Online and other non-store sales (think catalogs, kiosks, and vending machines) should grow by 10%-12% in 2018. Given that in 2016 digital sales accounted for 11.7% of total retail sales, according to the U.S. Commerce Department, digital growth will account for much of the overall expected increase.

Think of it this way. Say that total retail sales were $1 million, with $150,000 coming from digital. A 4% total increase would be $40,000. If digital grew 12%, then that market segment would have accounted for about $18,000 -- nearly half of the total gain.

Using that rough math, if online retail grows at a 12% pace then brick-and-mortar will only show about 2.5% growth. That happens to be the number Kiplinger forecasts inflation to come in at for 2018. So, if trends happen as expected, when adjusted for inflation, physical stores can expect essentially zero real growth. 

Flat is better than down

The good news for retailers is that flat sales when adjusted for inflation are better than declining sales. In addition, for chains that have fully embraced an omnichannel model the line between in-store-shopping and digital has blurred. A customer might be standing in a store ordering from the same retailer online or ordering online to pickup in store.

It's clear from these numbers that there is retail growth to be had. Getting a piece of it, however, requires more than being just a storefront.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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