Why traditional retailers have the checkout blues

Dylan Martinez/Reuters/File
Workers are seen in the Amazon.co.uk warehouse in Milton Keynes, north of London on November 17, 2006. This year, with online shopping popular amid the pandemic, the company's revenues are already up by more than a third.

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Gustavo Bottan, a baby boomer in Boston, says he’s “never, ever liked shopping.”

“Going to the mall, looking for this or that, I hate that with a passion,” he adds. 

Why We Wrote This

The COVID-19 pandemic has made 2020 an inflection point in the rise of online shopping at the expense of physical stores, a shift on par with the postwar boom in shopping malls.

For Mr. Bottan, ordering products online is something of a relief. And one thing 2020 has had in spades is online shopping, what with pandemic health concerns and restrictions on face-to-face commerce. We’re still buying stuff, and when it comes to office chairs and web cameras we’re buying more than ever, thanks in part to federal stimulus dollars. 

But what about brick-and-mortar stores? The near-term outlook is dire: As many as 25,000 could close this year in the United States, according to Coresight Research. The company expects a quarter of America’s 1,000 malls to close in the next three to five years. 

This year’s disruptions will permanently transform the way we shop, much as the advent of department stores did around the time of the Civil War and the adoption of indoor shopping malls after World War II. 

The difference is that these shifts enhanced, or at least preserved, the social aspect of shopping. After 2020, will shopping ever again be something we do together?

Cara Salvatore loves a local corner bodega in Brooklyn, its specialty food items, and the cashiers who work there. But the writer and online entrepreneur rarely goes there anymore because its aisles feel too narrow and cramped to maintain social distance from other people. Instead, Mx. Salvatore’s purchases happen online – for just about everything.

“I don’t love letting somebody else pick what produce I get,” Mx. Salvatore says. Even the writer’s parents in Maryland are grocery shopping online now, “which I never expected. They’re in their 70s!”

It’s a similar story in Tacoma, Washington, for Rick and Sarah Daniel, MBA graduates who are not working as they care for Mr. Daniel’s ailing parents. Men’s deodorant? A click away on Amazon Prime. Bulk household items from Costco? A monthly delivery via Instacart, an online delivery service. The only in-person shopping the couple still does is for fresh food. 

Why We Wrote This

The COVID-19 pandemic has made 2020 an inflection point in the rise of online shopping at the expense of physical stores, a shift on par with the postwar boom in shopping malls.

The conundrum is the couch.

The Daniels want to get one so they don’t have to rely solely on their antique sofa from the 1800s that needs reupholstering. They’ve looked at new sofas online, but feel uncomfortable buying sight unseen, even with all the fancy 3D imaging on furniture websites. Yet they feel unsafe going into a store to sit on sofas. “We would prefer to wait and shop for that in person, so we can see and touch,” says Ms. Daniel.

Welcome to pandemic shopping 2020, where consumers constrained by health concerns and state and local restrictions on face-to-face commerce have turned most shopping into a sterile contactless experience. We’re still buying stuff, and when it comes to office chairs and web cameras we’re buying more than ever, thanks in part to federal stimulus dollars. And while that stimulus effect is fading, Christmas sales should provide a welcome boost to retailers. 

But this year’s festive shopping season will probably not be a “Miracle on 34th Street” for struggling brick-and-mortar retailers as the biggest gains will go to online platforms like Amazon, whose revenues are already up by more than a third this year. While Black Friday online sales surged by nearly a quarter compared to 2019, traffic at physical stores plunged by more than half, according to separate surveys. The near-term outlook for physical stores is dire: As many as 25,000 could close this year in the United States, nearly triple the closures last year, according to Coresight Research, which also expects a quarter of America’s 1,000 malls to close in the next three to five years. Mall stalwarts like J.C. Penney, Neiman Marcus, and Brooks Brothers have all filed for bankruptcy. 

The silver lining to all this disruption is that consumers and retailers have been jolted out of their old habits, forcing them to experiment with new ways of shopping. Some of these changes will permanently transform the way we shop, much as the advent of department stores did around the time of the Civil War, the adoption of indoor shopping malls after World War II, and the birth of e-commerce in the 1990s.

The difference is that most of those transformations enhanced, or at least preserved, the social aspect of shopping. In the present era of change, that social aspect has all but evaporated. Everyone agrees that online shopping will get bigger, more efficient, and more streamlined, and that the ease of ordering from home will be irresistible. 

But the future of the physical shop, from the big-box outlet near the interstate to the independent home decor store on Main Street, is less clear. Will shopping still be something that we do together, a form of leisure and entertainment? Will it ever become fun again?

Mike Segar/Reuters/File
A grocery picker works in a Peapod grocery distribution center in Jersey City, New Jersey, Aug. 21, 2018. Peapod offers grocery delivery services, which many consumers have turned to amid the pandemic.

***

As a Wall Street retail analyst, Greg Melich spends a lot of time figuring out how and where U.S. consumers are spending their dollars and which companies are best positioned to ring up their sales. He’s tracked the meteoric growth in digital commerce during the pandemic. Take Walmart, the nation’s biggest retailer: Online sales rose 79% in the third quarter. 

Still, Mr. Melich reckons that shopping as entertainment will be back, because most of us want to go back to shopping in person when it feels safe to do so again. “I’m not a believer that all retail goes online. ... People are social animals,” he says. 

The easing of the COVID-19 pandemic would provide short-term relief for shoppers who want to resume their social habits and indulge in what retail experts call “revenge shopping.” 

Ms. Daniel wants to go window-shopping with her mother again; Mr. Daniel wants to browse book and antique stores. “There’s things we’re definitely looking forward to getting back to,” he says.

Even after the pandemic is over, however, four shopping and lifestyle trends will drive the future of retail, according to Mr. Melich, a senior managing director at Evercore ISI, an investment bank. Two of these trends are familiar: online shopping and a hybrid of online and on-site purchases. The other two are more tied to the pandemic and thus more speculative. But they could prove far-reaching in how we live and shop.

One is nesting at home. The other is fleeing density, moving from crowded cities to less-crowded ones or to the suburbs. 

Nesting is likely to continue, Mr. Melich believes, because many Americans prefer to spend more time working from home and are also making fewer trips to restaurants and other public forms of entertainment. 

As a result they’re spending more on their home, creating a surge in sales for hardware and electronics stores, online furniture retailers like Wayfair, and even small entrepreneurs like Pack Matthews, whose Columbia, Missouri, firm sells office chairs meant to accommodate folks who prefer sitting cross-legged.

When the pandemic hit he fretted that sales would drop for handmade chairs that cost $980 and up. Instead, Mr. Matthews saw sales double. Under a deal he has with Google, he offers chairs at a discount to its employees working from home. The pandemic boom has allowed him to move production from a shared makerspace to a dedicated facility. 

“We’re helping folks make the home working environment its healthiest,” he says. 

The other trend is less certain. Early evidence points to some residents exiting New York and San Francisco. Other research finds a surge in temporary moves by urbanites who may be moving to less dense locations to wait out the virus. However, should that movement outlast the pandemic, it could parallel the national exodus to newly built suburbs after World War II.

These two trends could end up boosting retail sales. For roughly two decades, consumers have devoted an increasing share of their disposable income to experiences rather than physical items sold in stores. The pandemic has restricted or shut down venues that cram people together, whether it be airlines and restaurants or concert halls and movie theaters. So if we continue to hunker down at home, then more of our disposable income could wind up in the hands of retailers. 

That would be fine for Gustavo Bottan, a baby boomer and business development director at Northeastern University in Boston. Since the start of the pandemic, he’s grown wary of crowded spaces like movie theaters and is sticking with his TV for now. “I have a large enough screen that I can kind of feel what [the big-screen experience] is at home.”

Not so fast, says Michael Upton, a software engineer in North Chelmsford, Massachusetts, who graduated from college a year ago. “I definitely would go see movies more than anything,” he says. It’s not just movie theaters that he misses during the pandemic. “The community experiences that we have lost – they’re a big part of human nature that we enjoy doing. Imagine going to an amusement park when nobody’s there.”

Ann Hermes/Staff
“The community experiences that we have lost – they’re a big part of human nature that we enjoy doing.” – Michael Upton, software engineer and moviegoer

***

The challenge for retailers is to understand what kinds of communal shopping experiences will attract consumers in the future. Some are doubling down on online and hybrid options, knowing that even after the pandemic recedes there will be some who prefer to shop that way. 

“It’s easier for me to click a few buttons on my phone and get something in two days than to take an Uber to the grocery store,” says Grace Kim, a sophomore at Eastman School of Music in Rochester, New York. Even buying clothes online has become easier, she says, because sites like Boohoo help customers answer questions about specific brands’ sizes that fit them, the curvature of their hips and belly, and their preferences in loose vs. tight-fitting clothes. 

Ms. Kim still likes shopping in person. But in the future, “it would be less frequent.”

On a recent evening, retail consultant David Bishop placed an online order for curbside pickup at a Target store near Chicago. Curbside pickup, once a niche offering, has become a way of life for many pandemic shoppers wary of exposure to the coronavirus inside stores. It has also been a lifeline for retailers that would otherwise have had to shut down during state or local lockdowns. 

When Mr. Bishop’s notification came that his order was ready, he clicked on an app saying he was on his way and drove to the store. He parked, and a minute later his order of nearly two dozen grocery items had been brought out to his car. “So it’s almost, like, magical,” he says. 

The next day, he worked with another grocer in Minneapolis where the average wait time for a curbside pickup was five minutes. Five minutes may or may not be a long time to wait in a checkout line. But in the competitive world of hybrid shopping, it can feel like an eternity to wait five minutes in your car, especially if you have a young child and you know that other retailers can do the job in a minute. 

“At that level, you start getting to a point where a customer can get frustrated,” says Mr. Bishop, who is a partner at Brick Meets Click, a grocery consultancy in Barrington, Illinois. 

To pull off curbside “magic,” Target and other retailers are investing heavily in sophisticated geolocation and other technology that lets staffers know when the customer’s car is heading to the store, when it enters the parking lot, and when it’s approaching the pickup area. 

Going a step further, Amazon has pioneered cashierless stores, selling meals and snack food in cities like Seattle, Chicago, New York, and San Francisco. When shoppers take an item off the shelf, the system of cameras and sensors automatically charges it to their Amazon account. If they put it back on the shelf, the system credits their account. Once the system scans the Amazon app on the shoppers’ phone, there’s nothing else to scan: no special grocery carts or checkout lines before they leave the store.

Ted S. Warren/AP
An Amazon employee demonstrates how to scan a smartphone code to use at an Amazon Go Grocery store in Seattle, Feb. 21, 2020.

Of course, such technologies involve huge investments by multinational corporations, which raise privacy and competitive issues. Location tracking already happens under the radar, but in the hands of big companies it may draw additional government scrutiny. In 2019, Facebook paid a $5 billion fine for deceiving customers about their control over privacy. 

A House of Representatives subcommittee recently concluded that Amazon, along with Facebook, Apple, and Google, holds monopoly power. It found that Amazon holds sway over half or more of U.S. online retail sales by dominating the third-party sellers on its site. Amazon argues it isn’t a monopoly and has no incentive to undermine the sellers on its platforms. 

Some shoppers are also wary of Amazon’s growing clout. A recent survey of shoppers found that a third believe the company uses questionable practices, though nearly all respondents agreed that the company puts its consumers first. 

“I try really hard not to buy from Amazon, because I feel that it’s really hurting our small communities,” says Betsy Morris, a retired baby boomer in Huntington Beach, California. “I always look locally first and if I can’t find it, I’ll go to Amazon.”

***

Just as the pandemic is global, so too are the trends at work in the retail sector. Many of the pressures facing American brick-and-mortar stores are also roiling those in rich countries in Europe and Asia. For hints of what the future may hold, retail experts say, look to China.

That’s partly because Chinese consumers have embraced digital commerce more quickly than Americans have, leapfrogging the mall era to shop on their smartphones. China was also the first to experience the coronavirus and among the first to emerge from it. 

“China is now into the new normal, as it were, the first country in the recovery phase of COVID, and it serves as a signpost to the rest of the world,” says Kanaiya Parekh, a Hong Kong-based retail expert for Bain & Co. 

Several retail trends in China are recognizable to U.S. retailers: the move from in-store to online sales; growth in spending on health and wellness, everything from fresh fruit to sporting goods; and what Mr. Parekh calls a flight to value. Globally, luxury brand sales are down this year. In China they continue to grow, but cheaper local brands are growing even faster. 

Chinese online retailers led by behemoth Alibaba are also trying to make internet shopping fun by livestreaming celebrities selling goods. Livestreaming product demonstrations and celebrity endorsements is nothing new, but China, where nearly 1 in 4 retail sales are done online, has turned it into a juggernaut. 

Last year on Nov. 11 – China’s so-called Singles Day for online shopping – retailers sold about $60 billion worth of goods, says Mr. Parekh. That’s more than Amazon sells in an entire month. And livestream sales accounted for 7% of the total. This year on Singles Day, which actually stretched over several days, sales doubled to $120 billion and livestreaming made up 10% of the total.

Livestream companies featured personalities such as Li Jiaqi, China’s “King of Lipstick,” and even retired U.S. basketball legend Earvin “Magic” Johnson, who sold hemp- and cannabidiol-based creams on Alibaba’s Tmall platform. 

As in China, U.S. retailers are trying to make the online experience easier, more efficient, and less intimidating, including for personalized items, such as clothing and groceries. Still, many consumers report that the fun is still missing. 

Ann Hermes/Staff
The sun sets over cars in the parking lot of Walmart’s Intelligent Retail Lab on Nov. 19, 2020, in Levittown, New York. The facility is the only Walmart AI lab location of its kind. Walmart’s e-commerce sales rose 79% in the third quarter.

Ms. Morris, the retiree in Huntington Beach, still insists on grocery shopping in person. “Honestly, that’s the only social interaction I have. It’s fun,” she says. 

It should be even more fun when all the stores are able to reopen, she adds. “It has been like a year that we haven’t gone to a home goods store or a home decor store. We’re all going to go out and say: What is everyone doing? What do houses look like? Is gray out for a paint color?”

Mr. Bottan, the baby boomer in Boston, offers a different perspective. “I have never, ever liked shopping,” he says. “Going to the mall, looking for this or that, I hate that with a passion.” So for him, ordering online for home delivery is something of a relief.

But even he waxes poetic over the hours he’s spent in bookstores like Barnes & Noble. “You have a Starbucks there. You can browse,” he says. “You can go with your kids and read a book. They’re not selling a book; they’re selling an experience.”

***

Mx. Salvatore of Brooklyn, the writer who buys and sells almost exclusively online, sells artsy homemade picture frames at Duskshaped. But they (Mx. Salvatore identifies as nonbinary) dream of opening a physical shop in the future, a place where shoppers can linger and browse. 

Online retailers “put all those algorithms in place to try to show you things that you wouldn’t have discovered otherwise,” they say. “But I don’t think it compares to the experience of walking into a store and seeing things you wouldn’t have seen otherwise.”  

Ann Hermes/Staff
“I don’t think [online shopping] compares to the experience of walking into a store and seeing things you wouldn’t have seen otherwise.” – Cara Salvatore, online entrepreneur

That’s hardly an old-fashioned view. One of the myths in retail is that because younger customers are comfortable with digital technologies, they’re less interested in shopping in person. In fact, researchers have found that by a wide margin both millennials and the generation born after 1995 prefer brick-and-mortar shopping to buying online.

“I’m not really buying into” online grocery shopping, says Mr. Upton, the software engineer. “There’s something very tactile about food, to see what you’re eating.”

It’s perhaps the melding of physical and online shopping – the hybrid or multichannel category – that could spur some of the biggest retail innovations over the next few years. 

For most of history, people could only shop one way: in a physical location. In the 1870s, Montgomery Ward introduced catalog shopping to the general public, a novelty made possible by the crisscrossing of railroads across the continent. In the 1990s, e-commerce emerged on the back of the internet, a technology seeded by military research dollars. 

Now in the pandemic era, retailers like Target are working on making ordering online and picking up at the store a seamless process. And that could be just the start. Other hybrid models will emerge, especially as retailers wring delays out of the system, says Kirthi Kalyanam, executive director of the Retail Management Institute at Santa Clara University in California.

Amazon, which already provides free two-day delivery to Prime members, now offers one-day delivery nationwide for a fee and same-day delivery on select items in several cities. Its Amazon Fresh grocery service lets shoppers pick a two- to three-hour time slot for delivery.

Jason Redmond/Reuters
A woman walks through an Amazon Go Grocery store in Seattle, Feb. 21, 2020. Amazon has opened several convenience stores using an app and cashierless technology.

Yummy, a hybrid grocer in Los Angeles, is going one better. It now offers to deliver groceries to select LA neighborhoods and suburbs within 30 minutes of an online order. The fee is $6.99 for a minimum order of $14.99 – or free if you spend $125 or more. And in China, several delivery companies are also moving to 30-minute delivery for online orders, says Mr. Parekh.

Stores will increasingly become places to showcase products rather than to stock inventory, says Mr. Kalyanam. Online retailers will re-create their online persona in a physical space: Think Apple stores or Lululemon. And consumers will have multiple ways to buy their goods. Stores might not even carry inventory, but promise to deliver your purchase from a nearby warehouse in a half-hour.

“Fast forward three or four years, you’re going to have ... five, six different big, familiar ways of shopping,” says Mr. Kalyanam. “Shopping as fun will come back, and bricks-and-mortar will be stronger than ever before for shopping as fun.”

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