Black Friday shopping declined by 6.2% from 2018 levels in brick-and-mortar retail stores, according to ShopperTrak data.
It isn’t that people are spending less on holiday shopping. In fact, retail sales as a whole continue to rise. The main culprit is online shopping. According to Adobe Analytics, shoppers spent a record-high $7.4 billion on online Black Friday shopping this year, nearly 20% more than 2018’s total.
What’s more, Cyber Monday spending continues to soar. Consumers spent a staggering $9.4 billion online on Cyber Monday shopping, 19.7% more than they did a year ago.
Are brick-and-mortar retail stores necessary anymore?
With numbers like this, it may seem like the wave of retail bankruptcies and store closures we’ve seen in recent years could be just the beginning. And while there could certainly be more pain ahead for the industry as it adjusts to the new e-commerce-driven world, it’s important to take a step back and put things into perspective.
Consider that e-commerce made up just 11.2% of all retail sales in the third quarter of 2019, according to the U.S. Census Bureau. Some estimates put the proportion slightly higher, but virtually every reputable data source agrees that e-commerce is below 15% of the overall retail landscape. In short, most retail sales still occur in stores.
What’s more, while e-commerce is indeed rising -- online sales made up less than 5% of retail sales in 2010 -- it’s not expected to be the dominant way people buy things anytime soon. Forrester Research predicts that 17% of U.S. retail sales will come from e-commerce in 2022, and most other estimates are in the same ballpark.
In a nutshell, e-commerce is certainly becoming more prevalent. But to say that physical retail stores aren’t going to be necessary much longer is simply not true.
The important takeaways for retail real estate investors
The need for retail real estate isn’t going away. Not even close. However, there are a couple of investment principles that could help you make smart decisions when it comes to retail real estate.
For one thing, there are certain types of retail that will always need physical spaces, many of which are retail REITs. Grocery stores are an obvious example -- sure, there are some grocery delivery services, but these generally need a physical location to operate out of, and in close proximity to customers. Warehouse clubs are another type of e-commerce-resistant retail as are other deep-discount retailers like dollar stores. These types of retailers offer bargains that aren’t practical for even the most efficient e-commerce giants to match.
Two other categories that are largely immune to e-commerce competition are non-discretionary and service-based retailers. For example, a convenience store that sells gas has little to worry about from online competitors. The same can be said for auto service businesses and fitness centers, as these businesses sell services, not physical products that can be delivered on a UPS truck.
Also keep in mind that many retailers are integrating in-store pickup for online orders, which has been very successful in many cases. In fact, I'm writing this article using a laptop I bought online and picked up at my local Best Buy (NYSE: BBY) about an hour later. This reinforces the need for physical retail locations, even as more of the actual shopping experience moves online.
Net-lease retail REITs like Realty Income (NYSE: O), National Retail Properties (NYSE: NNN), and Store Capital (NYSE: STOR) focus primarily on these types of businesses that need physical locations.
And this isn’t to say that discretionary retailers will be completely wiped out by e-commerce, but many of them will trim their physical footprints considerably over the coming years. So as an investor, it’s smart to focus on the most productive retail spaces -- think top-tier mall operators like Simon Property Group (NYSE: SPG) and Taubman Centers (NYSE: TCO) where the “destination” nature of the properties, thanks to experiential components like entertainment venues and esports attractions, keeps traffic and sales high.
The bottom line is that the latest Black Friday and Cyber Monday sales trends show that retail is continuing to migrate online. And while it isn’t necessarily a death sentence for retail real estate as an investment, it’s important for investors to keep the changing retail landscape in mind.