InterFace Keynote Address: Panic Over E-Commerce’s Effect on Retail Real Estate is Full of Myths

by Katie Sloan

New York City — News headlines such as “Retail Is Dead” have painted a picture of desolation and destruction for the current state of retail real estate in the United States. However, while e-commerce “is the most discussed, it’s also the most misunderstood,” according to Melina Cordero, global head of retail research for CBRE.

Cordero’s remarks came during her keynote address at the InterFace Net Lease conference held on Wednesday, Oct. 3. The ninth annual event drew 265 real estate professionals to the New York City Bar Association.

Cordero listed a series of myths about retail and e-commerce that lead to apocalyptic headlines that she says are simply not accurate.

Myth 1: E-Commerce is Taking Over

To illustrate her point, Cordero displayed a chart tracking growth, showing e-commerce outpacing in-store sales. However, when the actual sale totals rather than growth percentages are compared, only 10 percent of retail sales are online. Furthermore, 50 percent of online retail sales go to companies with a brick-and-mortar presence.

“Less than 4 to 5 percent of total retail sales are going to online-only players. This is a very different picture than what we’re usually presented,” said Cordero.

She cited specific retailers who, while known as brick-and-mortar stores, make a very high percentage of their money online. For example, Nordstrom’s online share of sales is 27 percent, Anthroplogie’s is 39 percent and Williams-Sonoma is 53 percent.

“People ask if online is taking over brick and mortar. Well, you could argue it’s the other way around,” said Cordero. “Aren’t brick-and-mortar players learning to take over that space and leverage it for their own business?”

Myth 2: E-Commerce is More Efficient

E-commerce has completely flipped the distribution structure for products on its head. While consumers may see free deliveries directly to their door as incredibly convenient and efficient, it also disrupts a system built around sending huge, predictable shipments to a limited number of locations.

“Not only are you delivering to your established store network, but also to millions and millions of doorsteps, on demand, by the hour, within two to three days, and you have to do it for free,” notes Cordero. “The cost of fulfilling online orders is astronomical and it’s putting incredible pressure on retailers and markets.”

Online returns are extremely costly, as they take a formerly one-way distribution system (from the warehouse to the store) and “push things back through the supply chain, causing a lot of friction and issues.”

This challenge is compounded by a higher likelihood of returns. Returns happen for only 8 percent of in-store sales, compared with 30 to 40 percent of online sales.

Returns get so costly and erode profit margins so much that retails end up throwing out products because it will be cheaper than trying to repackage, resell and reship them, said Cordero.

Myth 3: E-Commerce and Stores Hurt Each Other

The future of retail belongs to the omnichannel sellers, according to Cordero — retailers that combine online and in-store presence. Consumer data shows that online sales and in-store sales both are higher in a market where the retailer has a physical store.

“When you have online sales available, your store sales are higher. When Macy’s closes a store, their online sales in that market go down,” said Cordero. “This is why retailers aren’t rushing to close their store networks.”

Cordero even went as far as to predict that online-only retailers with no store presence are almost never profitable, and will no longer exist at all by 2030. Instead, in-store retail will remain essential, but shift to a heavier focus on convenience. Expect to see an increase in curbside pickup service, automated kiosks and even robots, suggested Cordero.

“We’re approaching the end of the line. I predict in the next five to 10 years we’ll never stand in lines again. Everything is going to be so efficient and automated. You’ll tell your grandchildren about lines the same way we’ll tell them about landline phones.”

— Jeff Shaw

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