Retail is Struggling, but Physical Stores Won’t Soon Disappear

2 min read
May 1, 2020
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It’s the first of the month. Time to pay rent. Not everyone is paying, though. Many retailers are saying they won’t pay normal rent given the current conditions. Gap is one of many negotiating for rent relief. It has gone further and said that some Gap stores will never reopen.

Many parts of the economy are suffering, but retail is in an especially bad place. The sector was transforming rapidly before the crisis. Lockdowns and the prospect of a recession to follow will accelerate current trends and maybe even create some new ones.

One big trend is the rise of ecommerce. It’s tempting to look at how well Amazon is doing right now and conclude that ecommerce is on its way to domination. This interpretation is even more convincing when you see news stories about Gap planning to close stores.

Source: eMarketer

A big problem with that conclusion is that ecommerce represents a small portion of retail sales, the number is around 16% right now. As you can see above, this also varies greatly by product category.

Another thing to keep in mind is the recent experience of direct-to-consumer (DTC) businesses. As the name itself suggests, these are retail operations that don’t go through third-party sellers. Many recent DTC examples also started exclusively online, such as Warby Parker or Casper. The thing is, many of these DTC companies don’t sell directly to consumers anymore and also don’t sell exclusively online.

As retail expert Doug Stephens puts it, physical stores are media. They are a powerful way of interacting with consumers. The experience of DTC brands born in the digital era shows that the usefulness of physical stores is not going away. That said, smart retailers are adding online components to their business models. The retail model of the future looks like a mix of online and offline.

The pandemic, along with other existing trends, is taking us toward a new retail equilibrium. It’s too soon to predict what that will look like, but recent experience shows that it will probably include a lot of physical stores. Property owners may be frustrated about not getting their rent on time, but they probably shouldn’t convert retail spaces into condos just yet.