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The 'retail apocalypse' is a myth; brick-and-mortar retail gets lot more exciting

The 'retail apocalypse' is a myth; brick-and-mortar retail gets lot more exciting

Online shopping is killing brick-and-mortar retail, right? Wrong! The reality is better than you think.

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If you read the business headlines, it sounds like brick-and-mortar retail stores are dying – a so-called "retail apocalypse."

Around 8,600 stores could close in the U.S. this year, according to a report from brokerage firm Credit Suisse.

Some even speculate that America has built its last major mall.

Mall troubles are related to a spate of bankruptcies and physical store closings. J.C. Penney, RadioShack, Macy's and Sears have announced large numbers of store closures. Sports Authority went out of business altogether last year; Dick's Sporting Goods took over the Sports Authority brand name and intellectual property.

At least a dozen major retailers have declared bankruptcy this year.

Toys "R" Us, which is $4.9 billion in debt, filed for bankruptcy last month, although its roughly 1,600 retail stores are still open. The company is rumored to be "toying" with the idea of a $2 billion Asian spin-off IPO.

The doom-and-gloom stories are everywhere. Online sales are clobbering physical retail outlets, right?

Well, not so fast.

The rise of online shopping

The NPD Group says U.S. consumers will do 40% of their holiday shopping this year online, and each online shopper is expected to spend more online than they do in physical stores.

The poster child for success is, of course, Amazon, which gets people to pay extra for Prime memberships. Prime members get a long list of benefits like faster free shipping and digital content.

Consumer Intelligence Research Partners (CIRP) this week revealed that Amazon now has 90 million US Prime members. 63% of Amazon customers are Prime members, according to the report. That's billions of dollars in revenue just from the membership. On top of that, according to CIRP, Prime members spend an average of around $1,300 per year on Amazon.

Case closed. Online shopping is on fire. And it's killing brick-and-mortar retail.

There's just one problem with that narrative.

Online giants want physical stores

Amazon dominates online shopping. So why does it also want physical stores?

Amazon this year bought grocery giant Whole Foods for $13.7 billion — stores and all. And in the last two years, Amazon has opened a smattering of physical bookstores, a few campus bookstores and an experimental grocery story called Amazon Go.

The company this week opened 10 mini stores inside existing Kohl's stores.

In addition, Amazon last month bought a 5% stake in Indian retailer Shoppers Stop. And the company is reportedly seeking 15 brick-and-mortar stores in France.

Amazon is even opening a pop-up bar for selling alcoholic drinks in Tokyo.

Clearly the No. 1 online shopping company believes in physical stores.

Amazon's moves into physical retail is part of a much wider trend. Google, which started out as a search engine company, is also getting into retail sales. The company started selling the Pixel 2, Pixel 2 XL and Google Home Mini in pop-up stores (temporary or seasonal stores) in New York City and in Los Angeles on Thursday, with plans to continue selling through the end of the year. (Previous pop-ups offered only demos, not sales.)

Earlier this month Starbucks actually closed its online store for items like coffee beans, coffee mugs and espresso machines in order to focus on brick-and-mortar retail store sales offering those same items.

Online glasses retailer Warby Parker has opened at least 50 physical store locations. And mattress-by-mail e-commerce success story Casper is getting into physical retail; it plans to open 15 physical locations this month.

The big question is: Why are successful online retailers rushing into brick-and-mortar stores?

The correct answer is: all of the above'

The "retail apocalypse" narrative results from splashy headlines and anecdotal observations about big-name closures and bankruptcies. But the data tells another story.

The National Retail Federation (NRF) expects total retail sales to grow around 4% this year. And, yes, e-commerce is growing faster than brick-and-mortar. But crucially, physical stores are still growing - at a rate of nearly 3%.

Despite the headlines, the fact is that physical stores represent the overwhelming majority of all sales, and will continue to do so for decades. In fact, only around 10% of all sales are from online stores. The rest is good old-fashioned stores.

So what's going on?

Part of the story is that the retail industry is correcting for past mistakes. The biggest of these is wild over-construction of malls in the 1970s, '80s and '90s. Currently, the U.S. has some 1,200 malls, which is simply too many. U.S. rates of shopping space per capita is many times more than other wealthy countries.

Mall closures are a correction - the U.S. economy is moving from "too many" to "just the right number" of malls, and it looks like the mall idea is dying. It's not.

What's really dying is the bad mall idea.

In the heyday of mall construction, the model was to bring in two or three "anchor stores," which were big department stores like Sears, Macy's or JCPenney. Then, you'd attract a smattering of boring mall stores, including candle stores, sneaker retailers and clothing stores.

Boring vs. innovative

What happened was that consumers are getting bored with uninspiring malls at the same time major department stores are being displaced by more innovative retailers. The result: malls are seeing anchor store closures at an accelerating pace.

What's happening is that innovative malls are getting more popular, and non-innovative ones are getting less popular. The divide between bad malls and great malls is getting wider.

The innovative malls and retailers are learning from the e-commerce companies, and embracing data-driven retailing, personalization, apps and unique experiences.

What's happening above all is that retailers embracing omnichannel retailing are tending to find the most success.

Omnichannel retailing is the convergence of online and offline buying, where there is no pricing advantage in any channel. Instead, consumers are presented with options for buying online, in-store or a combination - order online and pickup in store (or order in store and have it delivered).

Retailers embracing omnichannel retailing, stores like H&M and Forever 21, are growing fast.

Wal-Mart's head of U.S. e-commerce, Marc Lore, reportedly said that "Online retail is simply intended to make us better merchants."

The bottom line is that there is no "retail apocalypse." That's based on an obsolete dichotomy between "online" and "physical" retail. The real division is between data-driven, app-centric, flexible and omnichannel retailing on the one hand, and old and stale retailing on the other.

What's emerging is a new understanding of how to sell goods and services to consumers. They want online. They want brick-and-mortar locations. They want choice. They want experiences. They want personalization.

And the companies that are delivering all that are taking over.

The result is that online stores are gaining physical retail options. And brick-and-mortar retail is getting a lot more exciting, interesting and enjoyable.