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Amazon, online retail to take share from brick-and-mortar stores post-pandemic

Amazon.com Inc. and other companies with large e-commerce businesses, including Walmart Inc. and Target Corp., will likely ride an uptick in online shopping during the coronavirus pandemic to gain market share from brick-and-mortar retail in the coming years, experts say.

U.S. e-commerce sales will reach an estimated $709.78 billion in 2020, or about 14.5% of total U.S. retail sales, up from $601.65 billion, or about 11% of total retail sales, in 2019, according to market research company eMarketer. That is the biggest jump in the e-commerce share of retail sales in a single year, Andrew Lipsman, principal analyst with eMarketer, said in an interview.

Overall growth in the e-commerce space, coupled with an increased uptake of online shopping from consumers who moved online while brick-and-mortar stores were closed for months, are driving the increase, Lipsman said. E-commerce's share of total retail sales will remain at a similar level of 14.4% in 2021 as consumers return to physical stores, but rise to 15.5% in 2022 as the economy gets onto sturdier footing.

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That growth trajectory will bode well for retailers like Amazon that were born online and others, like Walmart, that have made heavy investments in e-commerce operations and services such as curbside pickup, experts say. Spending at brick-and-mortar retail, meanwhile, is expected to decrease 14% year over year to $4.18 trillion in 2020, according to eMarketer. The pandemic slammed the retail industry, leading to record sales declines, millions of layoffs and a slew of bankruptcies from companies including J. C. Penney Co. Inc. and Neiman Marcus Group Inc. Retailers are now faced with tough decisions on the size of their stores and how many staffers they need.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

"There will be some normalization effects, but there will also be some permanent channel shifting that's been accelerated," Lipsman said. "In essential goods categories grocery and household essentials we've permanently catapulted [online shopping] three to four years into the future in a span of three to four months."

Winner takes all

Any gains will add to the momentum for players like Seattle-based Amazon, which remains the e-commerce leader and will account for 43.3%, or $46.85 billion, of $108.13 billion worth of U.S. e-commerce sales growth in 2020, according to eMarketer. Brick-and-mortar rival Walmart is second with 11.6% of the growth, or about $12.57 billion in additional e-commerce sales.

Both companies have been aggressively investing in online grocery delivery and fulfillment capabilities that make them uniquely positioned to grow. Walmart's U.S. e-commerce sales grew 74% in the first quarter and accounted for about 1.7% of the company's comparable sales for fiscal 2020.

Target Corp., which offers curbside and in-store pickup services, will account for another 3.3% of total e-commerce growth in 2020 while San Jose, Calif.-based marketplace eBay Inc. is estimated to make up 0.8% of total growth. Lipsman said that while eBay is still one of the biggest marketplaces in terms of sales volume, it's seen a "very low rate of growth" in relation to other players in the top 10.

Meanwhile, department store company Macy's Inc., which has been heavily exposed to the hardest-hit categories like workwear, event-driven apparel and home furnishings, is expected to see declines in e-commerce after underperforming for years, Lipsman said. Macy's also said June 25 it would cut 3,900 jobs as part of a restructuring plan.

Macy's said June 9 its overall sales for the first quarter ended May 2 fell more than 45% to $3.02 billion, though the e-commerce trend improved in May. The retailer will report more detailed results for the quarter on July 1.

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The gains will come on top of total growth in 2019 for players like Amazon, which reported revenue of $280.52 billion in 2019, up 20% from $232.89 billion in 2018, according to data compiled by S&P Global Market Intelligence.

Walmart saw total revenue reach $523.96 billion in its fiscal year ended Jan. 31, 2020, up 1.9% from $514.41 billion in the year ago period.

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Of course, no one can predict exactly when the immediate threat of the virus will subside, especially as states such as Texas and Florida continue to see coronavirus cases spike and fears of a second wave persist, experts say.

Brandon Fletcher, an analyst with Sanford C. Bernstein & Co., said in an interview that e-commerce gains from COVID-19 will have lasting effects and remain higher than they otherwise would have been pre-pandemic.

"You'll pulling forward demand that probably would have happened anyway," Fletcher said. "Three years of growth got pushed into one."

R.J. Hottovy, a Morningstar analyst who covers Amazon, concurred, saying e-commerce growth this year can be traced to discretionary spending that would have been spent on vacations and other leisure activities now being directed to home improvement and home confinement categories such as fitness and video games. That spending shift is likely to continue as the pandemic rages on. "There are a lot of home improvement projects that got moved up the calendar if you will," Hottovy said.

Essential retailers that shifted to online channels pre-pandemic, such as grocer player The Kroger Co., which saw an uptick in online grocery orders, stand to benefit. "That whole narrative of winner takes all, in my opinion, has become ever more true," Fletcher said.

The same may be true for athletic apparel company Nike Inc., which said June 25 that it will aggressively invest in digital operations in fiscal 2021, with expectations that digital sales could become 50% of its total business in the foreseeable future. The company said that digital sales grew 75% in its fourth quarter, accounting for 30% of Nike's total revenue that quarter of $6.31 billion.

David Swartz, a Morningstar analyst who covers Nike, said growing digital sales to 50% "doesn’t seem impossible."

"Nike has a big online business of its own already and its wholesale partners are growing theirs as well," he said in an email message.

No turning back

Meanwhile, major mall tenants like J.C. Penney, which filed for bankruptcy protection in May and continues to shutter stores, were already on the brink of death and will suffer in a post-coronavirus world, according to experts.

"What accelerated was the death of retailers who were weak," Fletcher said.

Dave Gill, vice president of insights and analytics at Rakuten Intelligence, is particularly bullish on continued e-commerce growth for retailers, especially if the pandemic threat plays out for the next year and a half. Consumers continue to utilize curbside pickup, creating a catalyst for sustained growth over "two, three, four or five years," he said.

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Walmart offers extensive online delivery and pickup options that analysts say will allow the company to grow e-commerce operations.
Source: Walmart

"Some of these behaviors are here to stay," Gill said in an interview. "Now that they see how convenient it is to have someone load your groceries in your car or your favorite restaurant bring your order out, I think there is no turning back."

It is a double-edged sword for retailers who will have to balance meeting growing online demand with new customer service expectations around areas like a seamless checkout experience and in-stock merchandise. "Basically every aspect of retail from an e-commerce perspective has been stress-tested," Gill said.

Retailers will be analyzing the reduction of their store footprints as online shopping becomes normal behavior, he said. For example, specialty children's apparel retailer The Children's Place Inc. announced June 11 it is planning to close 200 stores in 2020 and 100 stores in 2021. It's part of a plan by the company to reduce its mall-based, brick-and-mortar portfolio to less than 25% of its revenue entering its fiscal 2022.

Broadly, retailers will face "hard decisions coming up around how much square footage they need and what kind of staff they really need," Gill said.