The best retailers combine bricks and clicks — Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

Retail profits are plummeting. Stores are closing. Malls are emptying. The depressing stories just keep coming. Reading the Macy’s, Nordstrom, and Target earnings announcements is about as uplifting as a tour of an intensive care unit. The Internet is apparently taking down yet another industry. Brick and mortar stores seem to be going the way of the yellow pages. Sure enough, the Census Bureau just released data showing that online retail sales surged 15.2 percent between the first quarter of 2015 and the first quarter of 2016.

But before you dump all of your retail stocks, there are more facts you should consider. Looking only at that 15.2 percent “surge” would be misleading. It was an increase was on a small base of 6.9 percent. Even when a tiny number grows by a large percentage terms, it is often still tiny.

More than 20 years after the internet was opened to commerce, the Census Bureau tells us that brick and mortar sales accounted for 92.3 percent of retail sales in the first quarter of 2016. Their data show that only 0.8 percent of retail sales shifted from offline to online between the beginning of 2015 and 2016.

So, despite all the talk about drone deliveries to your doorstep, all the retail execs expressing angst over consumers going online, and even a Presidential candidate exclaiming that Amazon has a “huge antitrust problem,” the Census data suggest that physical retail is thriving. Of course, the shuttered stores, depressed execs, and tanking stocks suggest otherwise. What’s the real story?

Many firms operating brick and mortar stores are in trouble. The retail industry isgetting “reinvented,” as we describe in our new book Matchmakers. It’s standing in the path of what Schumpeter called a gale of creative destruction. That storm has been brewing for some time, and as it has reached gale force, most large retailers are searching for a response. As the CFO of Macy’s put it recently, ““We’re frankly scratching our heads.”

But it’s not happening as pundits predicted. In the heyday of the dot.com bubble, brick-and-mortar retail was one of those industries the Internet was going to kill – and quickly. The dot.com bust discredited most predictions of that sort. And in the years that followed, conventional retailers’ confidence in the future increased as Census continued to report puny online sales. And then the gale hit.

Read the full post at Harvard Business Review. 

David S. Evans is an economist, business adviser, and entrepreneur. He has done pioneering research into the new economics of multisided platforms. He is the co-author of Matchmakers: The New Economics of Multisided Platforms.

Richard Schmalensee is the Howard W. Johnson Professor of Management and Economics, Emeritus, at the Massachusetts Institute of Technology. He served as the dean of the MIT Sloan School of Management for nine years and as a Member of the President’s Council of Economic Advisers. He is the co-author of Matchmakers: The New Economics of Multisided Platforms.

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