New Playing Field For Bricks & Mortar and Online Retailers

It was thought that the COVID-19 pandemic would benefit dedicated online retailers at the expense of store-dominant retailers ― however, the opposite now seems to be occurring. This article looks at some of the factors at play and what the latest data is showing.

The pandemic pivot to ‘pure play’ retailers

During the pandemic, ‘pure-play’ ecommerce retailers – those who only sell through the internet – benefited from a large upswing away from stores towards online shopping, given store closures and consumer health concerns. As a result, many reported record profits, and their share prices hit all-time highs across 2020 and 2021. This was evident across the world, with Australian listed pure-play retailers no different.

At the time, it was believed that this step change in online penetration would be permanent, and this would be a new base from which online penetration rates would continue to grow. This was certainly reflected in the earnings expectations and share prices of many pure-play online retailers.

If we look at what’s happening across the US, UK and Australia, what we are now seeing is that online penetration rates are typically falling back towards the pre-pandemic trend line.

Why has this happened?

While many thought the pandemic would mark the start of a permanent shift in consumer behaviour ― and this aggressive shift towards online retailing would largely be sustained as pandemic restrictions around the world were lifted ― actions taken by bricks and mortar retailers and market forces have both contributed to change the playing field. As a result, many pure-play online retailers are now seeing weaker than expected earnings and corresponding share prices.

Bricks and mortar retailers improve their online game and become ‘omni-channel’ retailers

With many stores forced to close, or customer foot traffic significantly impacted during the pandemic, store-based retailers enhanced their online offering, particular around their delivery solutions. This meant retailers with a large store-based network had the flexibility to offer both home delivery (often picked from a nearby store) as well as touchless ‘click n collect’ to provide more options for customers. As a result, many moved to become genuine ‘omni-channel’ retailers, i.e. where a multi-channel, integrated approach to sales can offer customers a seamless shopping experience.

Rising online customer acquisition costs

Additionally, costs to acquire online customers have risen materially as all retailers fight to drive customer traffic to their websites. For example, digital advertising prices in Australia have increased substantially in some key sectors such as retail, and this is evident across Facebook, Google and other social media platforms.

We do not expect this to change anytime soon, providing omni-channel retailers an advantage as they typically have lower customer acquisition costs, given their existing store networks and loyalty programs.

The flight to adapt and evolve

So, what’s in store for the sector?

As consumer demand continues to drive choice and competition for the sector, all players will have to adapt and evolve. Omni-channel retailers are well placed given they provide the highest level of flexibility for customers. We can expect to see more resources committed to developing online offerings by all retailers, in particular to enhance product delivery options and the customer experience, which could open up fresh opportunities for investors.