Marketplaces, e-commerce software apps and the pandemic revolutionized the shopping experience, but does a rise in online sales necessarily mean the demise of brick-and-mortar retail? While the world will never revert to its former glory (aka florescent lit malls with atrium ceilings and giant pretzels), will physical storefronts really be a thing of yesteryear? The answer is no, but keep reading to find out why!
Perception vs Reality
Pivotal legislative actions and economic cycles played key roles in framing the perception that brick-and-mortar retail was declining compared to the thriving ascent of online sales. This resonated as a hot topic in California, because it impacted local government sales tax revenues and cultivated long-term concerns for the sustainability of these tax revenues from traditional retail formats. Let’s review…
2012 – AB 155
In 2012, Assembly Bill 155 was passed, amending the California Revenue and Taxation Code’s definition of what it meant to be engaged in business in California. It enacted click-through and affiliate nexus provisions on retailers making sales over the internet. As a result of this legislation, the State saw rapid growth in local tax receipts attributed to online sales as more taxpayers came into compliance.
2019 – AB 147
Concerns surrounding remote sellers continued to be an issue nationwide. In the South Dakota vs. Wayfair ruling, the U.S. Supreme Court eliminated the unfair disadvantage to local retailers and correlated shortfalls in local tax revenues. California quickly reacted and passed AB 147, the Marketplace Facilitator Act. The legislation established a threshold for economic nexus and required marketplace facilitators, like Amazon, to collect and remit taxes on behalf of all third-party sellers, essentially eliminating any tax advantage that online sellers previously enjoyed.
2020 – COVID-19
E-commerce trends accelerated during the pandemic as physical stores temporarily shuttered. Disposable income that historically was spent on non-taxable services/experiences shifted to taxable goods, thus inflating taxable sales during an overall economic downturn. Consumers adapted to new trends like curbside pickup and buy-online-pickup-in-store (BOPIS), reinforcing the use of technology to shop.
The Marketplace Facilitator Act and the pandemic occurred during the same period, obscuring the positive impact the legislation had on total taxable sales and the fact that the additional sales and use tax collected helped soften the blow to local government revenues throughout 2020.
While e-commerce will continue to play a role in local government revenues, brick-and-mortar retail isn’t going away any time soon. The reality is, taxable sales from physical stores grew 24% over the last ten years despite the negative pressures of slower population growth, increased percentage of spending on services/experiences, and online shopping. In 2021, when consumers no longer had to shop from behind the safety of a screen, physical stores grew 18.5% compared to e-commerce growth of 14.2%.¹ This positive trend continued into 2022 with more stores opening than closing.
The Experience of Shopping
The physical act of shopping and touching tangible objects is a form of therapy that online shopping cannot compete with. Consumers enjoy the disconnect from reality, time spent away from home and time not in front of a screen. Back-to-school shopping, be it for a new wardrobe or new school supplies, is an event children look forward to. Mothers enjoy spending time in fitting rooms with daughters trying on prom dresses. Husbands find daily, sometimes hourly, excuses to run (away) to Home Depot. In-store shopping provides an experience that we can attach positive emotions to – happy, excited, relieved – making it far more impactful than scrolling and filtering. What’s better than Amazon one-day shipping? The instant gratification of walking out of the store carrying your new favorite shoes and knowing they fit like a glove and you can wear them right away. Spurred by social media likes and spikes of dopamine, today’s society is motivated by instant gratification, so shopping is considered a rewarding and successful experience.
Another type of shopping experience is occurring in the form of trendy pop-ups. Retail stores like Target and Ikea, and well-known brands like Nike and Google, have set up pop-up shops – temporary retail spaces – to attract crowds and make connections with audiences outside of their typical target personas. This allows retailers to reconnect with those consumers that have been online shopping for the past few years. Shoppers are drawn to and respond accordingly to the “act now before it’s gone” appeal in fear of missing out (FOMO). Again, emotion is a key factor and one that retailers are manipulating as a marketing tactic. Pop-ups are a win-win-win for retailers because they act as experimentation and produce big results, are low cost, and provide the perfect setting for photo ops and social media shares.
Online shopping is convenient but only when you have prior knowledge of upcoming needs and time to shop ahead. Life is full of surprises (and procrastination) that make this impossible at times. How many times has your child announced last minute that they need to build a dinosaur diorama with macaroni noodles in a shoebox and it’s due tomorrow? Run to your neighborhood Target. A colleague just reminded you that tomorrow is National Boss’ Day? Stop at Hallmark on your way home. Brick-and-mortar stores to the rescue! In-store shopping is more reliable and always meeting shopper’s needs on the fly.
The Hidden Costs of E-Commerce
E-commerce business owners are quickly realizing the customer acquisition cost is more than they bargained for. Now that consumers have options again and are enjoying all the perks of brick-and-mortar shopping, it is harder to attract and retain customers. The cost of digital advertising has sky-rocketed, and it doesn’t offer the same audience tracking benefits it did a short while ago. Third party cookies are a thing of the past, so collecting user data and retargeting has become more labor-intensive and time consuming. Not to mention, the time to maintain sites continues to grow as more platforms emerge. And regardless of the platform, it’s becoming harder and harder to be seen in an over-saturated market.
Circling back to the idea that e-commerce is less reliable than storefronts, online orders have a higher return rate. Hitting on the emotions again, consumers are severely disappointed after waiting days to weeks for an order only for it to be the wrong size, poor quality, damaged, etc. In 2021, e-commerce return rates averaged 20.8% and return costs averaged 21% of order value.² On a $100 order that’s $21 out of the retailer’s pocketbook to cover all aspects of logistics, which doesn’t include the time and money spent on customer service to research and remedy the error. Consumers shop frivolously online because they know they can do so without any personal repercussions. They don’t think about the loss of revenue, the supply chain crisis, or even the environmental impact.
Key Takeaway: Optimize and Be Omnichannel
The pandemic did change many things in the retail environment, but retailers that continue to strive have adapted to the needs of the consumer and this will continue to play a role in their continued success. Taking a hybrid approach, many retailers have adapted by opening smaller-format stores, expanding their online presence, offering curbside pickup and buy-online-pickup-in-store options as well as continuing to reevaluate their future business strategies. Recent legislation has changed the way that taxes from online sales are distributed, making both forums (online and in-person) viable and lucrative options for retailers as we move forward post-pandemic.
Consumers appreciate having options. The convenience of e-commerce paired with the instant gratification of brick-and-mortar offers the best of both worlds and will get retailers the biggest bang for their buck, which in turn brings higher revenues to local governments.