Despite healthy spending by U.S. consumers, the shift to online has had a negative impact on the retail economy and continued e-commerce expansion is expected to eliminate 510,000 jobs and 30,000 more establishments by 2025.
And that’s on top of the 56,000 stores–or 10.7 percent of the discretionary retail footprint–already lost since 2008, as well as the 670,000 net jobs cut, or 9.6 percent, over the same time period. And with the U.S. economy expected to slow to a 1.6 percent growth rate this year from 2.3 percent, 2020 could see job eliminations totaling 32,000.
“For one job created in e-commerce, [four-and-a-half] jobs are lost in traditional discretional retail,” Aurélien Duthoit, Euler Hermes’ sector advisor for retail, technology and household equipment, said. “Shoppers’ growing taste for online orders has also hurt shopping mall footfall and department stores, which reported the sharpest decline in employment (at down 24.5 percent).”
Euler Hermes data, along with Bureau of Labor Statistics and calculations from Allianz Research, show that discretionary retail employment between 2007 and 2019 grew 76.3 percent for cosmetic and beauty supply stores. That’s in contrast to apparel and accessories stores, which saw employment declines of 10.9 percent in the same frame. Employment at department stores fared even worse, down 24.5 percent over the same span. Online retailers employed about 400,000 people in 2019, and added just 150,000 positions since 2007.
In general, consumer discretionary spending in the U.S. typically accounts for a huge portion of overall retail sales. Since 2008, spending on discretionary items has outpaced purchases in the food and beverages category, growing at a rate of 3.2 percent per annual versus a 2.9 percent growth rate for food and beverages. “In 2019, discretionary consumer goods generated an estimated $1.96 billion in retail sales, accounting for more than a third of the total U.S. retail market,” Duthoit said.
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Duthoit expects further e-commerce penetration and heightened competition in the retail sector. Because e-commerce growth at a rate of more than 10 percent each year hasn’t translated into net store openings, the retail expert believes that all segments, except beauty and cosmetics, will see substantial cuts in physical retail, with apparel and department stores among the categories facing the biggest challenges.
“This would represent a significant acceleration from the pace of destruction observed over the past few years,” he said. “Additional bankruptcies of large retail chains are inevitable and will be instrumental in reducing the U.S. retail footprint: We anticipate the highest default risks for large [corporations] in clothing, footwear and accessories stores, as well as department stores. Furniture and home furnishings stores are also likely to see a deterioration of credit metrics as competition heats up.”
In turn, retail consolidation means consumer goods firms will see heightened non-payment risks and a further concentration of their retail channel mix that could impact bargaining power and profitability. And incumbent retailers also could see growing competition from their own suppliers.
Duthoit cites Nike Inc. as an example of a consumer brand that’s opened hundreds of company-owned stores, helping it garner 31 percent of its revenues from 1,150 locations and company-owned e-commerce sites globally. Competitors such as Adidas, Puma and Under Armour are following a similar strategy, he said.
Austrian economist Joseph Schumpeter coined the term “creative destruction” to describe how new entrants, in this case in the retail sector, are supposed to capture growth or create new markets–even at the expense of established firms–and drive a net positive impact on the economy. However, Duthoit found that when it comes to employment and profitability, e-commerce isn’t compensating for the shrinkage and destruction that have devastated brick-and-mortar retail, resulting instead in a negative-sum game for the retail sector.
Duthoit detailed the negative impact in a recent report on “Retail in the U.S.: Towards Destructive Destruction,” which also noted that the surge in large retail bankruptcies since 2015 has involved more than $54 billion in liabilities. In addition, when reviewing credit rating agency data, Duthoit found that the 30 large discretionary retailers with a speculative grade rating have a total of more than $66 billion in liabilities.
In addition, “Drawing on a panel of 127 U.S. [corporations], we find that one in 10 listed retailers has gone bankrupt since 2008, and that another 42 percent have seen a decrease in profit margins, especially in the department store, discount store and clothing store subsegments,” he said.
Perhaps more important is that new businesses also have the lowest median profit margin of all industry segments. Duthoit believes there are few successful new entrants on the e-commerce front. “Between 2018 and 2019, e-commerce accounted for only eight out of 47 newly listed retailers. New entrants display the lowest profit margins and only three of them were cash-flow positive in fiscal year 2018,” the retail expert said.
Morevover, e-commerce sales in general have the lowest profit margin of all retail segments. Even when physical retailers operate a website, online sales tend to result in lower profitability, thanks to both lower realized prices and the high cost of competitive logistics, such as free order delivery and returns.