Shoppers Are Fleeing Physical Stores
Shift to Online Sales Is Prompting Retailers to Scale Back More Store Openings
U.S. retailers are facing a steep and persistent drop in store traffic, which is weighing on sales and prompting chains to slow store openings as shoppers make more of their purchases online.
Aside from a small uptick in April, shopper visits have fallen by 5% or more from a year earlier in every month for the past two years, according to ShopperTrak, a Chicago-based data firm that records store visits for retailers using tracking devices installed at 40,000 U.S. outlets. Even as warmer temperatures replace the harsh winter weather this year, store visits fell by nearly 7% in June and nearly 5% in July, according to ShopperTrak.
New data from Moody's Investors Service shows that the shift to online sales has prompted retailers to scale back store openings and will likely lead them to pare back their fleets even more in coming years, as more than $70 billion in lease debt expires by 2018. Growth in store counts at the 100 largest retailers by revenue has slowed to less than 3% from more than 12% three years ago, according to Moody's.
The pressure comes as consumer tastes are changing. Instead of wandering through stores and making impulse purchases, shoppers use their mobile phones and computers to research prices and cherry-pick promotions, sticking to shopping lists rather than splurging on unneeded items. Even discount retailers are finding it harder to boost sales by lowering prices as many low-income consumers struggle to afford the basics regardless of the price.
On Tuesday, Walgreen Co. WAG -4.15% said customer traffic in the nonpharmacy section of the store fell 2.6% in July. CVS Caremark Corp. CVS -0.13% said declines in traffic contributed to a 0.4% decrease in front-of-the-store sales, excluding newly opened or closed stores, in the quarter ended June 30, as customers aggregate trips and make fewer store visits. A decision to stop selling tobacco played a part in the declines, CVS said.
"Consumers are still a bit cautious," said Helena Foulkes, president of the pharmacy unit at CVS, noting that its competitors are offering more aggressive promotions this year.
Target Corp. TGT -4.40% warned investors on Tuesday that its second-quarter financial results would be lower than initially expected after heavy promotions didn't do enough to bring back shoppers following six quarters of declining traffic and lingering fears stemming from last year's credit-card data breach.
One deal at Target gave customers $10 off a $40 online order if they came into the stores to pick it up, which enticed some shoppers to stock up on diapers and other consumables but ended up denting the discounter's profit.
"While the environment in both the U.S. and Canada continues to be challenging, and results aren't yet where they need to be, we are making progress in our efforts to drive U.S. traffic and sales," said Chief Financial Officer John Mulligan, who is serving as Target's interim CEO.
The traffic declines are widespread across the industry. Last month, Family Dollar Stores Inc. FDO +2.01% said traffic declines contributed to a 1.8% drop in sales for the three months through May 31, excluding newly opened or closed stores.
Declining traffic numbers at dollar stores and pharmacy chains are particularly worrisome for the industry as big-box retailers like Wal-Mart Stores Inc. WMT -0.27% make big bets that they can win back shopper traffic by building smaller stores.
Despite the downbeat traffic numbers, overall retail sales have inched up every month since January as job growth and consumer confidence ticks higher. Store chains like warehouse club Costco Wholesale Corp. COST -0.08% and T.J. Maxx parent TJX TJX -1.06% Cos. continue to post gains, while retailers like Dollar Tree Inc. DLTR -2.16% and Wal-Mart plan to add hundreds of stores over the coming years.
Online sales now make up more than 6% of total retail sales, according to the U.S. Census Bureau. Internet sales have grown by more than 15% every quarter for the past two years and are having a big impact on the way many companies are looking at their brick-and-mortar stores.
In a response to a request to break out online sales by the Securities and Exchange Commission made public on Tuesday, Best Buy Co. BBY -0.47% said programs that allow customers to buy items online but pick them up in store, made it "increasingly difficult to distinguish between the performance of online and stores." Its online sales made up 8.2% of total revenue in the quarter ended May 3, from 6.3% a year earlier.
Earlier this year, Staples Inc. SPLS -0.78% CEO Ronald Sargent told investors that stores now "have to earn the right to stay open." With roughly half its sales originating online, the company plans to close hundreds of physical locations over the next two years.
"While we don't take this decision lightly, we know it is the right thing to do for the long-term health of our business as we become more efficient and increase our focus online," he said.
Sears Holdings Corp. SHLD -1.64% closed more than 12% of its stores in the past three years and has closed another 80 stores this year, while RadioShack Corp. RSH +17.42% plans to close 200 stores this year.
"We're in a transformation where retailers are recognizing the Internet isn't going anywhere and to be competitive, you have to have a more compelling online presence and an efficient store base," said Moody's analyst Charles O'Shea.
The lease obligations set to expire by 2018 provides companies that overbuilt in the past decade with a way to reduce their retail footprints. The change will be particularly apparent at office supply stores, where more than two-thirds of retail leases are set to expire, and specialty retailers and convenience stores, where roughly half of retail leases are primed to expire by 2018.
