

With retail sales growing at a tepid 1.3% (1), several of our clients were requesting finite answers to the questions: How do we navigate this current market? Is what we are seeing cyclical (meaning that it will bounce back with the business cycle), or is it structural (meaning is something more fundamental to the industry happening)? Is this a result of the clicks-based retailers pummeling the bricks-and-mortar stores? Conventional wisdom says it is. But what we know is that conventional wisdom is often wrong.
In order to determine what is driving recent market volatility some of my colleagues and I worked to assemble a report called Deloitte’s “Retail Volatility Index” (RVI), which is an empirical measure of industry disruption. In the report, we took on conventional wisdom and simplistic answers by looking deeply at market data.
Our research shows that this recent slow growth is in fact structural, rather than purely cyclical in nature. We found that since 2010 when we were coming out of the great recession, retail volatility (a measure of disruption in the industry) has increased 250 percent, resulting in $200 billion more of retail sales being “traded” among competitors.
For the last 100 years in U.S.-based retail, we have seen a steady trend of larger players driving volatility in the market by purchasing smaller companies, stealing share, largely competing against other companies with scale. However in the latest market shift, and a dramatic and fundamental reversal, we are seeing smaller companies increasingly taking market share away from larger companies. Conventional wisdom might say the loss of share by traditional retailers is simply an online versus bricks-and-mortar battle, with traditional retailers losing the e-commerce game – but our research shows this simplistic and widely held explanation to be untrue.
What is actually causing the majority of this volatility is technology breaking down barriers to entry. This makes developing a new, widely marketable retail company dramatically easier. Today, technology has created an environment where anyone with a unique idea and a desire to succeed can use their credit card to start a retail company. This case of a plug-and-play value chain is causing a flood of new competitors for retailers. What is also happening is that smaller retailers have the stronger hand in appealing to more and more narrow sets of consumers and as a result are driving fragmentation in the market. Some smaller retailers are now offering an experience or a niche product that the larger, at-scale retailers who cast a wider net find it more difficult to compete with.
In essence, traditional retailers are being subjected to death by a thousand paper cuts, where the competition is no longer the big-box retailer across the street, but rather a myriad of new players each stealing a small slice of share– and this represents a sea-change for the industry. The data reveals that technology is a driving force, but fragmentation is not purely an ecommerce driven phenomenon.
So, while some think that traditional retailers are losing the e-commerce game, when you looked closely, we find 16 of the largest e-commerce companies (2) in the U.S. are brick-and-mortar retailers that also have robust and growing e-commerce sales that have consistently outperformed the broader e-commerce retail market. Between 2010 and 2015, these brick-and-mortar retailers grew their e-commerce business by an average of 20.9 percent, compared with a 15 percent growth rate in the overall market (3) – indicating these retailers are actually taking share from those others who operate in the e-commerce space.
Digital is changing the way retail companies compete, but winning in this current marketplace takes more than simply having a website or an app. So how do retailers across the board survive in this new, ultra-competitive universe? The answer is that you can win in different ways. The winners, in-terms of sales growth and EBITA growth are increasingly winning because of two attributes: either product exclusivity or customer experience exclusivity.
Not all is lost for larger retailers, though. Looking deeply at the set of retailers we studied for our report, we found that the top retailers (4) who offer the most differentiated product and experience (versus those who compete more on value and convenience) show the highest compound annual revenue growth rate and margins, substantially beating the broader market.
Learn more about our Deloitte Retail Volatility Index at www.deloitte.com.
Kasey Lobaugh serves as the Chief Retail Innovation officer and omni-channel retail practice leader for Deloitte Consulting LLP. He works with many retailers to drive strategic perspectives and organizational change. Kasey consults with clients to think about the implications of the changing competitive landscape and the rapidly evolving consumer. Kasey focuses on broad business-based strategy that will enable innovative customer experiences, operational scalability and provide return-on-investment. He is the co-author of Deloitte’s Digital Divide study.
Footnotes:
(1) US Commerce Department, 2015 Retail sales growth rate
(2) Internet Retailer, Top 500 e-Commerce Retailers Database, 2016
(3) Internet Retailer, Top 500 e-Commerce Retailers Database, 2016
(4) Internet Retailer, Top 500 e-Commerce Retailers Database, 2016