As consumers do less shopping in physical stores and more shopping on the Internet, retail stocks will need to evolve or face extinction.
And if tech entrepreneur Marc Andreessen is right, they don't have much time. In an interview with PandoDaily's Sarah Lacy, the co-founder of Netscape and renowned Silicon Valley venture capitalist unabashedly predicted the demise of brick-and-mortar stores by the end of the decade.
"Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice," Andreessen said. "Malls are going under, and there's more to come. These chains are much closer to going under than you think."
He reasons that the superior business model of online retailing will undermine brick-and-mortar rivals.
"Retail chains are a fundamentally implausible economic structure if there's a viable alternative," he says. "You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20% to 30% in revenues. It just doesn't make any sense for all this stuff to sit on shelves. There is fundamentally a better model."
As extreme as it sounds, the transition is already well under way in some retail categories.
Online retailer Amazon.com (Nasdaq: AMZN) played a major role in undermining the business of two of the country's largest bookstore chains, Borders, which went out of business in 2011, and Barnes and Noble Inc. (NYSE: BKS), which recently announced plans to close a third of its stores over the next decade.
And the popularity of online video streaming such as that offered by Netflix Inc. (Nasdaq: NFLX) torpedoed video rental giant Blockbuster, which filed for bankruptcy in 2010 and was eventually bought by Dish Network Corp. (Nasdaq: DISH).
Why Retail Stocks Are Under Pressure
Many retailer stocks are already feeling the pinch from online competition, even though ecommerce only makes up about 5% of sales.
But the trend is clearly moving in the direction of online sales. Ecommerce sales in November and December of 2012 increased 13.7% from the year before, while U.S. chain stores saw just a 3.1% increase in the same period.
Retail stocks ignore the trend at their peril. Amid all its other problems, J.C. Penney (NYSE: JCP) in its third quarter last year saw online sales decline 37%, compared with a total sales decline of 26.6%. JCP is down more than 50% over the past year.
In addition to the convenience of ecommerce, retail stocks like Best Buy (NYSE: BBY) are getting slammed by the practice known as "showrooming," where customers check out products in a physical store before going home to order them online for a lower price. BBY is down more than 32% over the past year.
Last week Credit Suisse predicted in a research report on retail stocks that companies would close more physical locations in 2013 as sales there migrate online.
Retailers Must Embrace Ecommerce to Survive
While ecommerce is surely where retail is headed, Andreessen's vision of a world utterly devoid of physical stores seems a bit much.
Instead, they're likely to adapt to customers' changing habits.
A survey last summer by CapGemini of 16,000 online shoppers in 16 countries found that 51% expect that by 2020, physical retail locations will evolve into "showrooms" where they will select and order products.
And not all retail stocks will go under, either. Some have already started their transition from brick-and-mortar retailing to ecommerce.
TJX Companies Inc. (NYSE: TJX), which owns the brands T.J. Maxx and Marshalls, shut down its A.J. Wright chain in 2011, closing 71 of the physical stores.
On the ecommerce front, TJX announced in December that it had bought online retailer Sierra Trading Post for $200 million and is preparing to launch online brands for both its HomeGoods and Marmaxx divisions.
Nordstrom, Inc. (NYSE: JWN) bought two online retailers in the past two years, HauteLook in 2011 and Bonobos last year. At the same time, the company has made a concerted effort to make its own Web site competitive with those of successful online retailers.
All retail stocks will need to follow the examples of TJX and Nordstrom if they expect to survive in the long term.
"We've been thinking about where growth is going to come from across all retail over the next 10 years," Jamie F. Nordstrom, the head of Nordstrom.com and the great-grandson of the company's founder, told The New York Times following the Bonobos acquisition last April. "And certainly square-footage growth is not where that growth is coming from."
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