Over the past few years, the retail industry has witnessed a significant shift toward online shopping. E-commerce has become a dominant force in the retail market, as more and more consumers prefer the convenience and ease of shopping online. As a result, traditional high street retail businesses have faced increasing competition from online retailers, leading to a decline in their profits.
The evidence of the increasing dominance of online retailers is all around us, in the changing face of the high streets up and down the UK. Some of the numbers are stark and explain why new investors researching how to buy shares and make profitable stock market investments are less inclined to back high street operators when looking at the retail sector.
For instance, in 2019, Debenhams, one of the few remaining big high street names, had a profit margin of roughly 1% compared to the 17% profit enjoyed by online-only retailer ASOS. The reasons for the dominance of online retailing are not hard to find, but those considering investing in the retail sector need to be aware of the fundamental forces shaping this part of the economy.
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Profitable edge
One of the biggest advantages of online retail is the lower overhead costs. Online retailers do not need to maintain physical stores or hire a large number of employees, which significantly reduces their operating costs. In contrast, high street retailers have to pay rent, utility bills and other overhead expenses, leading to higher operating costs. These costs are often passed on to consumers in the form of higher prices, which can make shopping at traditional brick-and-mortar stores less appealing.
Retailers focused on the online market can reach a wider customer base than high street retailers. With the internet, retailers can sell their products to consumers across the globe, 24/7. This makes it easier for businesses to expand their reach and connect with customers from different geographical locations. High street retailers, on the other hand, are limited by their physical location and the number of customers they can serve in a day. The lack of a broad customer base can limit their sales and ultimately, their profits.
Another significant advantage of online retail is the ease of shopping. Consumers can browse through a wide range of products, compare prices and read reviews, all from the comfort of their own homes. This level of convenience has made online shopping increasingly popular among consumers, leading to an increase in online sales. In contrast, high street retailers require customers to physically visit their stores, which can be time-consuming and inconvenient. This is particularly true for customers who live far from the store or have mobility issues, making it harder for high street retailers to attract customers.
Still some life in the high street
In theory, traditional high street retailers still have some advantages over their online counterparts. One of these is the ability to provide a tactile shopping experience – customers can physically see, touch and try on the products they want to buy. This can be particularly important for products such as clothing and shoes, where the customer prefers to see and feel the product before making a purchase.
The physical experience of shopping can also be more enjoyable for some customers, especially those who enjoy the social aspect of shopping and the ability to interact with sales associates.
Another advantage of high street retailers is the immediacy of purchase. Customers can purchase a product and take it home immediately, which is particularly important for customers who need the product urgently or do not want to wait for shipping. This is not possible with online retail, where shipping can take several days or even weeks, depending on the location.
Underlying trend
The problem for high street retailers has been that the intangible benefits of high street shopping are hard to monetise and while these factors will be important to many customers, for the vast majority, the convenience and simplicity of online retail shopping far outweigh the intangibles of visiting a shop.
Most high street retailers have attempted to stem the tide by increasing their own online presence. Some operators, such as clothing retailer Zara, have made a success of this approach, but for the most part, high street retailers have found that moving online merely slows the decline of their core business. What the future may bring for the retail sector is unclear, but at the moment it seems there is little sign of the underlying trend towards online retail being reversed.
