Shoppers Are Back in Stores. What That Means for E-Commerce.

Then came earnings from

Etsy

(ETSY),

eBay

(EBAY),

Shopify

(SHOP) and

Wayfair

(W) which painted a similarly downbeat picture. As Barron’s noted, the results seemed to indicate that shoppers were not only spending more on experiences over goods, but more frequently returning to bricks-and-mortar stores as the threat of the pandemic wanes.

Indeed, there’s more to the story than just the idea that everyone is too busy going on vacation and eating out to go shopping. After all, there were strong results from a number of companies like

Nordstrom

(JWN) and

Dollar General

(DG) that show there’s more nuance involved.

While factors like inflation, a return to in-person events, and rising supply-side costs are certainly at play, one interesting constant has been the persistent trend of consumers returning to physical stores.

That’s partly a revision to the mean—for all the big gains that e-commerce made in recent years, online sales are still dwarfed by bricks-and-mortar, as the former accounted for just 14.3% of sales in the first quarter, according to data from the Census Bureau. The fact that companies have been trying to rework their stores into experiences in recent years helps lure back shoppers even if they want to prioritize spending on having fun over buying things.

In addition, there was bound to be a slowdown after Covid-19 pulled forward so much online demand.

For example, in its most recent quarter,

Macy’s

(M) noted that digital sales were up 2% year over year, but jumped 34% relative to the comparable prepandemic period of 2019. Digital penetration as a percentage of sales slipped slightly—as people returned to stores—but again was well above 2019 levels.

Nordstrom

noted much the same earlier this week. It said digital sales were flat as shoppers chose to return to stores, highlighting its new flagship Manhattan location as the strongest in its fleet. So while e-commerce’s white-hot growth has cooled, it’s still gained ground in recent years, and is likely to keep doing so.

During the pandemic, a robust network of physical locations was an asset for retailers, as they could use them as distribution centers and points for curbside pickup. Now, they’re helping as consumers prefer to do some shopping in person, even if they put that on hold in recent years.

Therefore, e-commerce will continue to grow as a proportion of sales, just more slowly than it did in 2020, for example. The upshot is that retailers have to keep investing in e-commerce, as consumers demand convenience, switching and merging online and in-person shopping.

In the first quarter of 2022, web traffic that culminated in a sale—also known as converted traffic—to

Walmart

and Target’s websites fell 4.3% and 5.5%, respectively, year over year, according to data from

SimilarWeb
.
That’s despite the fact that investments in paid search results, such as showing up at the top of a Google page, remains high, after spiking during the pandemic.

While Walmart has maintained that level of spending, Target has pulled back a bit. “Paid search is a small percentage of total sales for both retailers, but the growing spend from Walmart highlights the continuing and increasing importance of digital marketing and the potentially growing cost of customer acquisition,” according to Seema Shah, senior director of research & analytics at SimilarWeb.

Of course, over time it’s hard to argue against the investment. Walmart is building out a third-party marketplace, not unlike Amazon, to further its online ecosystem, while Target saw tremendous success with buy-online, pickup in store options in recent years. Although the pandemic pulled forward a lot of e-commerce growth, which led to a near-term pullback, most experts expect online or omnichannel sales will be a growing part of the retail pie over time.

“Going forward, e-commerce is driving supply-chain investment, and could one day enable the U.S. consumer to buy 50/50 e-commerce and bricks-and-mortar, similar to China today,” writes Wells Fargo analyst Ike Boruchow, citing recent conversations with transport and logistics experts.

This earnings season, however, highlights that a physical store footprint remains a key asset for retailers. And the timing couldn’t be better in one sense: As freight costs jump on the back of higher fuel prices, bringing shoppers back into stores saves companies at least some shipping costs.

In addition, while digitally native brands may be taking a back seat for now, that comes after many saw big gains during the pandemic. A return to normalcy may not be as welcome for them, but a revision to prepandemic patterns would indicate they can still take share, if at a more modest pace.

Write to Teresa Rivas at [email protected]