The Pandemic Was Supposed to Push All Shopping Online. It Didn’t.
PGRI Introduction: March 2022 compared to March of 2021: The drop in online spending was 3.3%, the first year-over-year decline since November 2013. The rise for bricks-and-mortar stores was 11.2%.
EXAMPLE: Amazon posted its first quarterly loss ($3.84 billion!) in 7 years. The Wall Street Journal Reports: Revenue for the tech giant rose by about 7% for the January-to-March period, the slowest pace in about two decades as consumers returned to pre-pandemic habits and spent more money in person at stores.
The Pandemic Was Supposed to Push All Shopping Online. It Didn’t.
E-commerce retailers that rode a surge of online purchases in 2020 are now grappling with the fact that some customers have returned to stores
When millions of locked-down Americans went online during the Covid-19 pandemic, it looked like the possible start of a permanent shift in consumer behavior.
Just like working and watching movies at home, shopping at home was a faster, safer and easier alternative to trekking to an actual store. Companies like Amazon.com Inc., PayPal, Holdings Inc., Shopify Inc., and Wayfair Inc. and others notched record profits, as their stock prices hit all-time highs in 2020 or 2021.
But hold off on those obituaries. Even as pandemic restrictions end, and many people continue working and watching movies at home, stores are mounting a comeback. E-commerce companies that were counting on a broad secular shift are now facing slowdowns, and the prospect of expensive investments in bricks-and-mortar retailing while speeding up delivery times.
It turns out there are limits to buying stuff on screens. Foot traffic to malls and bricks-and-mortar stores has rebounded since vaccines and booster shots became widely available and the worst waves of the virus receded. Sales slowed at many digital storefronts specializing in apparel, home furnishings and other categories where many consumers prefer to see in-person and touch what they are buying.
“We’ve got over 100 years as a society of going into a store to buy something,” Bernstein Research analyst Mark Shmulik said. “That muscle memory doesn’t just switch off because you were forced to buy things online a couple of times during a pandemic.”
Data suggests consumers are finding a new balance between online and in-person shopping. In the second quarter of 2020, as stay-at-home measures were in place, the share of U.S. retail sales that happened online surged more than four percentage points to 15.7%, according to Census Bureau data adjusted for seasonal factors. By the fourth quarter of 2021, that share had dropped to 12.9%, putting consumer buying habits roughly back to their prepandemic trend.
This March was the first month since the pandemic hit during which e-commerce sales declined from the same period a year earlier while in-store sales rose, according to Mastercard SpendingPulse, which tracks transactions made over the Mastercard payments network as well as survey-based estimates for spending with cash and checks. The drop in online spending was 3.3%, the first year-over-year decline since November 2013. The rise for bricks-and-mortar stores was 11.2%.
Online sales fell at Dick's Sporting Goods in the most recent quarter, while sales at bricks-and-mortar locations open for more than a year increased. Pictured here is one of the company’s stores in November 2020.PHOTO: REBECCA DROKE FOR THE WALL STREET JOURNAL
Dick’s Sporting Goods Inc. saw online sales fall 11% in its most recent quarter while sales at bricks-and-mortar locations open for more than a year jumped 14% Electronics giant Best Buy Co. reported higher U.S. revenue in the fiscal year ending Jan. 29 despite a 12% slide in online sales. At department-store chain Macy’s Inc., the proportion of sales from digital sources declined in the quarter ended Jan. 29, to 39% from 44% a year earlier.
One shopper who is rotating back to stores is Karyn Hirsch. The 46-year-old food blogger from Los Angeles was a longtime holdout to ordering groceries online and only stopped going to her local market in person in December 2020 when both she and her husband got Covid-19. “That was a leap of faith, and I know that the store tried to do a good job, but it’s never going to be like it would be if you are in person choosing yourself,” said Ms. Hirsch.
Once she was fully vaccinated, she returned to the grocery aisles. Ms. Hirsch felt like shopping online limited her options. “It’s nice to know it’s available if I’m sick or otherwise not able to do my own shopping, but it’s certainly not going to be my first choice,” she said.
To be sure, online retail sales are still up from prepandemic levels, amid a long-term shift in shopping trends. Industry observers caution that shoppers could revert to some of their online pandemic habits if the health crisis worsens or companies make investments to improve the digital experience.
But the current moment is bad news for online retailers and the tech companies that serve them. Amazon posted about $206 million in operating losses in the U.S. in the fourth quarter, and revenue at its online stores segment fell by 1%, the first year-over-year decline since the metric was first disclosed in 2016. Online marketplace eBay Inc. reported that the number of active sellers and buyers on the platform declined in 2021 from the prior year. PayPal lost tens of billions of dollars in market value after it delivered a weak profit forecast earlier this year.
“E-commerce is definitely not as sexy as it was a year and a half ago,” said Max El-Sokkary, an analyst at Zevin Asset Management, which owns shares of Amazon and eBay. “The momentum that carried e-commerce during the pandemic has slowed down, and at some point the valuations on some of these stocks don’t make sense.”
Even in early 2020, e-commerce had its challenges. Illnesses at factories in Asia and elsewhere upended supply chains. Amazon and other digital sellers struggled with mass absences of employees.
The billion-dollar question for executives and investors was whether the new online buying patterns would stick. Mr. Shmulik, the Bernstein analyst, said he got pushback from clients when he wrote in mid-2020 that e-commerce growth would likely slow, citing data including how much volume was coming from desktop computers that people would walk away from when they weren’t homebound. Clients argued that all consumers needed was a nudge to try online shopping before they’d become converts.
An Amazon Fresh grocery store in Naperville, Ill., above, fulfilled online orders for home delivery and curbside pickup in 2020.PHOTO: ZBIGNIEW BZDAK /CHICAGO TRIBUNE/ZUMA PRESS
Even though foot traffic at shopping centers is still down from prepandemic levels, it has shown some signs of improvement. Monthly visits to the top indoor malls grew nearly 17% in March from the prior month, while open-air lifestyle centers and outlets grew at a roughly 18% and 26% clip, respectively, according to data-analytics firm Placer.ai. Retailers also opened more physical stores in 2021 than they closed for the first time since 2017, according to an analysis of more than 900 chains by research and advisory company IHL Group.
“We are seeing reopening happen and there’s this pent-up demand to go out, to dine out, to travel,” Rachel Glaser, Etsy’s chief financial officer, told analysts on a call in February. Etsy is an online marketplace that benefited from the shift to online shopping during the start of the pandemic. She said mobility from customers is on the rise as e-commerce declines.
Executives at PayPal were among those who initially wagered that online shopping habits picked up during the pandemic would last. The financial-technology company processed nearly $1 trillion in digital payments in 2020 and added roughly 73 million new users that year, nearly double 2019’s tally.
At an investor event last year, PayPal finance chief John Rainey said the company by 2025 would double its customer count to 750 million.
“2020 changed everything,” Mr. Rainey said in February 2021. “Black swan events tend to result in permanent changes in consumer behavior, and this one is no different.”
A year later, PayPal tempered its optimism. The company flagged 4.5 million accounts that it determined weren’t created to shop online but to take advantage of promotional offers, a waste of PayPal’s marketing dollars. The lift from users spending money from stimulus checks isn’t carrying over into 2022. PayPal in February abandoned its 2025 goal of reaching 750 million customers.
“We got ahead of ourselves in extrapolating some of the pandemic trends in terms of how enduring or persistent those would be,” Mr. Rainey said at a March investor conference.
Wayfair also had to temper its enthusiasm after riding a surge of demand for online shopping and home makeovers to its first annual profit as a public company in 2020. Its shares closed above $345 on March 22, 2021, or nearly 15 times its low from a year earlier.
Furniture retailer Wayfair is one of the companies that had to temper its enthusiasm after riding a surge of demand for online shopping. An employee, above, loads a forklift at a Wayfair warehouse in 2017.PHOTO: JOSEPH PHILIPSON FOR THE WALL STREET JOURNAL
By the end of 2021, Wayfair reported four million fewer active customers than the year before and swung to a loss, citing “broader e-commerce softness.” It also braced investors for new plans to spend big sums to build out a physical network of stores. Shares now trade around $108 apiece.
Wayfair Chief Executive Niraj Shah has likened consumers’ shifting behavior to a pendulum. “Beginning of Covid, it swung very, very strongly to online,” he told analysts in February. “And on our way out of Covid, it’s swinging the other way.”
At Amazon, the total value of goods sold grew in 2021 at half the rate it did in 2020, according to an analysis by research firm Marketplace Pulse. Costs for the largest U.S. online retailer are rising as well. Operating expenses in Amazon’s North America business are up more than 66% from 2019, growing at a faster pace than sales.
It spent more than $4 billion alone in the fourth quarter as it dealt with supply-chain constraints and inflationary pressures on goods and wages. Higher rates of spending also reflect the company’s efforts to deliver groceries to consumers in one to two hours and everyday items to homes the same day they are ordered, said Amazon finance chief Brian Olsavsky in February.
Price hikes are one way Amazon is dealing with higher costs. It recently raised the cost of its Prime membership in the U.S. to $139 a year, from $119.
Some shoppers are still searching for the right balance between shopping online and stores. Shirley Lo, 38, used to go regularly to HomeGoods and Target and switched to online shopping during the pandemic. The Washington, D.C.-based photographer says she’s replicated the social aspects of shopping in person through Facebook groups and other social media, so she doesn’t miss the bricks-and-mortar experience. “After the pandemic, it seems like most stores have more selection online, even a place like Target,” she said.
Ms. Lo said she uses in-store pickup to make sure the items she wants to purchase are available to avoid wasted trips, although she still goes to the grocery store for fresh produce and other perishables. “I’m very particular,” she said. “It’s nice to smell stuff like bread or herbs, and pick it up and eat it right away versus waiting even a couple hours for it to ship.”
In 2020, a person loaded a curbside pickup order into a vehicle outside a Target store in South Bend, Ind.PHOTO: DANIEL ACKER/BLOOMBERG NEWS
For traditional retailers, that equilibrium means investing in better offline and online experiences.
Walmart Inc. is working to keep e-commerce sales growing as consumer habits revert to fend off competitors, even as it relies on its around 4,700 U.S. stores for the bulk of its revenue and profit. Walmart said U.S. online sales grew 1% in the most recent quarter, while overall sales grew 5.6%.
Walmart is building around 100 automated small fulfillment centers attached to existing stores in the next few years, an investment executives hope will allow the company to fill more orders faster to meet demand without clogging store aisles with workers collecting online orders. The country’s largest retailer by revenue has also pinned its hopes on a new delivery service that will drop off online orders inside homes or a refrigerator for a $148 annual membership fee.
The retailer has a goal of getting home delivery times down to minutes in some cases, e-commerce chief Tom Ward said in a recent February interview. Delivery in “two days is kind of an e-commerce parity these days,” he said. “One day is pretty cool, same-day day is really impressive and sub-same day is even more impressive.”
Best Buy is remaking dozens of locations to be “experiential” showcases for fitness equipment, outdoor furniture and other premium items while also maintaining a virtual store launched last year for customers who want to video chat with Best Buy associates from home.
E-commerce companies remain bullish about the prospects of their businesses as technology advances to facilitate online transactions. But some executives say even as online captures an increasingly larger share of consumer spending over time, there are still some elements of the in-person experience that will be difficult for digital to duplicate.
“The internet is a great place to transact, and it’s not great to discover,” said Jeffrey Raider, co-founder and co-CEO of Harry’s Inc., a consumer packaged goods company. “Everyone’s working on that in the digital world, but there’s something that’s just amazing about in-person discovery.”