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Category: Shopping Centers Tags: Big-Box, E-commerce
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Big-box retailers have largely been unpenetrated by the internet, as frequent and everyday deals keep consumers returning to the stores searching for the latest merchandise. However, the pandemic launched e-commerce five to ten years into the future and forced many of the major players’ hands as they began to open new e-commerce platforms. It is no longer viable for many large discounters or equipment retailers to pay high rents for traditional retail spaces, as many shift toward wholesale distribution and fulfillment centers to satisfy online orders. In this article, Matthews™ reviews the data points pertaining to on-market e-commerce trends and how they affect big-box retailers.

 

Don’t Discount Off-Price Retailers

Off-price retailers comprise stores that sell a wide range of products at discount prices, including apparel, footwear, home goods, appliances, tools, toys and hobby goods, and other general merchandise. They have similar functioning disciplines to department stores but occupy big-box buildings with smaller square footage and various layouts. The industry appeals to a specific demographic of consumers in the lower to middle-income range, and performs well during tough and uncertain economic times.

 

Wages have stagnated, employment rates are still bleak, and income levels haven’t seen a rise. This, combined with inflation, has caused average wages to have the same purchasing power as 40 years ago, forcing more consumers to become value-savvy.

 

In recent years, discount stores have found ways to target customers and adapt their store opening programs and merchandising strategies accordingly, concentrating on consumer convenience. As a result of the pandemic, more retail locations have become available.

 

Discounters, which saw strong sales in 2020 and 2021, have had access to better quality real estate in freestanding sites and within strip centers. These locations maximize convenience and visibility as they have higher automobile counts on nearby roadways and easy access. With these new locations, tenants are investing in renovations, including improved checkouts, mobile point-of-sale capabilities, and low-contact pick-up, all of which keep stores more relevant. The discount model also allows companies to capitalize on untapped markets with fewer people and low margins in rural areas.

 

Discount retail stores have been growing at a faster clip than other retail environments. Source: Edge by Ascential

 

Under the current circumstances, the discount store market fares well during the global pandemic as more consumers prefer discount stores for daily purchases, joining the ranks of the price-conscious. Nevertheless, the competition from e-commerce will slightly hinder revenue growth. And, though sales rose, discounters still face the challenge in the form of margins.

 

 

Entering the E-Commerce Space

Although relatively late to leveraging online platforms, discount retailers will likely place more focus on their online sales, further siphoning revenue from their traditional, physical locations. The biggest companies in the discount store industry are TJX Companies Inc., Walmart Inc., and Ross Stores Inc. Amazon has compelled several players to strengthen their digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they also entail high costs.

 

E-commerce is expected to grow faster than brick-and-mortar sales, accounting for about 14.3%of total retail sales in 2021.

 

Major big-box retailers, such as Harbor Freight and HomeGoods, recently launched extensive e-commerce platforms, shifting sales away from brick-and-mortar stores. This is a major step in the right direction to compete with Amazon but presents the risk of decreasing margins to the point where business is unsustainable. For example, to attract and retain customers, lawn and equipment big-boxes will have to reduce markups, resulting in sustained low profitability.

 

Despite the significant absorption, discounters must be careful not to lower prices too steeply as they compete with Amazon and other online companies that can undercut costs.

 

While some of the industry’s participants were hurt by the temporary closure of stores during the height of COVID-19, the pandemic also brought a paradigm shift in consumer buying behavior. Whether consumers will remain loyal to their new spending patterns, should the economy recover fully or prices are further impacted by inflation, remains to be seen. But, one thing remains certain, discounters will continue enhancing their brick-and-mortar endeavors.

 

With the evolving consumer shopping pattern and behavior, industry participants are playing dual in-store and online roles. They are all vying for the biggest share on attributes such as price, convenience, and speed to market to compete with the increasing dominance of Amazon. They are redirecting resources toward digital platforms, accelerating fleet optimization, augmenting the supply chain, and focusing on improving financial flexibility. Further, industry players are looking toward superior product strategy and advancing omnichannel capabilities, while containing costs, optimizing inventory, and prioritizing capital expenditures.

 

Surprisingly, there are still some discounters who have announced they will rely only on brick-and-mortar business, turning away from online sales. These retailers include Burlington and Ross Dress For Less.

 

A spokesperson said that the nature of the discounter business model is the treasure hunt and the experience; the average price point offered is just an added benefit. This means brick-and-mortar still has a significant competitive and economic advantage over e-commerce due to the growing appreciation and experience provided. If brick-and-mortar retail is in trouble – Ross Dress For Less and Burlington never got the memo.

 

Industry Outlook

Since 2019, even Amazon has been trying to find ways to enter the low-priced goods space. The e-commerce giant has quietly lowered the price threshold for individual items eligible for free Prime one-day shipping – a clear shot at discount brick-and-mortars. The conglomerate has thrown another punch by opening large retail locations akin to department stores. This plan to launch large stores will extend Amazon’s reach into clothing, household items, electronics, and other areas already covered by discounters. It’s all about increasing customer share, whether online or in-store.

 

Given this announcement, big-box retailers still see growth opportunities by focusing on cheap goods and are rapidly building a scalable model. This creates numerous opportunities. Generally, higher-end retailers perform better against e-commerce as those customers want and need service and selection. The value side of retail is concentrated on providing affordable goods and services.

 

The middle retailer market is saturated, while discounters have plenty of opportunity and growth on the horizon. As e-commerce continues to make its mark, industry operators may be forced to exit or merge with larger players if in the middle market.

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