The Retail Industry and Its Impact on the Economy
Retail is how producers of goods and services get their products to the consumer. Retailers often get their goods directly from the manufacturer. That is when a commodity becomes a finished product.
Retailers can also buy products from a middleman, known as a wholesaler or distributor. The wholesaling company consolidates the products from around the world. It repackages them for easier marketing and distribution. Retailers are the last stop on the supply chain before the products end up in your shopping cart.
How Retail Is Measured
Importance of the Retail Industry to the U.S. Economy
In 2018, the U.S. retail industry generated $5.3 trillion in sales. It's almost tripled since 1992 when it was $1.8 trillion.
The largest category within retail is automotive, with $1.3 trillion in sales.
Food and beverage stores are next, at $746 billion. It's followed by general merchandise stores at $706 billion. This includes warehouse clubs and supercenters at $484 billion.
Online sales contributed $612 billion, compared to $35 billion in 1992. This dramatic increase is due to the advantages of online shopping.
Retailers created 4.8 million jobs in 2018. The median pay was $12.23 per hour in 2019. The number of jobs is expected to decline by 2% between 2018 and 2028. That's due to competition from online sales.
The COVID-19 pandemic hit the retail industry very hard. Shoppers were told to avoid any stores except essential services, such as groceries and drug stores.
As a result, retail lost 2.1 million jobs in April 2020.
The most important time of the year in retailing is the holiday shopping season. It starts on Black Friday, the day after Thanksgiving. Almost 20% of annual retail sales occur between Black Friday and Christmas. This season includes Cyber Monday, the biggest day of the year for online sales.
How Retail Works
Retailers make money by raising prices well above their cost of labor, equipment, and distribution. Everyone along the supply chain does the same thing.
Retailers can sometimes make more money if they bypass the wholesaler and purchase directly from the factory.
Some large retailers often manufacture best-selling items themselves. This is called vertical integration.
This price increase is known as a markup or the retailer's profit margin. It's typically 100% (double the cost) at each stage. That's called "keystone markup." It's needed to cover costs and provide enough profit to pay stockholders or private owners.
Examples of Retailers
The most common examples of retailing are traditional brick-and-mortar stores. These include giants such as Best Buy, Wal-Mart, and Target. But retailing includes even the smallest kiosks at your local mall.
Examples of online retailers are Amazon, eBay, and Netflix. Even though they are growing the fastest, they still only represent 12% of the total retail industry.
Many retailers focus on home sales. These include Schwan's food and Casper mattresses. Others sell through home-based parties. The most well-known are Avon, Pampered Chef, and Cocoa Exchange. A small group relies on TV channels like QVC, the Home Shopping Network, and Evine.
Retailers don't just sell goods, they also sell services. Restaurants, hotels, and bars are all included in retailing.
Many retailers combine different distribution methods. An example is Kroger, which offers both brick-and-mortar stores and online delivery. Large stores often also provide food services, like a restaurant. This reduced cost and increased consumer appeal is an example of economies of scale.
Online retailing is the fastest-growing segment, increasing 9% annually. By 2030, it is expected to reach $1.3 trillion.
Mobile devices, especially cell phones, are becoming the biggest source of internet traffic. At least 15% of U.S. adults shop online every week. Over half of Americans have used a cellphone to make an online purchase.
Although two-thirds of online shoppers would prefer to buy from brick-and-mortar stores, they make their final decision based on price. It's easier to compare prices online.
Almost half (45%) of Americans use their cell phones while in a store to try and find a better price online. Another 12% have used their phone to pay for an item while in the store.
The Future of Brick and Mortar Stores
Shopping centers and other brick-and-mortar stores have faced many challenges since the rise in popularity of online shopping. The COVID-19 pandemic has made those challenges even harsher. Many well-known stores aren't going to make it.
In March and April 2020, non-essential retailers were instructed to close by many state governments. Residents were asked to shelter-in-place to reduce the spread of the highly-contagious Coronavirus. Grocery stores, convenience stores, and pharmacies were allowed to remain open. Restaurants were only allowed to offer take-out.
Most stores that did stay open instituted policies to allow social distancing.
Walmart, Target, and Kroger limited the number of customers allowed in the store at one time. This could cut revenue. Others had to hire more workers to meet a surge in demand. Many stores, including non-essential businesses, expanded pick-up capabilities.
Many well-known department stores declared bankruptcy due to high debt entering the pandemic. These include J. Crew, JCPenney, and Neiman Marcus. These stores plan to remain in business.
Even before the pandemic, the popularity of online retailing was destroying shopping malls. Research from the University of Buffalo showed that 96% of the decline in shopping mall revenue was due to Amazon alone.
In 2018, former J.C. Penney CEO Mike Ullman said that only 25% of America's 1,200 shopping malls will survive over the next five years. Those that survive will have enough financing to transition to a new style of retail. They must also be in a location that serves the highest-earning 20%. He added that malls that can attract an Apple or Tesla store will probably survive.
In 2019, retailers filed for bankruptcy at record-high rates.
Well-known brands such as Payless, Z Gallerie, and Charlotte Russe announced bankruptcy in the first four months of 2019.
High-end retailers were not exempt, as Barney's New York, Roberto Cavalli, and Sonia Rykiel also liquidated.
The shift to online was not the only reason why they failed. Many retailers refused to shift to changing consumer preferences. Others simply took on too much debt or otherwise made poor business decisions.