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The Problem with Smaller Stores

No surprise, lackluster store sales and explosive online growth are dooming hundreds of retail stores across the country:

This holiday, online spending increased by 10 percent on desktop devices—a number that will likely grow another 2 percentage points when factoring in the role of mobile devices, according to data tracker comScore. Paired with a compressed holiday shopping calendar and a spate of freezing weather across much of the U.S., online shopping contributed to a nearly 15 percent decline in foot traffic this past holiday season, according to ShopperTrak.

“Stores are making a long-term bet on technology,” said Belus Capital Advisors analyst Brian Sozzi. “It simply doesn’t make strategic sense to enter a new 15-year lease as consumers are likely to continue curtailing physical visits to the mall.”

As a result, not only are stores closing, but store square footage is also shrinking:

But it’s not just the number of stores that are shrinking—it’s also their size, said David Birnbrey, chairman of retail real estate advisory group The Shopping Center Group. As fewer shoppers buy items at the physical store, retailers don’t require the same inventory levels to be kept in an attached storage room.

While it is ironic that big box retailers are trying to turn into the small Mom&Pop stores they killed off decades ago, it also goes against one of the core advantages of being a large retailer: grouping shipping costs over many items.

Large retailers get regular trucks filled with product. The product might be pens, and it might be tractor tires. It doesn’t matter, as the cost of shipping was shared over all the items on the truck, so the marginal cost of shipping any one item is essentially insignificant.

To the individual consumer ordering online, however, shipping costs are very significant. Delivering a single item to your doorstep is expensive in both fuel and manpower. Very inefficient. This is why Amazon.com is trying to create an army of flying robots to deliver plastic dog poo and other crap to your front door.

This competitive advantage physical store locations have to receive and store large and bulky items, or to ship small and cheap items, at almost no marginal cost to the store is so huge I’m shocked stores are in the position of losing market share to online sources in the first place.

A physical store allows a company to beat online total prices, passing those savings along to the consumer. Combining online ordering systems with existing inventory replenishment systems seems like a winning strategy moving forward.

Having recently been in the market for a large pre-fab doghouse, the difference in shipping costs in an online order versus a ship to store would have been significant, if only some local stores carried the doghouse I was looking for. Despite having five big-box retailers in the area, any of which I would have been happy to drive to in order to save almost a hundred dollars in shipping, I had to order the doghouse online.

To paraphrase Yoda: That is why you fail.

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