The E-Commerce Savior Leaves Town

Costco’s (COST) same-store sales fell 7% last month. The firm was lucky. Abercrombie & Fitch’s (ANF) numbers were down 38%. Saks (SKS) plunged by 16.3% and Neiman Marcus fell 27.3%. July was a sign that all but a few retailers particularly Wal-Mart (WMT) are continuing to watch the year slip away from them.

There was a chance, a promise that e-commerce activity would salvage the retail sector. The increase in revenue from online retail websites averaged 20% in 2007. In the first half of last year, the number fell but was still 12%. There was no increase in the fourth quarter of 2008 compared to the same period the year before. The figures from comScore are in for the second quarter of this year, and online retail sales actually dropped 1% to $30.2 billion, which is astonishing given the robustness of the business just a year ago.

Online advertising and online retail were not supposed to drop as much as traditional media like TV and magazines or traditional store activity with families walking through malls that stretch on for miles without buying anything. The belief was that, because the internet is still growing and people are spending more time online and less time reading newspapers or paying attention to their children or spouses, that retail spending in cyberspace would be fine. E-commerce should be particularly attractive in a bad economy. It allows consumers to comparison shop without getting up from a desk.

The lack of activity in the e-commerce sector puts additional pressure on the upcoming shopping season. Retailers with little access to capital for inventory may have one last stand in the fourth quarter of this year. A ruinous holiday period could put a firm like Abercrombie & Fitch at death’s door.

Online sales have become a larger part of total revenue at major retailers than they were just two years ago. Gap’s internet revenue hit $1 billion last year, but Gap’s annual sales are about $15 billion. E-commerce would have to be growing well into the double digits to offset same-store sales declines.

The retail industry has done most of what it can to become more efficient. Many of the largest store chains have closed locations that their analysis shows are among their weakest. Layoffs have been significant and painful. Macy’s (M) has shuttered a number of locations. It may have to close more if the next few months are not reasonably good. After that it gets into the game of trying to outrun the hang man.

The retail industry learned an unpleasant lesson this year. The internet is not a cure-all, but the schooling is even harder than that. Once every retailer is online with complex, well-tested websites, none of them has a significant advantage. The competing store fronts have moved from the street level to the PC. Whatever edge e-commerce gave the early movers has become lost. Every big retailer knows all the internet sales tricks.

It will be interesting to see what the retail industry will do with the internet now that it is no longer new and no longer a way out of selling aisles of products in physical stores. The internet is just a mall without a parking lot and its perceived value as the next generation of retailing is entirely gone.

Douglas A. McIntyre