R.I.P. Mall-Based Retailers?

Halloween is firmly in the rearview mirror folks, and those leaves changing color outside are soon to give way to big sticks for the rest of the year. That's right -- it's officially time for the holidays! That means family feasts, eggnog-everything, and our wallets opening wide for our friends and family during the holiday shopping season.

A retail first for the 2017 holiday shopping season

According to a newly released annual survey from Deloitte on the holiday retail environment, things are looking up for most folks in 2017. The average consumer is expected to spend $1,226 during the holiday shopping season, with households above $100,000 in annual income expected to spend an average of $1,000 more ($2,226). As a whole, 81% of respondents in Deloitte's survey noted that their household financial situation is the same or better than it was last year, which is up by 18 percentage points from the 63% of respondents who affirmed so back in 2012. In other words, the holiday season appears to offer plenty of opportunity for retailers.

However, Deloitte's survey showed that not all retailers are expected to be on equal footing. For the first time ever in its 32 years of conducting its holiday survey, a majority of spending is expected to come from online purchases in 2017, as opposed to brick-and-mortar businesses.

Last year, there was an even 47%-to-47% split between online and in-store purchases, with 6% going to catalog and direct mail purchases. This year, the breakdown is 51% to online purchases, 42% for in-store, and 7% to the other category (catalog and mail order). For households earning in excess of $100,000, this trend is even more pronounced, with 57% of their budget expected to be devoted to online purchases, compared to just 39% in brick-and-mortar stores. Department stores also ranked a distant third behind the internet and mass merchants in terms of shoppers' destinations this holiday season.

This trend has been ongoing for some time

The survey also shows a very well-defined, progressive shopping pattern based on age. Seniors, who didn't grow up with smartphones or the internet, are still far more likely to shop in-store than online. But if we progress through each subsequent (and younger) generation, the likelihood of shopping in-store drops, and the propensity to shop online rises. For instance, millennials and Generation Z plan to spend a respective 58% and 61% of their budgets online this holiday season, compared with only 38% and 33% in physical stores.

If there is a partial silver lining here for brick-and-mortar retailers, it's that the older generations (seniors and boomers) still have a majority of the wealth in this country. Therefore, physical retailers still have a reasonable chance of generating healthy profits in the intermediate term. However, this shift to online shopping has been ongoing for some time, and the results of Deloitte's survey suggest it's not going to change anytime soon. Unless mall-based retailers adapt, they could run the risk of going extinct by the time millennials and Generation Z have the bulk of this country's wealth in a few decades' time.

Three reasons mall-based retailers are struggling to keep up with the online experience

It really comes down to in-store retailers' need to overcome three of the biggest competitive advantages of online shopping.

The first is selection. Online companies can offer a considerably broader selection of goods to consumers than an in-store retailer. Brick-and-mortar retailers are limited by the square footage of their locations, whereas online retailers often have a very limited supply of inventory, if any at all. Online shopping allows internet-based companies the privilege of showcasing specialty and hard-to-find items through photos and online reviews from other customers who've purchased the item. This gives online retailers the ability to purchase goods only when a customer agrees to buy them, which can be considerably more favorable than in-store retailers that have to build their inventory and hope consumers buy it.

Second, and building off the first point, there are often pricing advantages to buying products online. Whereas brick-and-mortar retailers have to pay for rent, their inventory, and their salespeople, online retailers don't have this issue. Their lack of a physical presence, along with not having to buy inventory in advance, means they can usually offer similar products at a discount to physical stores. Price plays a sizable role in the purchasing decision with consumers, which gives online retailers a clear advantage.

Finally, it's a matter of convenience. Consumers can shop online from almost anywhere as long as they have a mobile device and an internet connection. In fact, Deloitte's survey showed that more than a third of respondents (36%) plan to use a mobile payment app this holiday season. By comparison, shoppers have to usually drive to a mall and battle traffic if they want to shop at a brick-and-mortar retailer.

The one advantage mall-based retailers offer

However, mail-based retailers are unlikely to go anywhere without a fight. Even though the data suggests they're facing an uphill battle against online retailers, they can offer something that's just not possible with purchasing online: an experience. In addition to the instant gratification of purchasing something now and not having to wait days or weeks for it to arrive, in-store retailers allow the consumer to forge an emotional connection with a brand, company, or associate. That's not nearly as likely to happen with an online purchase.

Perhaps one of the best brick-and-mortar retailers with regard to forging emotional attachments with its customers is Nordstrom (NYSE: JWN). And remember, Nordstrom caters to more affluent consumers who, according to Deloitte's data, are even more likely than the average consumer to shop online this holiday season.

First, Nordstrom avoids cheapening its merchandise with run-of-the-mill sales. By providing an everyday price, Nordstrom creates an exclusivity and elegance about the brand. More so, when it does host its twice-annual sale events, it creates a following that can attract more cost-conscious consumers, and it keeps the event special.

Nordstrom is also tinkering with a concept known as the experiential store. In October, the company opened a small store known as Nordstrom Local that carries no merchandise whatsoever. Its purpose is to allow consumers to receive services like tailoring and manicures on-site, alongside stylists that can assist in designing outfits for shoppers. The more personal Nordstrom can make the experience, the less chance it has of losing shoppers to Web-based companies.

Is this the end of mall-based retailers as we know it?

Now, this isn't to say that Nordstrom or any mall-based retailer should ignore the direct-to-consumer experience. Nordstrom and all of its peers are heavily investing in a future of Web-based sales. But that doesn't mean the mall-based retailer will necessarily disappear. Those brick-and-mortar retailers that can offer an experience or some form of exclusivity should have no trouble attracting new and return customers. It's the retailers that lack an identity and rely on sales to draw in customers that are likely to see their margins squeezed by web-based retailers.

While "R.I.P mall-based retailers" might be a true statement for some brick-and-mortar chains, I don't believe it's time to write-off the physical mall-based retailer just yet.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.