Retail Isn't Dead, It Just Smells Funny

The massive shift from brick and mortar retail to online shopping has picked up steam the last few years. Digital sales have been growing at a double-digit rate, and online sales as a percentage of total U.S. shopping is now at 9%. Online-only stores aren't the only ones driving this number anymore, though.

A siege on physical stores

For years, Amazon (NASDAQ: AMZN) has been leading the charge in retail disruption by offering convenient online shopping, competitive pricing, and fast delivery times direct to consumer's homes. Revenue has doubled several times over in the last decade as the company gobbles up market share, and in the meantime Amazon has become not only the largest digital retailer in the U.S., but also one of the largest retailers overall.

Brick-and-mortar stores have been slow to move on the changing trends, but this year could end up being a turning point. It's estimated that over 5,000 stores have closed through the first half of the year, which puts 2017 on pace to be the worst year for store closures ever (over 6,000 stores closed in 2008). The pain has been widespread, from the well-documented woes of department store Sears (NASDAQ: SHLD) to smaller specialty retailers like Rue 21 and Gymboree.

When Amazon reported second quarter 2017 results, the company's overall revenue continued to grow double digits, but retail sales slowed down with momentum favoring the company's newer web services business. Meanwhile, traditional retailers like Wal-Mart Stores (NYSE: WMT) and Target (NYSE: TGT) have been showing signs of life, with digital store sales growth well in excess of, not just the above illustrated national average, but in excess of Amazon's retail growth too.

It is worth noting that both company's total digital sales are in the mid-single-digits and are much smaller than the hefty lead Amazon has. Looking at the numbers, Amazon is still driving total U.S. e-commerce sales growth as the largest player in that space, but other retailers getting into the online action are making up an increasingly larger share of those gains.

The race to bring retail into the 21st century

Not convinced these recent efforts will be enough? That may be fair, as the couple billion in digital sales at Wal-Mart and Target pale in comparison to the $48.5 billion in retail revenue at Amazon so far this year. Plus, while both Wal-Mart and Target have been reporting positive e-commerce progress, there have been multiple quarters in the last two years where in-store foot traffic was declining.

That means online sales are merely replacing store traffic in many cases. With that being the case, traditional retailers race to go online isn't against Amazon as much as it is against each other. The physical store is under transformation, not going extinct. Even Amazon apparently thinks this with its pending purchase of Whole Foods (NASDAQ: WFM).

The battle isn't just among big-box stores either. Companies like Shopify (NYSE: SHOP), a big supporter of small businesses and provider of digital-physical hybrid retailer software, are booming because of the migration to online. Shopify's revenue is up 75% so far this year to $279 million and was up 90% last year as demand for online support from small businesses continues to ramp up. As of the mid-point of 2017, the company supported the online efforts of half a million businesses worldwide.

An inflection point for traditional retail?

Headlines would suggest that the retail industry is in a world of hurt, and for those that are late to the digital party, that may be the case. However, for those quicker to follow Amazon's blazed trail, life has been a little easier.

It's still early on in this battle, but with the majority of shopping still done in-store, consumer demand for a digital experience is pitting old brick-and-mortar stores against each other in new ways. As the retail industry innovates, investors should make sure the retail companies they own are leading the way.

10 stocks we like better than AmazonWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Nicholas Rossolillo owns shares of Shopify and Target. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool owns shares of Whole Foods Market. The Motley Fool has a disclosure policy.