This Holiday Season Shows the Phone is Mightier than the Store

Cyber Monday is becoming cyber month.

If you were busy plundering stores over Black Friday weekend, you were in the minority among American shoppers. According to the National Retail Federation, more consumers shopped online than in stores over Thanksgiving weekend for the first time ever.

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The proliferation of smartphones and the popularity of services likeAmazon(NASDAQ: AMZN) Prime have made online shopping as common as visiting a store. It's a trend that spikes during the holiday season, but is also an early indicator of where retail sales are headed for the rest of the year.

For the first time ever, more than 10% of retail sales could take place through e-commerce channels this quarter according to the Census Bureau, but that figure is somewhat misleading.

The Census Bureau includes sectors like autos, gasoline stations, and building materials stores that e-commerce does not compete with. Stripping out those categories and including only those such as department stores, clothing, sporting goods, electronics and others that can be outsourced to the online channel reveals that e-commerce is a lot more popular than the census indicates. Including just that group of sectors, online sales claimed 28.4% of sales through the first three quarters of the year, and that number should increase over the holidays as online shopping becomes more popular during the colder months.

What it means for retailers

The future of retail is becoming more and more clear. Anything that can be sold online will be, and the convenience and price will often make it more appealing for consumers than shopping in a store. Shoppers already know that the selection on Amazon or WMT) is wider than anything a single store could carry, adding another reason to shop online.

Those stores that are in e-commerce's direct line of fire are starting to suffer. That group of retail categories has seen sales increase just 0.5% through the first 10 months of the year.Some segments, including department stores, general merchandise, and electronic stores, have seen sales fall. Clothing stores have seen sales increase just 0.4%. And this is during a year when the economy has been the strongest since the recession, and overall retail sales have been solid.

Physical stores saw sales grow by just $5 billion through the first ten months of the year, while e-commerce sales were up more than $37 billion in that time.Amazon alone has seen North American revenue increase by more than $11 billion in that period.

Adapt or die

Department stores are having the biggest problem with this transition. Overall sales are down 5.2% thus far this year as the retail format becomes less and less relevant. A generation ago, the localMacy's(NYSE: M) was where you went to get clothes, gifts, home items, cosmetics and more all at once. But the need for such a store is less clear today, as consumers can shop online or easily visit those stores that specialize in each category. Macy's website was inundated with traffic over the Black Friday weekend -- a sign that its brand and product selection still resonate -- but there were so many shoppers that the site crashed.It wasn't the only one, as shoppers reported that sites includingExpress andWilliams-Sonomawere also down. These companies need to allocate more capital to e-commerce to prevent such crucial bottlenecks from happening in the future, and they're likely to get a better return on investment through e-commerce rather than physical store presence.

Wal-Mart seems to have learned this lesson. It acquired e-commerce upstart this summer for $3.3 billion and rotated its management team in favor of Jet's execs. It lifted the cap of 8 million items on its site to more than 20 million, and was more aggressive on price and assortment than it has been in the past. was one of the clear winners, as sales jumped 400% on Black Friday and Cyber Monday, and average order value was up 19% as Jet benefited from its new retail partner.

Stores like Toys R' Us, which is especially popular over the holidays, have turned to using stores as shipping depots to meet demand.

E-commerce sales have grown by an average of 15% over the past five years and show no signs of slowing down. Over the last seven quarters, e-commerce sales have grown faster by volume than overall physical retail sales, at $80 billion compared to $79 billion. Those trends will only accelerate.

Retailers like Wal-Mart, which are focusing on e-commerce, should continue to grow, while the department stores and others likeCostcoandDollar General, which have mostly neglected e-commerce, are likely to struggle. As they say in business, the time to invest in e-commerce was yesterday.

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