Tens of thousands of retail stores might have to close over the next few years to keep up with the pace of shoppers shifting from brick-and-mortar retailers to online, according to a new report from UBS.
UBS analysts examined the supply of brick-and-mortar retail locations that would be necessary to align with the demand to shop in those physical locations. What they found paints a bleak picture for the future for retail stores.
“We [estimate] for each 100 bps increase in [e-commerce] penetration (currently 16%), an additional [9,000] stores would need to close,” the UBS analysts write. “To put this in perspective, it would be the equivalent of 7 Toys ‘R’ US chains.”
What’s more, UBS estimates that anywhere from 30,000 to 80,000 stores would need to close to maintain low-single digit sales/store growth should the e-commerce penetration reach 25% of retails sales by 2025. The 80,000 figure assumes that there’s 2% total retail sales growth, while the 30,000 figure assumes there’s 3% sales growth.
In recent years, retail store productivity has lagged overall retail sales growth. Store closures would be necessary to maintain equilibrium.
“This suggests that closures of underperforming stores would need to accelerate in order for the group to return to a higher store productivity growth rates,” the report said.
Meanwhile, consumers opting to make purchases online have also weighed on retail store productivity. In fact, e-commerce has also been a critical driver of overall retail growth, contributing between 30 and 50% over the last three years.
Presently, e-commerce represents 16% of total retail sales, excluding food and gas, which is up from 8% in 2004. The average household now spends $4,600 online compared to $3,140 just five years ago.
While the picture seems bleak for most physical retailers, UBS analysts are bullish on home improvement stocks like Home Depot (HD) and Lowe’s (LOW). The store count for home improvement retailers has declined gradually since 2009.
“We expect both retailers to demonstrate continued top-line strength in the foreseeable future as they continue to gain share of a growing vertical.”