Moody’s: Physical stores key to retailers’ online growth strategy

New York -- A physical store presence is key to most retailers for their online growth strategy, according to a new report by Moody’s Investor Services. Based on existing data, Moody’s estimate online sales as a percent of total retail sales are just 6% today, and will increase to 7.1% by 2016, and potentially reach a double-digit (mid-teens) share of the total retail sales pie in about five years.



Even though most groups in the retail industry have made significant strides in building an e-commerce presence in recent years, the report found, most of the 13 sub-sectors in the report still derive a surprisingly small percent of their overall sales from online channels.



“Despite the apparent popularity of the Internet to the U.S. consumer, most retail sectors are still far from fully leveraging this potential,” the report states.



Here are some highlights of the Moody’s report, which was written by Moody’s VP, senior analyst Charles O’Shea:



• Online Presence is a longer-term credit-positive for U.S. retail. A viable online channel is becoming more critical for brick-and-mortar retailers to maintain and strengthen their competitive positions.



“In our view, online sales is a cost-effective way to maximize existing physical locations and to leverage distribution capability,” O’Shea states. “We believe the successful development of this channel will ultimately be a credit positive for retailers.”



• Mass store closings are unlikely as companies increase online presence. Moody’s sees little evidence online growth is causing more retailers to close large numbers of physical store locations to save on unnecessary costs.



Extensive store networks give shoppers the option to see and touch the product that they may have researched online, which is one of the reasons store networks will remain a crucial link in the online logistics chain, the report finds. Points of distribution for ship-from-store capability will also remain important.



Online growth among retail sectors will vary widely. Some sectors have made tremendous strides in building a viable online presence, in particular the music, video and digital content group, which we expect will double its online sales penetration to 70% by 2016. At the other end of the spectrum, the food, beer and wine group has barely moved the online needle and will likely not grow beyond 1% penetration by 2016.



• Growth may be greater than public data suggests. Moody’s findings are drawn primarily from the U.S. Census Bureau and U.S. Department of Commerce, which uses historical data-based surveys rather than direct reporting from companies, which means findings are far from comprehensive.



“Many companies do not report their online business and there is little consistency with respect to individual disclosures of what actually constitutes an online sale,” O’Shea states. “We think these constraints suggest that the volume of online sales are actually larger than what available data sources suggest.”