• by Jack Loechner , Staff Writer @mp_research, June 7, 2016

Richard Schmalensee, Professor of Management and Economics Emeritus, at the Massachusetts Institute of Technology; previously dean of the MIT Sloan School of Management and a Member of the President’s Council of Economic Advisers, with David S. Evans , economist, business adviser, entrepreneur, having done pioneering research into the new economics of multisided platforms, present a paper concluding that retail profits are plummeting, but the best retailers are those who combine bricks and clicks.

An analytical study by the two distinguished economists, acknowledges that:

• Stores are closing.
• Malls are emptying
• Reading the Macy’s, Nordstrom, and Target earnings announcements is not uplifting
• The Internet is apparently taking down yet another industry
• Brick and mortar stores seem to be going the way of the yellow pages

But, says the report, the Census Bureau just released data showing that online retail sales surged 15.2% between the first quarter of 2015 and the first quarter of 2016. However, there are more facts to be considered, says the report. Looking only at that 15.2% “surge” would be misleading. The increase was on a small base of 6.9%. Even when a tiny number grows by a large percentage, it is still tiny.

More than 20 years after the internet was opened to commerce, the Census Bureau says that brick and mortar sales accounted for 92.3% of retail sales in the first quarter of 2016. Their data show that only 0.8% of retail sales shifted from offline to online between the beginning of 2015 and 2016.

So, despite all the talk about drone deliveries to your doorstep, and all the retail execs expressing angst over consumers going online, the Census data suggest that physical retail is thriving. Of course, the shuttered stores, depressed execs, and tanking stocks suggest otherwise; that many firms operating brick and mortar stores are in trouble, says the report.

The precipitous decline in foot traffic in recent years, even though it hasn’t been accompanied by a massive decline in physical sales, is the canary in the coal mine. People can shop more efficiently online and therefore don’t need to go to as many stores to find what they want. And, the rise of mobile has recently added a new level of complexity to the process of retail reinvention.

So far, the main thing many large retailers have done in response to all this is to open online stores so people will come to them directly rather than to Amazon and its smaller online rivals. Even if they get online traffic, they struggle to make enough money online to compensate for what they are losing offline.

Among large traditional retailers, Walmart recently reported the best results, leading its stock price to surge, while Macy’s, Target, and Nordstrom’s nosedived. Yet year-over-year Walmart’s online sales only grew 7%. Part of the problem, says the report, is that almost two decades after Amazon filed the one-click patent, the online retail shopping and buying experience is fraught with frictions. A recent study graded more than 600 Internet retailers on how easy it was for consumers to shop, buy, and pay. Almost half of the sites didn’t get a passing grade and only 18% got an A or B.

Part of the explanation, says the report, is that the Census retail data are unreliable. It seems likely that Census simply misclassifies a large piece of online sales. It is certain that the Census procedures, which lump the online sales of major traditional retailers like Walmart in with “non-store retailers” like food trucks, can mask major changes in individual retail categories. The bureau has not chosen to present their data in more useful ways, though, claims the authors.

Despite the turmoil, brick and mortar won’t disappear any time soon, says the report. The big questions remaining are:

• Which, if any, of the large traditional retailers will still be on the scene in a decade or two because they have successfully reinvented themselves
• Which new players will operate busy stores on Main Streets and maybe even in shopping malls
• How the shopping and buying experience will have changed in each retail category

Investors should not write off brick and mortar. Whether they should bet on the traditional players who run those stores now is another matter, concludes the report.

The full paper can be found here.