Your Smartphone Is Killing the Mall—and Slowing GDP
A recent headline caught my eye: “Streaming Overtakes Downloads, CDs as Top Music Revenue Driver,” reported Variety in late March. Music delivery is constantly evolving. Compact discs overtook cassette tapes in the late 1980s, which in turn had displaced vinyl albums only a few years before that. But then digital music went mainstream with the introduction of iTunes and the iPod in 2001, and it took only a decade for downloads to displace physical recordings as the top form of recorded music delivery.
And now, barely five year later, streaming music—Spotify, Pandora, Apple Music and the like—have dislodged downloads as the top means by which Americans consume music. What’s the significance for retailers? It’s yet another way in which technology is disrupting old business models, especially for physical retailers, and curbing sales in stores.
When I last blogged about the impact of e-commerce on the retail sector, I discussed how bricks and mortar stores have been losing sales to online retailers at an alarming pace that shows no sign of slowing, despite innovative omni-channel strategies from leading retail chains. Though e-commerce accounts for only about 8% of non-auto retail sales overall, online sales continue to grow not only much faster than in-store sales, but the sales shift appears to be accelerating with consumer adoption of mobile shopping and as consumers feel more comfortable making online purchases for a wider range of goods, like apparel, now the fastest growing online category. In fact, last year apparel overtook electronics as the top e-commerce sales category.
To be sure, there are several categories of goods that most shoppers still do not generally buy online: groceries (for which in-person item selection is paramount); personal care items (too frequent and inexpensive to justify online searches); and building materials (shipping costs swamp the value of the product itself). Excluding these categories from the retail mix, the e-commerce share of all retail is that much greater. Market penetration in the core retail categories more amenable to online shopping (apparel, electronics, hobby items) now exceeds 20 percent. These higher-margin products account for much of the goods traditionally sold in malls and community centers, which explains a large part of why these centers continue to struggle, even seven years after the end of the recession.
The Rise of Virtual Media
But recorded music points to another factor besetting the retail sector today: what I have called digital displacement – the replacement of physical products with virtual goods and services, many provided free to end-consumers. Not so long ago, most recorded music was sold in physical stores, first as albums and tapes, and then as CDs. [For a brief while, mail order houses such as Columbia House accounted for a share as well.] With digital downloading, music sales increasingly moved to online retailers such as Apple and Amazon, prompting the demise of Tower Records, Sam Goody, and virtually all record chains.
And now streaming services are the top recorded music purveyor. According to figures from the Recording Industry Association of America (RIAA), the source for the Variety article above, 2015 marked the first year that streaming was the largest component of music industry revenues, comprising 34.3 percent of the market, just edging out digital downloads (34.0 percent) and physical recordings (28.8 percent).
And notice the change in terminology. The vendors are not selling products (whether physical recordings or downloads) but services (a music subscription service). The change is more than semantic: with no product, there’s no retail sale. With no retail sale, there’s no retailer—online or physical—involved at all.
Movies have gone through a similar, if condensed, progression, starting with videotapes in the 1980s, rented through chains such as Blockbuster, evolving into DVDs in the 1990s, purchased at electronics stores and then increasingly rented via Netflix and Redbox. But with rapid advancement in home internet speeds, consumers increasingly stream their movies through Netflix or their cable company. Aside from niche used-record shops, few stores today sell either recorded music or movies. As recently as a decade ago, these stores were staples of every community center in America. [Ironically, it’s also fair to point out that both music and movies started off as “services”—music as performances in halls and movies in cinemas—so in a sense, the distribution of these art forms has come full circle.]
Of course, books were the first online consumer product to reach a mainstream audience. Remember when Amazon was just a bookseller? Now PwC forecasts that consumer e-books will soon surpass print books, as e-books proliferate while sales of print books decline. But at least these purchases are still recorded as retail sales, though perhaps not for much longer. Magazines may be going the “all you can drink” route. Six leading publishers formed Texture, which allows unlimited downloads of some 200 magazines through a monthly subscription fee. Again, no retailer or retail sales involved. Will books be next?
Other forms of media are seeing similar trends. The once hot video-gaming store GameStop is struggling for relevance, despite the huge popularity of gaming, as the industry moves away from consoles and software (which is to say retail goods) and toward downloading and online games (services). Meanwhile, newspapers have already died a thousand deaths, notwithstanding the persistence of a declining number of regional and national powerhouses, as our society finds new ways of delivering news at no direct cost to the consumer. All of which translates directly into fewer sales in bricks and mortar stores and hence less retail space that can be supported.
And Now Other Virtual Goods and Services on your Phone
These media trends are just the tip of the most pernicious threat of all for physical retailers: the smartphones and tablets that host an endless range of free products and services that are supplanting physical goods previously sold in stores. It started with websites like Google Maps that replaced physical maps, and crowd-sourced encyclopedias and search engines that have rendered most printed reference books obsolete. Then came the consumer rating websites that have virtually eliminated printed travel guides. And so on.
But it’s the growing ubiquity of mobile devices that is really laying waste to retailing. Start with perhaps the most popular feature on the smartphone, aside from, you know, the telephone itself: the camera. The camera function alone reduces the need for the camera and electronics stores that used to sell cameras, the photo processing stores that developed film, the stationary stores that sold photo albums.
Standard features on most smartphones now include an alarm clock, radio, thermometer, dictionary, mp3 player, calculator, address book and scheduler—not to mention the apps for streaming music, videos, and movies—all of which replace physical products formerly sold in stores. Newer features or downloadable apps include a compass, flashlight, scanner, and games, as well as the maps and crowd-sourced rating services. Our mobile devises replace travel agencies, messaging services, answering machines, and newspapers. Virtually all of these are free to the consumer, though some are supported by ads. Neither acquiring nor using virtually all of these apps would even count as a retail sale! And so, whole categories of stores have been eliminated or shriveled to a small shadow of their former size.
I do not know of a comprehensive accounting of the lost sales involved, but the carnage covers so many retail categories it would might well be impossible to quantity accurately. To cite just two examples: CD sales in the U.S. have declined by $12 billion, or almost 90 percent, from $13.4 billion in 2000 (the year before iTunes) to just $1.5 billion last year. And camera exports from Japan (which accounts for the vast majority of cameras made worldwide) have dropped by two-thirds since peaking in 2008, a loss of some $12 billion globally. Suffice it to say, the introduction of more food uses and personal services like massage and clinics, does not come close to replacing what has been lost.
The Hit to GDP …
Arguably, the incorporation of all of these services and products into our phones and tablets also reduces GDP as well—though perhaps this issue demonstrates the limitations of GDP accounting more than anything else. GDP counts only what people and firms actually pay for, not the utility these products bring. [In a similar way, GDP counts housekeeping services, for example, when we hire someone to do it and not if we do it ourselves, no matter the quality of the output or level of effort expended.] To the extent that our mobile devises provide all of these services and products for free (or nearly so), one could argue that we’re better off as a society for having them at no (or little) cost, even if our economic accounting conventions fail to take proper stock of them. Further, this perhaps contributes to the slowdown in measured productivity that has vexed economists.
… And the Hit to the Retail Sector
But one fact is undeniable, no matter the accounting: retailers, and especially physical stores, are the clear losers in this transformation of retailing. The damage goes far, far beyond leakage of sales from stores to online retailers.
And the impact on shopping centers and retail districts? Perhaps surprisingly, a mix of both good and bad. There’s no doubt that our country suffers from a significant surplus of retail space, and the digital product revolution (on top of other market and economic issues) is exacerbating the problem. Most at risk are centers in secondary and especially tertiary markets, as well as the less competitive malls within even the strongest markets, as retailers focus on the best markets and top-performing shopping centers in the increasingly bifurcated retail sector.
But there’s a more positive angle to this loss of traditional retail tenants, as well, as new tenants emerge to take their place. One new tenant group receiving a lot of attention are the e-commerce retailers like Bonobos and Athletica, who are establishing small brick and mortar footprints. Even Amazon is testing a chain of bookstores, while Microsoft is following Apple’s lead. But this phenomenon is more hype than reality. Most of these online retailers are opening in a few key destination urban districts, often not in retail space at all. Moreover, the “stores” are intended to showcase the brand, but typically do not conduct in-store commerce, instead directing shoppers to their websites for purchases. These outlets will fill little of the vacated shopping center space.
Of much greater significance is that shopping centers are raising both the amount and range of “experiential” entertainment space, making for more interesting, dynamic retail environments where shoppers are tempted to spend more time—and money—consuming a variety of goods and services. As I discuss in my current Knowledge Leader article, malls are providing shoppers with a more diverse set of reasons to come, shop, play, and stay. In this “back to the future” trend, shopping centers are becoming more like the old urban districts that they broke from generations ago. And that could be the most profound impact on retailing of all.
Andrew is the U.S. Chief Economist for Colliers International, where he provides thought leadership about commercial real estate, capital markets, financial investment and related sectors. He’s held a variety of leadership roles in both the public and private sectors.