Downturn and retailing?

With discretionary consumer spending often the first victim of economic slowdown, retail sales in the United States and United Kingdom are likely to face a torrid year.

A distinguishing feature of the likely downturn is that it will be the first to happen during a mass internet age. A sharp drop in retail sales would be a significant test of the foothold online retailing and services have gained, and the role of traditional retailers and service providers in the face of internet competition.

The end of the shop?

Despite periodic forecasts that the internet will spell the end of old-fashioned retailing, there is relatively little evidence that this is happening.  Nonetheless, a downturn in retail sales is likely to highlight the strengths and weakness of the internet relative to its old-fashioned alternative:

• Specialist providers.  While the internet provides opportunities for those offering specialist goods and services, it is unable easily to provide knowledgeable staff able quickly and easily to answer questions and resolve queries, or interact with and sell to clients where any degree of complexity is required.  Therefore, while online booking services, whether directly from transport providers, or via online travel companies, have largely displaced travel agents to sell flights and make hotel reservations, specialist tour companies, particularly for high-end clients, tend to continue to have a strong offline operation.
• Budget providers.  While online retailing has increased sales in the middle of markets for goods such as food, clothing and other everyday items, economies of scale, along with shipping costs, mean that they are often less competitive for the large-scale sale of budget items.  Moreover, many of their customers often do not have ready access to internet connections and banking services needed for online retailing.  Therefore, while 'mainstream' supermarkets are increasing online sales, their low-cost counterparts remain largely off-line operations.
• Impulse buying. The internet also is not conducive to impulsive purchasing, meaning that to some extent, 'old-fashioned' retailers will remain able to sell some products -- such as books, music and film, jewellery and luxury food items -- at a slightly higher cost than their online equivalents.  However, other items, such as relatively large and expensive consumer electronics are less common impulsive purchases.  As retailers of these items tend to run large premises, they may particularly suffer if disposable incomes fall.

Artificial distinction?

Yet the distinction between 'High Street' and online retailers remains a largely artificial one.  Most major -- and even specialist -- retailers have both an online and offline presence, which complement each other.  Indeed, the most successful retailers over the medium-term are likely to be the ones most able to exploit these synergies.  Nonetheless, the internet does offer retailers the opportunity to adapt capacity to meet demand, without the need to open and close stores, which means that retailers able to exploit this benefit of an online presence are likely to be particularly well placed to weather an economic storm.