Target and Walmart prove the pandemic e-commerce surge won't reverse

Walmart and Target both reported stellar third-quarter earnings this week, sending their shares soaring. And once again, the biggest headline for both was e-commerce.

Walmart (WMT) said its online sales rose 79% in the quarter. Target (TGT) said its online sales rose 155%.

Those are enormous gains, and they come after Walmart’s online sales rose 97% in Q2, and Target’s online sales rose 195% in Q2. The slight dip for both figures in Q3 can be attributed to the fact that the second quarter marked the height of widespread U.S. lockdown, and then many brick-and-mortar chains reopened their stores in Q3, leading to increased foot traffic.

The reopening of physical stores in Q3 also explains why the e-commerce share of overall U.S. retail spending dipped to 14.3% for Q3, down from 16.1% in Q2, according to the Commerce Department. U.S. digital sales still grew to $199.4 billion in Q3 2020, up 37% from Q3 2019, but physical retail grew as well, so the e-commerce share dropped.

E-commerce share of U.S. retail has exploded during pandemic

Consider this: e-commerce as share of U.S. retail was just 10.8% at the end of Q2 2019. In the second quarter of 2020, at the peak of the COVID-19 pandemic, e-commerce spending surged 44.5%, its biggest growth in 20 years.

Of course, the shift from physical retail to online shopping was already happening before COVID-19. Walmart’s online sales rose 74% in Q1 2020, pre-pandemic, and Target’s rose 141%. But stay-at-home orders accelerated the shift further. (And not just in the U.S.: in the European fashion industry, e-commerce rose from 16% of total sales in January 2020 to 29% in August—six years worth of growth in eight months, according to a report from Business of Fashion and McKinsey.)

Now the question is whether the e-commerce levels will remain the same beyond the pandemic; signs point to yes.

It’s become one of the biggest existential business questions of the pandemic: Which trends that accelerated during this time will reverse once there’s a widely available vaccine, and which will stay, establishing a new normal?

Judging by the hit to “stay at home stocks” like Peloton, Zoom, Slack, CrowdStrike, and Chewy from the news of a forthcoming COVID-19 vaccine, many investors believe the end of the pandemic will mark the end of the explosive growth for many at-home tech names that have surged since March.

But the acceleration of e-commerce, which has gone hand-in-hand with the embrace of retail BOPIS (buy online, pick up in store), is the safest bet of pandemic consumer trends to stick around.

Walmart is ‘convinced that most of the behavior change will persist beyond the pandemic’

Dick’s Sporting Goods (DKS) provides a useful case study. Dick’s launched curbside pickup early in the pandemic and found that 75% of its online orders in Q2 were fulfilled by stores (either shipped to a customer from their nearest store to increase shipping speed, or picked up curbside, rather than shipped from a warehouse). Curbside pickup helped Dick’s deliver a record Q2. In Q3, even after Dick’s reopened its stores to in-store shoppers, curbside continued to thrive. “We anticipated originally that we would see a large drop-off when the stores reopened,” Dick’s president Lauren Hobart said on the company’s Q2 earnings call, “but that is not the case.” Dick’s CEO Ed Stack added: “It started off as a safety piece, people wanted it because they didn't want to come in contact with anyone else. It's now becoming a convenience piece.”

McKinsey retail analyst Sajal Kohli concurs: it isn’t going anywhere.

“We think curbside is going to be exceptionally sticky,” Kohli told Yahoo Finance. “Some categories are still going to be incredibly conducive to in-store interaction, but for several categories, I think consumers discovered this newfound convenience, and they will actually stick to curbside, which has massive implications, as you can imagine, for retail.”

Walmart has even pulled back its grocery store footprint in the U.K. and Japan to prioritize e-commerce. CEO Doug McMillion stated his view plainly on the company’s third-quarter earnings call: “Changes in customer behavior have accelerated the shift to e-commerce and digital. “Our e-commerce and omni-channel penetration continue to rise, accelerating trends by two to three years in some cases. We're convinced that most of the behavior change will persist beyond the pandemic.”

These retail chains are telling us something: Don’t expect a flood of brick-and-mortar foot traffic and a corresponding drop in e-commerce when the pandemic ends.

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Daniel Roberts is an editor-at-large at Yahoo Finance. Follow him on Twitter at @readDanwrite.

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