How online shopping is saving the bricks-and-mortar store

Shoppers browse in person to see, touch or try on items before ordering them online. They are picking up or returning purchases in stores. And retailers are increasingly relying on their shops as fulfillment hubs, shipping items ordered online from store stockrooms in addition to warehouses.

Overall, nearly 42% of e-commerce orders last year involved stores, up from about 27% in 2015, according to research firm GlobalData.

“There was a narrative that as online grew, stores would become less relevant. But it hasn’t worked out that way,” said Neil Saunders, managing director at GlobalData. “In many ways, the store is still the heart or hub of retail.”

It is another example of how online-only retail has its limits, and why physical stores are making a comeback. After years of overbuilding that lead to a sharp contraction, retailers are on track to open more stores than they close in 2024 for the third consecutive year, according to advisory and research firm Coresight Research.

Many retailers have found that it is too expensive and difficult to attract and retain customers without physical stores. And using stores as pickup and drop-off points helps lower the labor, packaging and shipping costs involved in online orders.

Big-box retailers started building up their store-fulfillment operations and infrastructure for in-store pick ups and returns before the pandemic after realizing that returns were higher for items bought online and that digital sales were less profitable.

Kohl’s now fulfills more than a third of its online orders in stores, Walmart more than half, and Target nearly all its sales from its network of roughly 2,000 locations, according to the companies.

The pandemic sped up the integration of online and in-store shopping, as mandated closures and infection concerns forced retailers to offer curbside and pickup services, Saunders said. Now, many customers expect these options, which often allow them to avoid shipping fees and get their sunblock and dish soap sooner than waiting for delivery.

Karen Dolan, a 64-year old resident of Redding, Conn., recently ordered three dresses online from Macy’s, and plans to go in person to the department store to return two of them.

“When you go to stores no one has your size, so it gets very frustrating,” Dolan said. “You tend to order online and try-on at home.”

Dolan said she prefers returning items directly to stores because it’s more convenient than returning them through the mail, which requires packaging them back up and sometimes paying shipping fees. She also likes to browse in the store after making her return, to see if something she was eyeing online has gone on sale and because she enjoys shopping in person.

“I definitely like to feel it, touch it, look at it,” she said.

E-commerce’s growth and impact on the retail landscape shouldn’t be understated. Online sales accounted for 15.4% of total retail sales last year, up from 14.7% in 2022 and 6% in 2014, according to the U.S. Department of Commerce.

And as online shopping expanded, in-store shopping went through significant upheaval in the mid-2010s. Hundreds of retailers declared bankruptcy. Competition from online shopping was a factor in retailer distress, along debt-laden balance sheets and an oversupply of retail real estate.

The integration of online and physical shopping isn’t without hiccups. The return of items bought online in store can artificially depress locations’ total sales, making it difficult for landlords who track retailers’ performance to set rent rates or collect percentage-of-rent proceeds, said Josh Dinstein, senior vice president, acquisitions, at Continental Realty Corporation, which owns retail real estate across the country.

And not all types of retailers have figured out how to make services like in-store pickup profitable. Grocery stores, which already operate on thin margins, are struggling to make money on fulfilling online orders, which are labor-intensive and require setting aside significant additional space in the store for the refrigeration of items awaiting pickup.

“I don’t think it’s as profitable as everyone thought it could have been,” said Josh Suffin, president of real-estate services for RetailStat.

Still, more national retailers are integrating their digital and in-store shopping experiences. Abercrombie & Fitch Co.started investing heavily in technology to do this about a decade ago. It now designs locations to make it quick and easy for shoppers to retrieve items bought online, installing locked cabinets by the checkout area to hold merchandise waiting for pickup.

“The customer demands this seamless omnichannel experience where the stores and the digital business are connected,” said Scott Lipesky, chief financial and operating officer.

By the end of 2023, Abercrombie & Fitch Co.’s business was 45% digital across its four brands. The rise of e-commerce sparked changes to the company’s portfolio. Over the last several years the retailer has been closing its biggest stores in major cities worldwide and opening smaller-format stores in the same markets.

“The flagship went from being a giant store to a cellphone and the screen,” Lipesky said.

But, he added, stores are still necessary and the company plans to open more locations that it closes this year.

Write to Kate King at kate.king@wsj.com