The Shift To E-commerce Could Boost The Digital Advertising Market From Approximately $180 Billion To $410 Billion By 2026
Americans appear to be shifting how they spend their time and money. In 2021, e-commerce accounted for nearly 14% of total retail sales, up from 11% in 2019. Despite losing share, however, the physical retail footprint in the US remains large. In our view, a significant decline in the US retail footprint is imminent as sales continue to shift online, turbocharging the next leg of digital advertising spending in the US. Our research suggests a base-case scenario in which US digital advertising spending will grow at a compound annual rate of 9%, from roughly $180 billion in 2021 to $275 billion by 2026, as shown in the green bar below. Our bullish estimate projects a 19% compound annual rate of growth to $410 billion in 2026, as shown in the purple bar below.
Although the US e-commerce penetration scaled from less than 5% of total retail sales in 2011 to nearly 14% in 2021, it remains lower than the worldwide average of 19%, and far below China’s 44%, as shown below.
We believe US e-commerce will continue to increase toward China’s 44% penetration over the next five years, accelerating brick-and-mortar retail closures. In a 2018 report by Cowen and Company, ICSC, and Cushman & Wakefield, the US ranked number one in total retail square footage per capita––nearly 24 square feet per person, as shown below.
That vast brick-and-mortar footprint is problematic, given that retail vacancy rates in the US rose from 9.4% in 2019 to 10.5% in 2021, according to Moody’s Analytics. Our research suggests that the US retail rental market depreciated in value from $318 billion in 2019 to $300 billion in 2020. Despite a short-term recovery to nearly $312 billion in 2021, we expect continued decline as more commerce moves online. By 2026, in our base case the retail rental market will contract by 2.7% at a compound annual rate to approximately $270 billion. In our bull case estimate the decline is 3.2% to $264 billion.
As physical retail activity has waned, the US digital advertising market approached $180 billion in 2021, 63% of the total ad market. We believe cost considerations will increase that percentage significantly over the next five years. The annual cost of physical retail rent is 20+ times more expensive than “renting” a storefront on Shopify, as shown below. If we were to include other upfront costs and ongoing capital expenditures, the relative cost savings of online stores would increase accordingly.
With capital liberated from its prior allocation to physical space, businesses are likely to increase digital ad spending to boost their online presence. In our bull case, the digital ad market could eclipse the US retail rental market in 2024, reaching $410 billion in 2026, while in our base case, the eclipse doesn’t occur until 2026, which puts the market at $275 billion in 2026, as shown below. Our forecast for digital ad spending would equate to 1.47% of US GDP in the bull case and 0.98% in the base case. At the same time, physical retail rental spend would approach 0.97% and 0.95% of US GDP, respectively. Put differently, digital advertising spending––as share of total ad spend plus retail rent spend––could increase from 30% in 2021 to somewhere between 45% and 56% by 2026.