Can brick and mortar stores compete with virtual retail?
We were recently contacted for our insights on this topic. Check out the article in The Economist.
Retail vs e-tail in America
Nov 26th 2009 | NEW YORK
From The Economist print edition
Bricks-and-mortar shops struggle to win customers back from virtual ones
Shoppers on Black Friday, the traditional start of the holiday shopping season in America, which falls on November 27th this year, are notoriously aggressive. Some even start queuing outside stores before dawn to be the first to lay their hands on heavily discounted merchandise. Last year berserk bargain-hunters in the suburbs of New York City trampled a Wal-Mart employee to death. Despite the frenzy at many stores, however, the recession appears to have accelerated the pace at which shoppers are abandoning bricks and mortar in favour of online retailers—e-tailers, in the jargon. So this year Black Friday (so named because it is supposed to put shops into profit for the year) also marks the start of many conventional retailers’ attempts to regain the initiative.
E-commerce holds particular appeal in straitened times as it enables people to compare prices across retailers quickly and easily. Buyers can sometimes avoid local sales taxes online, and shipping is often free. No wonder, then, that online shopping continues to grow even as the offline sort shrinks. In 2008 retail sales grew by a feeble 1% in America and are expected to decline by more than 3% this year, according to the National Retail Federation, a trade body. In contrast, online sales grew by 13% in 2008 to over $141 billion and are predicted to grow by 11% in 2009, according to Forrester, a consultancy.
Online sales now account for 6% of all retail sales in America (up from 5% in 2008) and that figure is expected to reach 8% by 2013. E-commerce is also growing in Europe and Asia, where online sales in 2008 totalled $60 billion and $40 billion, respectively. In Britain, internet shopping now accounts for nearly 4% of total retail sales, according to Planet Retail, a research firm.
Online-only shopping sites such as Amazon and eBay, two e-commerce giants, have thrived in the downturn. Amazon’s sales rose to around $5.5 billion in the third quarter of the year, up by almost 30% from a year before. Listings, chiefly from commercial vendors, have surged so rapidly on eBay that its website briefly crashed on November 21st.
The range of items available online is also growing. Amazon has started selling groceries. Consumer-goods companies such as Procter & Gamble (P&G) are encouraging the sale of things like nappies (diapers) and laundry detergent online. At the opposite extreme, the internet is also being used to sell luxury goods. Faberg?, a defunct jewellery-maker known for its gem-encrusted eggs, relaunched in September. It will not open any shops but will instead operate only online.
The shift in spending to the internet is good news for companies like P&G that lack retail outlets of their own. But it is a big concern for brick-and-mortar retailers, whose prices are often higher than those of e-tailers, since they must bear the extra expense of running stores. Happily, however, conventional retailers are in a better position to fight back than last year, when overstocking forced them to resort to ruinous discounting. Inventories are about 15% lower this year. Some big retailers, such as Saks and Target, have recently reported rising revenues and margins.
The most obvious response to the growth of e-tailing is for conventional retailers to redouble their own efforts online. The online arms of big retailers are performing well, on the whole. Saks, for example, saw online sales rise 9% in the nine months to the end of October while sales in its stores fell by 19%. The company expects online growth to outpace sales in stores for the “foreseeable future”, says Stephen Sadove, its boss.
The concept of “multichannel” shopping, where people can buy the same items from the same retailer in several different ways—online, via their mobile phones and in shops—is gaining ground, and retailers are trying to encourage users of one channel to try another. Growing online traffic may actually increase sales in stores too. According to a spokesman for Macy’s, a department-store chain, every dollar a consumer spends online with Macy’s leads to $5.70 in spending at a Macy’s store within ten days, because consumers learn about other products online and come into stores to look them over before buying them. Many online retailers offer tools that let people locate the nearest outlet that has a given item in stock.
Retailers are also trying make shopping seem fun and exciting to counteract the economic gloom. One common tactic is to set up “pop-up” stores, which appear for a short time before vanishing again, to foster a sense of novelty and urgency. Following the lead of many bricks-and-mortar outfits, eBay recently launched a pop-up in New York where customers could inspect items before ordering them from kiosks.
Shoppers are increasingly looking for an “experience” when they go to stores, says Jack Anderson of Hornall Anderson, a branding and marketing firm, and are no longer interested in purely “transaction-based bricks and mortar stores.” Apple, which encourages customers to try out its devices in its stores, is considered a pioneer of this strategy, and has attracted many imitators. The Walt Disney Company, for example, is rumoured to be redesigning its stores to attract shoppers looking for entertainment, with new features such as “magic mirrors,” which will allow children to play with Disney characters.
Stores are also trying to lure customers by offering services that are not available online. Best Buy, a consumer-electronics retailer, has started selling music lessons along with its musical instruments. Lululemon athletica, which sells sports clothes, offers free yoga classes. The idea is to bring people back to its shops regularly, increasing the likelihood that they will develop the habit of shopping there.
Another great hope is that mobile phones will come to the rescue of conventional retailers. Some consumers already use internet-enabled handsets to shop online. But many analysts think a technology called near-field communication (NFC) might boost sales at stores, by allowing shoppers to scan products with their phones to learn more about them, and then to pay by swiping their phones at the till. Unfortunately, NFC will not be widely available for some time—too late to help harried retailers through Black Friday.