Consumers, Not Retailers, Will Win Retail Wars

Carts

Just in time for the holidays, the bricks and mortar retail empire is (trying to) strike back. 

Against who? Amazon of course, the beta noire of Wal-Mart, BestBuy, Target and pretty much anyone else that has “show and sell” locations across the U.S.
 
As readers know, I’ve written and talked about Amazon quite a bit in the past. But for those of you just joining us, the summary is that based on a combination of killer logistics, not having to pay taxes in most states, innovations such as Prime and now a platform (its Kindle line of Tablets and eReaders) to sell real and physical goods, Amazon has emerged as the #1 threat to non online-only retailers.
 
Companies such as Buy.com and eBay, in theory should pose the same threat, but for various scale and strategy reasons, haven’t. Many retailers have seen sales drop, especially on high margin goods – electronics, luxury apparel, jewelry. Increasingly, Amazon is trying to steal away consumers of low margin goods such as kitchen towels, binders and breakfast cereal.
 
In some sense though, the current and present danger to them has been overstated and amplified by the media. Consider that Amazon’s revenues are still only a tenth of Wal-Mart’s $450B annual revenues.  Or that though “show rooming” has received extensive coverage in the business press (including news that Best Buy was using non-scannable bar codes for big ticket items in its stores to prevent shoppers from doing spot price checks from within Bestbuy stores and subsequently buying the item more cheaply online), per a recent BusinessWeek issue (the one that uses an ultra cheesy “Best Buy zombie” cover) only 5.5% of BestBuy’s sales have been lost to this phenomenon.
 
Still, given Amazon’s hyper-competitive nature and U.S. demographics that are steadily becoming more comfortable buying and ordering things online, the retail empire has begun to strike back this year. 

Kindle Fire HD

Electronic Trojan Horses – The first salvo I cite is Wal-Mart saying, on Sept 20, that it would not sell any more Kindle Tablets or eReaders, after its current inventory ran out. It didn’t give any specific reasons, but its not hard to guess why:

“The Kindle Fire is the Trojan horse,” said Andrew Rhomberg, the chief executive of Jellybooks, an e-book recommendation site. “It’s a shopping platform that covers so many more categories than e-books. It affects Wal-Mart in a different way than the early Kindles and e-readers did.”

Colin Gillis, a technology analyst for BGC Financial, said that by selling Kindles, Wal-Mart was “encouraging its customers to step into that ecosystem. Every time you pick up your Kindle, they’re trying to get you to buy patio furniture” at Amazon, Mr. Gillis said. “If I were Wal-Mart, I certainly would not be encouraging my customers to go down the path of owning a Kindle and buying things from Amazon.”

And since the Kindles were low-margin goods anyway, Wal-Mart is not likely to lose much in the short-term and may in fact, potentially gain more in the long term. As an aside, an analysis of the impact of Amazon on Wal-Mart sales, broken down by category would have been nice to see at this point…something that Wal-Mart may have used in arriving at this decision. 
 
Same Day Delivery

The second broadside, again from Wal-Mart, is actually more interesting and might be a stronger one – in the form of a $10 same-day delivery service in a few test markets
 
Amazon’s strategy with same day delivery went something like this: Why would someone want to spend an hour of their time driving and shopping for a basket of goods if they could get the same thing shipped from Amazon the same day or even just the next day? 
 
And that, is an excellent question.
 
A question that my household answered in a way that Amazon hopes more U.S. shoppers and consumers do.
 
We use diapers.com (which Amazon now owns) to regularly buy baby supplies for prices that are as competitive as those in our neighborhood Target or Wal-Mart (or even Costco) but with the added advantage that, as long as we buy at least $50 worth of merchandise and place the order by 3pm, the order shows up on our doorstep the next day, 6 days a week.
 
Extending that shopping behavior to other household items is not too hard and there are probably millions of people that could easily use Amazon and its subsidiaries (diapers.com, soap.com, a sister site for pet supplies, etc.) the same way. 
 
Here, Wal-Mart is co-opting Amazon’s strategy by treating its ~ 4000 stores as distribution centers, which in some ways, they are. Perhaps these locations are not as big as Amazon’s mammoth 40 distribution centers, but they can hold tens of thousands of SKUs and can be quickly “refilled” from other mammoth regional distribution centers that big box retailers typically maintain. As expected from Wal-Mart and anyone that big, it is testing the waters in a small way:

The Wal-Mart tests, the first of which started last week in the Washington suburbs, let customers order toys and other popular gifts, and have them delivered to their homes the same day. Ms. Lester, the Wal-Mart spokeswoman, said the company chose which items to include based on what was popular in its order-online, pick-up-in-store service. 
Analysts don’t seem convinced that this is a viable model for Wal-Mart, but since no one can truly know how viable something will be unless it is tested out for an extended period of time, I expect more roll-outs in more test markets in the next few moths. In fact, in the last few days eBay announced a same day delivery pilot in New York City by teaming up with a variety of local merchants and so did Google, on the West Coast. So clearly, this idea has some legs – offensive ones or defensive ones.
 
And who knows, perhaps, based on its successes here, every Wal-Mart store will eventually hold a retail store and a smallish distribution center of sorts (with both sharing the same physical inventory/storage space) dedicated to certain categories, at some point in the future? Last I checked there was nothing on the roofs of most Wal-Mart stores. I wonder how that unused space could be put to some use…
 
The third offensive front is price-matching, something that I think has the potential to make a difference – but  once again retail analysts aren’t convinced this is a great idea.
 
[Question to retail analysts: So what would you have bricks-and-mortar retailers do? Thrown in the towel, shut down and walk away?]
 
I actually got to test this out earlier this week at a BestBuy store and thought it worked quite well, from a convenience and shopper perspective:
 
Me: I would like to buy this today but I see that the online price is $50 lower.
BestBuy Employee: Sure, can you show me where you saw that?
Me: Here you go (showed him the online price on one of the laptops dotting BestBuy).
BB Employee: OK, we can match that. Let me go and get your item for you.
 
(as an aside, the 27″ Thunderbolt display was beautiful when I unpacked it at home)

I guess BestBuy had to make a choice between giving up revenue and giving up margin. If electronics, especially big ticket items, have 20 to 30% margins built-in and BestBuy (and others too, though I don’t know how many $1000 HDTVs, Laptops and Tablets Wal-Mart and its ilk sell) can afford to give up some of that in return for revenue, traffic and potential up-sell opportunities, this might be a win-win strategy. 

Shoprunner Logo
 
The last one is ShopRunner, which I also talked about, a while ago.
 
Presumably, ShopRunner, which is a 2-day delivery service from tens of large retailers and was designed to compete with Amazon’s very successful Prime service, targets the same demographic that shops at Amazon, but there have been execution issues and as of Oct 2012, it is not entirely clearly how effective or successful ShopRunner is…which I attribute to a combination of problems with ShopRunner’s logistics, marketing, messaging and promotion.
 
Almost everyone in the U.S. has heard of Amazon. How many have heard of, leave alone tried, ShopRunner? But perhaps this will change sometime in the future.
 
Beyond Online Shoppers
 
While these four broadsides target that part of the population which shops at Amazon today but could be persuaded to shop at their local big-box stores, a huge chunk of shoppers are still not comfortable shopping online and interestingly, some of the innovation in the retail space seems to be benefiting them as well. 
 
Consider what Wal-Mart did earlier this year, in terms of letting customers buy or reserve items online (since all customers are now comfortable browsing for things online) and then walking into a store and paying with cash:

With the cash option, Walmart was trying to appeal to customers who did not have bank accounts or credit cards. Walmart says the majority of in-store purchases are made with cash or debit cards, and that about 15 percent are made with credit cards.

In the first weeks of the cash option, Walmart noticed that a different set of customers also found the service appealing. About 40 percent of the customers who paid with cash when ordering online ended up using noncash options, like a credit card or check, when they arrived at the store. They simply had not wanted to provide that financial information online. “There’s still a large segment of people out there afraid of identity theft or just plain putting their credit card online,” Mr. Anderson said. The service already accounts for 2 percent of Walmart.com’s sales.

I wonder what Amazon will do, in the not too distant future, about these types of shoppers…

The Two Dimensional War: Convenience and Cost
 
What makes this all the more interesting is that neither Wal-Mart nor Amazon can be written off easily. Each of them has shaped the retail landscape in different ways, just for different periods of time.

While eCommerce taxation I believe is inevitable and should level the playing field (though some research says that in states where Amazon does collect taxes today, consumers pay 10 to 11% less on the same items on Amazon), I expect furious innovation from Amazon to constantly expand its appeal to new shoppers and find ways to retain existing ones. As someone said recently, the amazing thing about Amazon is its ability to react and continually act like a start-up, despite its decidedly non-startup status today. Consider the constant stream of innovations coming out there: Amazon’s new “lockers“,  Amazon Supply (a site that sells industrial parts to businesses!) to Amazon EC2 – public cloud infrastructure that powers everyone from Netflix to Instagram, etc. (though the last one doesn’t sell physical merchandise).
 
At the same time, if some of the things I discussed above are any indication, neither can Wal-Mart be expected to be standing still. Here, Walmart.com’s CEO has the right idea:

“We are living in the age of the customer, and you can either fight these trends that are happening — showrooming is one — or you can embrace them,” said Joel Anderson, the chief executive of Walmart.com for the United States. “We have a lot of assets, but they’re only assets if you embrace the trends of the customers.”
That fighting spirit, on all sides, is why I think that the victors will probably not be decided for at least another decade.

In the short term, while it appears that these retail wars are for shoppers wallets, I think that in the longer term, this is in fact a battle that aims to win over consumers and shape their shopping behavior along the twin dimensions of convenience (ease of use, variety and speed) and cost.

That’s because every move, and counter-move, is designed to make it easier for shoppers to buy. More choice, faster “goods in hand”, fewer dollar costs and reduced traffic, time and stress costs.
  
So regardless of how long the battles last though and how margins get further squished in the process, it is clear that consumers will win again and again. 

One Response to “Consumers, Not Retailers, Will Win Retail Wars”

  1. Another perspective on where retail is headed – some of the same things I talked about, above – and other things that I just learned about myself

    http://qz.com/31068/supermarkets-without-cash-registers-amazon-in-strip-malls-the-future-of-retail-is-weird/

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