Bloomberg via Getty Images/Andrew Harrer The traditional big-box retailer is a dead man walking, right?
That’s been the conventional wisdom ever since Amazon.com (AMZN) began to take over the retail world, with its cheaper prices and speedier-than-thou delivery times. How could traditional retailers, saddled with overhead from brick-and-mortar stores, hope to compete?
Just Browsing, Thanks
Showrooming has taken a chunky bite out of the business of traditional retailers. In a poll conducted by Gallup in November, 6 percent of respondents said they bought merchandise online after showrooming in a retail store, with an additional 3 percent saying that they intended to do so. That’s nearly 10 percent of the customer base.
In a sector that has always subsisted on thin margins, those are sales that brick-and-mortar operators can’t afford to lose. One famous victim of the trend is electronics superstore Best Buy (BBY). Due in no small part to showrooming, the company’s results have taken serious hits over the last few years. From fiscal 2010 to 2013, sales stagnated around $50 billion, while the bottom line dived into the red.
It hasn’t been easy, but several brick-and-mortar retailers have quietly been trespassing across Amazon.com’s online space. And they’ve been doing it with the one asset the conventional wisdom states is a liability in this age of e-commerce — their stores.
From Warehouse to Your House
To some extent, big-box retailers are fighting Amazon at its own game by opening their own Web fulfillment centers. Just last October, Walmart Stores (WMT) announced it would open one in Texas and another in Pennsylvania.
That, alas, doesn’t compare to Amazon, which since 2010 has spent nearly $14 billion to build its fulfillment center network. However, Amazon’s real competition in this new battle isn’t Web fulfillment centers — it’s the brick-and-mortar stores again.
The big-box guys have begun to fill online orders from the stock of their brick-and-mortar outlets in a process known, naturally, as “ship from store.” This has several beneficial results. Most critically, it adds a large number of distribution centers to a retailer’s network. Walmart, for example, has nearly 4,200 outlets across the country. This puts a good two-thirds of the population within five miles of one of its stores.
Proximity like that means retailers can get goods to customers quickly, not to mention cheaply. Amazon.com promises free two-day delivery for members of its Prime service. But that can easily be matched by retailers shipping from the store just a few miles away from your home. Not to mention that “ship from store” is a often a hybrid service that gives customers the choice of picking up their purchases from the store themselves — if they’re in stock — within hours. Right now, according to Walmart, 10 percent of the items ordered on its website are shipped from one of the retailer’s stores, with “the majority” delivered in two days or less. Sounds a lot like Amazon Prime, right?
Ship from store also helps enormously to reduce inventory. In many ways, success at retail derives from how well a company manages the goods in its warehouse. It’s a difficult art to get right; a retailer with too many unwanted products wastes valuable warehouse space, eventually leading the guilty party to chop prices (and hence profit margins) in order to get rid of the stuff. Too few goods, and disgruntled customers facing stock shortages leave the store — possibly never to return — to buy what they want from a competing business.
We’re still in the early days of this retail tug-of-war. Some of the big names in retail have adopted ship from store, although many are still relatively new to the game. And, again, dealing with inventory is tricky, so it’ll probably take some time for even the most grizzled retail veterans to find the fulfillment center/store warehouse mix that works for them.
Walmart is enthusiastic about the system, but has cautiously rolled it out in a mere 35 or so of its many locations. Gap (GPS) only began leveraging its 2,600-strong retail store network to boost its online business in 2012, while higher-end department store Nordstrom (JWN) has been at it for a (relatively) long time, having launched its ship-from-store efforts in 2009.
There’s plenty of money to be made for those who can finesse the mix. An analyst from investment bank Credit Suisse (CS), cited in a USA Today article, estimates that beleaguered Best Buy stands to make an additional $5.8 billion in annual sales and $168 million in profit with ship from store. That’s something like 12 percent of the company’s most recent annual top-line figure, and a slightly higher percentage of the net profit the last fiscal year the company was in the black (2011). It’s no exaggeration to say that this could mean the difference between survival and extinction for such a company.
For a retailer with a heavy real-world presence, those numbers look very enticing indeed. In this virtual era, physical stores have come to be seen as more a liability than an asset. But, if utilized in concert with online shopping technology, they can not only be an asset, but also provide a strong competitive advantage against pure e-tailers.
Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com.
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