In its second-largest acquisition, Amazon buys the company for $970 million.
Web sales are rising much faster than store sales creating a tough decision for chains—how to balance store and Internet investments.
If holiday spending is any indication, a growing share of the consumer wallet is going online, relative to other sales channels. The eSpending Report from Goldman, Sachs & Co., Harris Interactive and Nielsen/NetRatings shows that for the first five weeks of the 2004 holiday season, shoppers reported spending 22% of their gift dollars online versus 20% in 2003. Correspondingly, the percentage of gift spending that went to stores dropped to 72% from 74% the previous year, while spending on catalogs held steady at 6%.
That suggests more consumer spending is going online, forcing retailers of all kinds to think carefully about where they invest their resources. "Capital is scarce," says Dale Achabal, director of the Retail Management Institute at Santa Clara University. "The question is, where are you going to get the biggest bang for your buck?"
More than sales
And while web sales are rising at the seeming expense of stores, it`s not as simple as that, analysts say. Retailers should be cautious about knee-jerk reactions to channel shift without probing what lies underneath. It`s that kind of short-sighted thinking that led a number of retailers to cut catalog mailings when web sales started to pick up, only to discover that sales in both channels then flattened out or dropped off.
In fact, several multi-channel retailers with robust e-commerce sites capped
their announcements of year-end results with news of store expansion to come. Luxury brand Coach, with nearly 200 U.S. retail stores, wants to bring that up to 300 a few years out. Best Buy has said it will build 73 stores in the U.S. and Canada over the next year. Research and consulting firm Global Insight Inc. forecasts that spending on retail construction in the U.S. will reach about $49 billion this year, an increase of about 12% over last year.
So, what`s happening? For starters, it`s becoming clear that sales don`t tell the whole story, and channels have a much more complex and interdependent relationship than just which one generates the most sales. One example is the cross-channel role of the store pick-up option for online orders. The customer completes the sale online, but then goes into the store, where a good many encounter items they wish to purchase that are above and beyond their original online order. Are those incremental sales because the retailer has invested in its web site, in its store, or both?
The rapid growth of web sales also masks another dynamic: part of that growth comes from the fact that the Internet is satisfying demand created in other channels. "A lot of people make the decision to buy something as the result of getting a catalog or because of an ad in the paper. But rather than picking up the phone, they punch it up on a web site and it`s done," says Todd Barr, vice president at retail consultants Kurt Salmon Associates.
Barr`s point is that now, closing the deal in one channel may just be the end point of a process in which other channels played a vital part. So the growing integration of channels means that the question for multi-channel retailers is no longer whether they should invest in stores or the web, but how they balance the ongoing investment needed by both. "Retailers that have the money to invest are continuing to open up new stores. But that doesn`t mean they aren`t putting dollars back into the web also," says Sunita Gupta, executive vice president of retail consultants LakeWest Group. "I am not working with any retailer that isn`t looking at both."
Retailers` challenge now is to prioritize investments in either channel against the scale and timing of the expected return. How those priorities are set will vary according to retailers` individual circumstances. But the process starts with the same essential questions retailers must ask themselves about their brand strategy, their category and target audience, their stage of lifecycle, and what their competition is doing.
The answers to those questions may drive very different decisions on store and web investment priorities at different retailers. Often it starts with the level of competition a retailer faces. A retailer that is locked in a battle with a close competitor to build market share in the brick-and-mortar world will have to respond in kind. "If they don`t keep building new stores, they know No. 2 is waiting to take the market," Gupta says. In that situation, stores may move higher up on the priority list.
For other retailers with store systems that are 10 or more years old, staying competitive might mean putting dollars into store facelifts or upgrades. Others, still struggling to make their web site more user- and search-friendly than their competitors` sites, might spend on improvements at the web/customer interface before they invest in technology to tie a less-than-perfect site more tightly to their other channels on the back end.
Barr advises multi-channel retailers juggling store and web investment to think in terms of their brand strategy. Where the brand image includes both value and assortment, for instance, that should be consistent across all channels. Take Staples. The brand premise at Staples is that no matter what store a customer walks into anywhere across the country, Staples offers a comprehensive assortment of what`s needed for the office, at reasonable prices. "For a retailer like Staples, whatever it does on the web needs to reinforce that brand premise," according to Barr.
Under that scenario, brand strategy dictates that a key driver of web investment is the effort to make sure the web is as much like the stores as possible. But web vs. store investment as informed by brand strategy can add up to something quite different at another type of retailer. Luxury retailer Neiman Marcus isn`t after the mass-market penetration pursued by big-box retailer chains. It builds stores only where it finds the population density to provide a sufficient volume of high-end foot traffic, and it has direct-sale customers in locations where it doesn`t want to build stores.