June 1, 2012, 12:00 AM

Looking Ahead

Top 500 chain retailers see fewer stores, plenty of e-commerce and more digital shoppers.

Lead Photo

For the top executive of a major home improvements chain with nearly 1,800 stores in the U.S., Canada and Mexico, Lowe's Cos. Inc. CEO Robert Niblock spends a lot of time talking about e-commerce these days. And with good reason.

In 2011 online sales for Lowe's (No. 47) grew year over year 70%, while comparable-store sales for the chain's bricks-and-mortar locations were flat. Last year the web was the fastest-growing channel for Lowe's, with online sales that reached an Internet Retailer-estimated $510 million from $300 million in 2010. In comparison, total sales increased about 2.9% to $50.20 billion from $48.81 billion in 2011

To grow its web business in 2011 and going forward, Lowe's made several improvements to its e-commerce site, including rolling out MyLowes.com, a new interactive suite of tools that gives shoppers more customized ways to create and store room designs, check out available inventory across stores and the web, and create and store folders and lists to organize products, projects and ideas. In December Lowes also purchased ATG Stores, an online retailing company that operates more than 500 home improvement and related microsites, for an undisclosed amount. The acquisition did not have an impact on Lowe's growth online in 2011, the retailer says.

"We made incremental improvements to our e-commerce platform, fueling a 22% increase in traffic and a 35% increase in conversion rates, resulting in a big increase in e-commerce sales year over year," Niblock told Wall Street analysts in February on Lowe's year-end earnings call.

Lowe's has big plans in mind for e-commerce, and it's hardly alone among the largest chain retailers ranked in the latest Internet Retailer Top 500.

That's because consumers increasingly see less need to hit shopping malls and physical stores as they shift more of their shopping online, use more Internet-enabled mobile devices such as smartphones or tablets to check prices and buy, and cull product information and opinions from social media channels such as Facebook. Some numbers tell the story:

  • In 2011, the web remained the fastest-growing channel for 89.9%—62—of the chain retailers ranked in the Top 500 that break out store sales and other financials.
  • The web accounted for more than 20% of total sales for a dozen Top 500 chain retailers and more than 30% for five store merchants: Staples Inc. (No. 2) 42.4%; OfficeMax Inc. (No. 12) 40.7%; dELiA*s Inc. (No. 198) 38.2%; Williams-Sonoma Inc. (No. 24) 37.9%; and Office Depot Inc. (No. 6) 35.7%.
  • E-commerce sales are now the equivalent of lots of stores. At Staples, the biggest office supplies retailer, the company's 2011 web sales of $10.60 billion generates as much business as 1,687—73.5%—of the chain's 2,295 stores.

To grow—or for some brands even to survive—chain retailers need to do a better job of engaging customers across stores and online and in using their stores to generate more web sales. "The chains have to think way beyond just the stores," says Anne Zybowski, director of retail insights for research firm Kantar Retail. "Using the web to drive store sales is old-school. What counts now is keeping your brand relevant across any channel consumers want to shop and these days that's increasingly online."

Best Buy is closing about 50 stores and looking to grow its e-commerce base as it tries to compete with other online retailers that sell consumer electronics, notably the leading e-retailer, Amazon.com Inc. For Best Buy, the shift to even more e-commerce growth is critical. While web sales for Best Buy increased 18% to $2.95 billion in 2011 from $2.50 billion, total sales increased only 1.9% to $50.70 billion from $49.74 billion while comparable-store sales declined 1.7%.

To drive growth online Best Buy recently hired former Starbucks Corp. chief technology officer Stephen Gillett as president of Best Buy Digital and Global Business Services, a newly created position. The retail chain also will continue to diversify and accelerate its e-commerce growth with new initiatives such as devoting more time and resources to growing web sales in China. "Best Buy has to do everything it can to remain relevant to today's digital shopper," Zybowski says.

In 2011, as a group the chains ranked in the Top 500 generated an annual increase in comparable-stores sales of about 2.6% while operating a total of 114,957 stores. But in comparison the Top 500 chain retailers grew e-commerce much faster—by about 15% to combined web sales of $64.62 billion in 2011 from $56.35 billion in 2010. "More chain retailers are coming to the realization that they don't need to expand their store count or operate as many locations as they once did because more of their business is becoming web-based," says Will Ander, a senior partner with retail industry consulting firm McMillan Doolittle. "The smart chains are the ones looking to grow online because there aren't that many places left in the U.S. that warrant the cost of building another big-box store."

Indeed, a number of Top 500 retailers are looking to dramatically increase their spending on e-commerce while at the same time closing stores or opening new stores only selectively. Nordstrom Inc. (No. 31) told Wall Street analysts on its year-end earnings call in February that over the next five years about 30%—$990 million—of the company's planned $3.30 billion in capital expenditures will be spent on further developing its Internet infrastructure, including about $140 million in 2012. In comparison Nordstrom will only open one new department store in 2012 and about eight more in the foreseeable future.

"For full-line stores, we're at 117 right now, and we think there's an opportunity for around 125 in the United States," Nordstrom executive president Erik Nordstrom told analysts. "So our store count and new store count are dropping."

To remain relevant with its customer base, Lowes.com now offers nearly 250,000 products in its online inventory, with plans to double that SKU count. Lowe's in 2011 also rolled out a new online distribution program the chain calls "flexible fulfillment" to expedite order processing and shipping. Previously all orders purchased on Lowes.com were shipped only from the chain's distribution centers. If the item was unavailable, customers had to wait.

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