9/30/11
Retail chains reduce the size of their remaining stores and fill them with Internet features, hoping to lure shoppers.
Allison Enright , Senior Editor
Retail store empires have crumbled because of the web. Blockbuster Video, now part of Dish Network, is a smidgeon of what it once was. Borders is gone, and so are a host of others that for too long failed to harness the web effectively or grasp the implications of changing consumer behaviors. They choked on the operational costs of running too many retail stores too few consumers chose to shop because the web offered products and services that were cheaper, more convenient and customized to their tastes.
Now many surviving retail chains are moving to embrace the web further because they see online as key to their long-term growth—and survival. While online retail sales still comprise less than $1 for every $10 spent on products in retail categories commonly bought online, online is where retailers are generating real growth. Web sales for Williams-Sonoma Inc., for example, were up 18.7% during the second quarter of 2011, whereas comparable-store sales nudged up only 1.4%. The company says it will permanently close 27 stores by the end of fiscal 2011, which will leave it operating 573 stores. That's 6% fewer stores than two years ago when it had 610.
Retail stores are more expensive to run and generate smaller profit margins than their online counterparts. Profit margins are closer to 30% for online sales versus about 5% for a retail store, says Bill Bass, an online retail veteran and president of Charming Direct, the e-commerce division of multichannel retailer Charming Shoppes Inc., which will close 200 of its more than 2,000 stores this year.
In the fight to remain both profitable and relevant, retail chains are moving to invest in their online capabilities, reduce their store counts and average store size, and integrate what consumers like about online into the stores that remain.
Williams-Sonoma has the company of plenty of other retailers that are also moving to operate fewer, and oftentimes smaller, stores. The average retail footprint for newly leased or constructed Best Buy stores in 2008 was nearly 49,000 square feet; in 2011 it is 43,000, down 11%, according to CB Richard Ellis Econometric Advisors, which analyzes commercial real estate data. Lowe's new store footprint shrank nearly 6%, Target's dropped 22% and Wal-Mart, including its smaller-format urban Marketplace stores and all other store formats, dropped 33% during the same time frame.
"If retailers can divert a small percentage of the costs associated with running stores elsewhere, if they can recover even 2% of square footage, that can be massive numbers" says Kasey Lobaugh, principal and leader of the direct to consumer and multichannel retail practice at Deloitte Consulting LLP.
Meanwhile, the excess retail space created by the deaths of retailers like Borders, the closures of underperforming stores and newly constructed but unleased properties—builders added 37.3 million square feet of retail space in the last four quarters, according to the CoStar Retail Report—has pushed the retail availability rate above 10%, well above the historical average of 7%, says Abigail Rosenbaum, senior economist with CB Richard Ellis Econometric Advisors.
Commonly tied into leases lasting five, 10 or even more years, some major retailers, like Best Buy Co. Inc., are looking to relieve the drag of underperforming square footage by sub-leasing space within their stores to other retailers. Brian Dunn, CEO of Best Buy, has said the retailer is exploring sub-leasing options in about 50 Best Buy locations in Texas and expects to pursue more as it continues to invest in online with the aim of doubling its web sales in the next five years. JC Penney Co. Inc., too, is expanding store-within-a-store concepts to drive foot traffic. This is a logical tack for retailers trying to arrest slides in per-square-foot profitability while they're tied to long-term leases, but it's a stopgap measure, says Lew Kornberg, managing director of corporate retail solutions at Jones Lang LaSalle Inc., who helps retailers plan their real estate strategies.
In a market where half of consumers carry in their pockets smartphones that can connect them to the online retail world while they stand in a store aisle, Kornberg says the way forward is for retailers to befriend the web and find ways to make it work to their—and their customers'—advantage.
It's not an easy shift or one retailers wanted to make, says Candace Corlett, president of WSL Strategic Retail, a retail consultancy that tracks consumer shopping behavior. "Stores aren't driving this" she says. "Consumers are. Retailers are in response mode because the smartphone is becoming the new shopping buddy."
With consumers able to buy almost any product from their mobile phones at any time, store retailers need to work harder to win sales because an online-only retailer can probably beat the in-store as well as online prices of multichannel retailers. A basket analysis conducted by Wells Fargo investment analyst Matt Nemer earlier this year of nearly 100 identical products at multiple e-commerce sites, for example, found that online-only Amazon.com undercut the online prices offered by multichannel retailers like Wal-Mart Stores Inc. and Target Corp. Walmart.com's prices were 19% higher than Amazon's and Target.com's were 28% higher. Prices in Wal-Mart stores and Target stores are not necessarily the same as on their web sites. Both retailers say they do not price-match between their retail and web stores.
How stores compete
Stores are approaching web-in-store integrations from many angles, from letting clerks place orders on the web store at the register for items out of stock or not carried in the store, to making online data like reviews, videos and customer purchasing history available to store shoppers.
Moosejaw Mountaineering, which operates seven stores in the Midwest and sells outdoor gear and apparel, this month will roll out a program that links the web deeply to in-store shopping. When a customer who belongs to the retailer's loyalty program, Moosejaw Rewards, comes to a store he can provide his e-mail address to an iPod Touch-toting clerk who can then pull up everything Moosejaw knows about the customer, including his online and offline purchase history. Thus, for example, if the customer wants to buy new North Face hiking boots like the pair he bought at Moosejaw three years ago, the clerk can see what he bought then and supply a recommendation for boots available today. When the shopper is ready to buy, the clerk can swipe his credit card through a credit card reader attached to the iPod Touch and the consumer skips the checkout line.
The aim is to keep customers and clerks engaged with one another in stores, says Eoin Comerford, senior vice president of marketing and technology at Moosejaw. "Our new mobile point-of-sale system will allow our associates to process a sale or a return without ever leaving the customer on the sales floor" he says.
It's also designed to make better use of floor space, including the space now devoted to checkout counters. "As we roll out new stores, we can do away with the behemoth cash wrap to create a more open, welcoming experience" he says. The retailer also is adding two-dimensional Quick Response, or QR, code tags to stores that smartphone users can scan to connect to Moosejaw.com for more product information.
PacSun, a retailer of apparel aimed at teens and young adults that operates more than 800 stores, this summer began introducing iPad tablet computers to the in-store sales mix. Clerks at 300 PacSun stores have access to an iPad that hosts an app designed to help them sell more effectively to its typically technologically astute customers.
"This has created a whole new way for our store associates to relate to our customers" says Tim Katz, senior operations manager at Pacific Sunwear of California Inc. Clerks use the app to help customers create outfits they can then buy in the store. PacSun expects to roll out iPads to all stores next year, he adds. The company closed 44 stores in fiscal 2010 and says it expects to close between 30 and 50 more in fiscal 2011. It has no plans to open new stores.
Charming Shoppes, which operates apparel stores primarily aimed at plus-size women, including Fashion Bug and Catherine's, is testing a similar outfitting tool in 12 stores, Bass says.
Web orders from stores
The Finish Line Inc., which operates 660 athletic shoe stores across the country, lets clerks order at the cash register merchandise or sizes not available in the store. 80% of such orders are fulfilled by the nearest Finish Line retail store, which shortens the delivery time to the customer and cuts the shipping expense to the retailer. The average delivery time for a product ordered online from a store location is a day and a half, says David Seifert, Finish Line's vice president of e-commerce. Toy retailer Toys ÔR' Us Inc. announced last month it will tap its retail store inventories to fill online orders, which clerks also can place from stores.
Sears and Kohl's department stores feature kiosks that let consumers order items or sizes they can't find in store at their respective e-retail sites. Every Sears store has multiple ordering kiosks, says Michael Murray, chief marketing officer of online at Sears Holdings Corp., and consumers can choose whether they want the item shipped to their homes or to a Sears store. "The ordering kiosks mean a customer never has to walk out of a store to find a product because nothing is truly ever out of stock" he says. Sears Holdings closed 15 Sears stores in the United States during fiscal 2010. Other than specialty stores, it opened no new full-line Sears stores.
Code connection
A Sears mobile app also includes a tool that lets in-store customers scan a QR code to obtain product information from Sears.com. Finish Line stores also post QR tags on the shelves that consumers can scan with mobile phones. Each tag links the smartphone-toting customer to the product's detail page on FinishLine.com, where she can find more information about the product and read customer reviews, Seifert says. Finish Line says it plans to open five to 10 new stores in fiscal 2012, while closing 10 to 15.
Lowe's Companies Inc. is deploying an army of 42,000 iPhones—about 25 per retail store—that clerks by the end of the year will use to assist customers at its home improvement stores. Consumers with their own smartphones, or a clerk with a store phone, can scan tags and connect to more information, such as an installation video, on Lowe's mobile commerce site.
Magic Beans, a Boston area toy retailer, last year began offering a mobile app that let its store customers scan a code to get more product information, but went one step further. Time-strapped consumers can pay for purchases without ever having to interact with store clerks. Co-founder Sheri Gurock says 42% of smartphone owning shoppers over last Thanksgiving weekend used the app to skip waiting in the checkout line.
Gurock, like Moosejaw's Comerford, envisions a future where stores don't even have cash register stations. As consumers continue to move more of their spending online, it's the retailer that integrates online in its stores and serves customers' needs that will survive, consultants say. Kornberg says the changes will further differentiate between the really good retailers and those that aren't.
Click here if you would like to view the Internet Retailer E-Commerce Trendsetter's Product Showcase