September 28, 2006, 12:00 AM

Pressures on stores could spell more online retailing

Climbing gas prices, rising labor costs and higher interest rates are only a few of the factors that could stand in the way of store expansion.

As a strategist in the Internet practice of retail consultants Kurt Salmon Associates, Chad Doiron stays current with how America shops. So when it came time for him to buy a new oven over Labor Day weekend, it wasn’t surprising that he joined the throngs he’s been watching in how he chose to execute that purchase.

Before he got into his car to drive to any home appliance retailer, he already knew from online research which models he would be willing to consider, their features, their prices, and whether they were on the floor for him to view. He ultimately narrowed his target to one store that met all his criteria and made the purchase there.

“We went to one location because driving to one store after another all over town all afternoon would not benefit us. In fact, it would cost far too much. We could have spent $75 on gas,” Doiron says.

Anecdotes such as Doiron’s abound. And that’s not the only trend in the larger economy that stands to change both consumers’ shopping patterns and how retailers serve up the shopping experience. The healthy profits enjoyed by many big-box chains are built in part on inexpensive labor, but there’s growing pressure on chains to improve workers’ compensation. And some business analysts also wonder if creeping interest rates and rising capital construction costs could be enough to put aggressive store expansion strategies on pause.

The bottom line is that rising costs on both sides of the cash register are putting pressure on consumers and retailers to be more efficient in their approach to commerce-and that the Internet channel is in line to be a chief beneficiary of that convergence. “The one area that really hasn’t felt much of a slowdown in spending happens to be Internet sales,” says economist Bernard Baumohl, director of The Economic Outlook Group. “When you look at the annual growth of retail sales, year over year, it’s been around 7%. But Internet sales have consistently been growing at three to four times that. It appears that Internet sales are somewhat impervious to the stresses and strains we are seeing in the household sector.”

The most visible factor affecting retail sales both online and offline is the rising price of a gallon of gasoline. A survey about shopping intentions conducted by online shopping engine Shopzilla at the end of July found that a third of consumers were planning to shop more online as a way to spend less on gasoline. That confirmed the results of a Shopzilla survey as gas prices rose following Hurricane Katrina last year and a similar survey by consultants Retail Forward Inc. earlier this year.

“Higher energy costs will be a factor that will help the online retailer,” says David Wyss, chief economist at Standard & Poor’s. While cautioning that the fourth quarter’s seasonal peak in online shopping could partially obscure the true effect of gas prices on web vs. store sales, he notes, “The money that people spend at the gas pump is money they don’t have to spend at the mall or online. But online is a more convenient way to shop and save gas. When people feel squeezed, they want to find a bargain. It’s a lot easier to find bargains on the Internet than by driving to the store.”

Rising labor costs
In addition to consumers’ desire to spend less on gas, Wyss and others note online and web-to-store sales will continue to get a boost from the increasing penetration of broadband connectivity into U.S. households. “As more people purchase more computers, as high-speed Internet access becomes more available around the country, and as wireless systems are set up, it’s natural to conclude that even as the economy slows, we are really not going to see the Internet show a comparable slowdown,” says Baumohl.

Consumer’s increasing adoption of the channel is just one advantage favoring the future of online retail. Another is that it’s little affected by another issue big-box stores have managed to hold at bay for years but are now being forced to grapple with: rising labor costs.

Federal efforts to increase the minimum wage would take it above $7, while some municipalities are passing ordinances requiring big-box retailers to pay at an hourly rate that’s even higher; in the case of Chicago, $10 an hour. Even though Mayor Richard Daley vetoed the City Council’s bill, observers say that’s not the end of the pay debate.

Baumohl cites second quarter Commerce Department figures showing that average weekly earnings-a figure that represents the earning of 80% of U.S. workers-were up 4.2% over a year earlier, but that adjusted for inflation, that’s an increase of only about 1.1%. While small, “It’s long overdue that households are beginning to earn more than inflation,” he says. He notes that one element driving the increase is “widespread criticism of companies that have been making huge profits, largely on the backs of workers who have been more productive, but are not getting their fair share of these profits.”

The expansion question
Rising labor costs have little direct impact on online retail, giving it a development advantage over the offline channel. Neither does another issue facing stores-how are they to approach a store expansion strategy at a time when consumers want to shop more online and spend less on gasoline and stores are facing rising construction costs?

The short answer is, it depends. While some retailers pursue store expansion on the basis of such factors as population density in a target market or even a gut feeling that it’s time to move into or expand in a particular region, larger retail chains more often have a very sophisticated formula for making those decisions. Store expansion strategies with such retailers typically evolve from annual revenue growth goals established at the top corporate level.

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