Alphabet Inc. today reports that Google’s advertising revenue rose 19.5% in the second quarter.
Retail chains reduce the size of their remaining stores and fill them with Internet features, hoping to lure shoppers.
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.