Brick-and-Mortar Retailers Have Much to Be Worried About
Barely two weeks into the holiday shopping season, some retailers are feeling relieved that their most important selling season isn't turning out as bad as expected. But they still need to spend some time thinking about other forces besides the economy that are affecting their industry in the mid- and long-term.
Ten years ago, traditional brick-and-mortar retailers had no fear of Internet retailers (e-tailers). Times have changed, however, and the way that today's shoppers use the Internet has also dramatically changed the playing field for all retail businesses.
Internet e-tailers tend to be deep discounters. Face it, they can be. They don't have huge overhead like retailers do in malls and they can be located anywhere where labor and warehouse space is cheap.
Even eBay is putting pressure on certain types of small business retailers. According to ComScore, a leading online analytical firm, eBay had more visitors on Cyber Monday 2008 (last Monday) than any other online e-tailer. EBay beat out Amazon.com (in second place), Wal-Mart (third place), and Target.com (fourth place). ComScore estimated that eBay had 13 million visitors this Cyber Monday verses 9 million on Cyber Monday 2007. The top 20 most-visited onine retailers had a total of 57 million visitors to their Web sites this year, a 33 percent increase over last year.
During the last five years, consumers have become more confident in online shopping security and are much more likely to make a big online purchase.
Many traditional retailers also have a significant online presence. Wal-Mart had a rough start at trying to find their way as an Internet e-tailer some years ago, but has now become the number three online merchant. So today a traditional retailer doesn't just have to compete against Wal-Mart down the street, but also against their online store.
Of the top 20 online e-tailers visited on Cyber Monday 2008, 15 are also major brick-and-mortar retailers. In addition to the companies mentioned above, names like Toys ‘R Us, J.C. Penny's, Best Buy, and Limited Brands (Victoria Secret) were included in the list. Clearly, these retailers have learned that, in order to thrive, they can't simply rely on their mall locations; they must also have an online presence.
Shoppers have found a number of ways to use the Internet for shopping. Obviously, they can go on a site like Amazon.com and search for a book by topic, buy it, and have it sent to their home two days later. More and more though, consumers are using the Internet to research their purchases and find the source to buy it from with the best price and terms. For example, say I want to buy my son a laptop computer. I may be willing to buy it online, but it's just as likely that I can buy it as cheaply at a local computer discounter. Without having the pressures of a sales clerk breathing down my neck, I can go on my favorite retailer's site, research laptops, and narrow down my selection to the top 2 or three choices. Let's say I would like to purchase the computer at Best Buy. I can either buy it online from them or instead find the store closest to me, pay for it online, and have it held at the customer service counter. When it is time to pick it up, I simply run into the store and they hand me the computer, paid for and ready to go. For those of us who hate shopping, this actually makes the process tolerable.
Even more threatening to both traditional retailers and e-tailers are price shopping comparison engines. Typically, I need to know what it is I want to buy by make and model, and then enter the information into the search engine. In the matter of several seconds I have a screen with many of the online merchants who sell this product, along with the price and often user-generated reviews of the merchant's customer service. So I make my purchasing decision online and then shop for the best price online. Often you will not have to pay sales tax or shipping costs. That could save you an additional 10 percent on the price of a purchase. Increasingly, shoppers are using this dual tactic to make their more expensive purchases of items such as electronics or other consumer goods where touching and feeling the product is not necessary.
Shopzilla.com is one example of a helpful price comparison search engine. Let's say I want to buy a Garmin GPS unit. I can go to Shopzilla.com and enter the name and type of product. Two seconds later I have a list of 30 sites where I can purchase my GPS unit. Many of them are names I already shop online with, like Amazon.com. If I make my purchase from one of these sources, I have squeezed the retailer/e-tailer's profit margin to its last point, and if I am savvy, I can avoid shipping and sales tax costs as well. By the time I finish paying for the item, I could easily save $35 in sales tax and shipping of a $300 item in a brick-and-mortar store down the street.
The lesson that small business retailers need to learn from this is that they must have an Internet presence or they will likely lose sales because shoppers today enjoy spending time browsing merchandise online 24 hours a day. A good example of a brick-and-mortar retailer that has learned the value of having an online presence is The Texas Store. Owners Richard Horn and Bill Mathews have found that even though they don't have an online store per se, they have people from all over the country calling them and buying Texas-themed merchandise. Says Richard Horn, "We sell high quality University of Texas shirts and memorabilia and will often get calls from U.T. alumni across the country who want to buy something to wear to the next football party or to give as a gift." Interestingly, Bill Mathews mentions that the top-selling items in his store are T-shirts and other merchandise that feature the "Keep Austin Weird" theme that is popular in their city. According to Mathews, "Keep Austin Weird" is popular all over the world. After the first of the year, The Texas Store is planning on opening an online store to sell their top-selling merchandise.
Small business retailers may or may not decide they want an online store. If they are selling unique or one-of-a-kind type products, it would make sense to have an online store since the overhead costs are very small. If the small business merchant is selling commodity items or items like the GPS unit described above, they won't really benefit from having an online store.
Lastly, if you are in a shopping mall that is charging you an exorbitant rent for your space, you should know that many malls in the U.S are going out of favor by consumers. Now consumers are shopping more at smaller centers and are shopping at destination stores rather than simply walking the mall looking for something that catches their fancy.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
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