Why Retailing Will Never Be The Same Again (from Daily Clips) May 14, 2009

 We’re all acutely aware that the Internet and the recession are ravaging the newspaper business and raising the possibility of its extinction. But meanwhile a much bigger industry, the $4 trillion U.S. retailing business, is also being radically reshaped by the Web and the economic downturn. It’s happening far more subtly, but the ultimate impact will be just as profound, both for retailers and for the manufacturers that sell through them. A major shakeout of retail chains is under way, as the bankruptcies of Circuit City, Linens ‘n Things, Mervyns and others make clear. What is less well understood is that an economic and technological tsunami has begun to force merchants into one of two camps: They must be either discounters that sell national product brands on the basis of price or stores that don’t need to discount because they offer uniquely compelling products and shopping experiences. This bifurcation is beginning to transform the retailing landscape, and it is also spurring some major suppliers that don’t like either scenario to open their own stores, as Apple and Coach already did in recent decades. The retail restructuring didn’t start with the current recession. It actually began, slowly, in the 1980s, when apparel retailers like the Gap noticed how quickly discount retailers could shrink their profit margins on the products they sold–in the Gap’s case, Levi’s jeans. In the 1990s, the Web emerged to give shoppers an unprecedented tool to instantly find the best bargains, online or at a store, and thus avoid merchants that charge more. Still, only 4% of goods in the U.S. are purchased over the Web, but its impact on the other 96% is substantial and growing. Every day 15% of Americans use the Internet to research products. Last holiday season, the majority of working Americans who had Internet access on the job–55%, or some 73 million people–did their shopping research, and some purchasing, online, according to Shop.org. In this way the Web has helped consumers flock to discounters for everything from jeans to high-definition TVs. Online retailers like Amazon, whose $19 billion in annual revenue continues to grow unabated, have thrived. But so have, even more, largely offline retailers like Wal-Mart, Costco and BJ’s. Wal-Mart alone has doubled its share of the U.S. market for general merchandise and groceries since 1995, from 9% to more than 20%. The result: Retailers that can’t compete on price or convenience have to find another way to differentiate themselves–with distinctive offerings, and with engaging customer experiences that drive home what’s compelling about those offerings. In the 1980s, the Gap gave up on competing at selling Levi’s to start designing its own clothes. Since then, retailers of all types, from apparel chains such as Abercrombie and Aeropostale to category killers such as PetSmart and Best Buy, and even grocery chains like Trader Joe’s, have begun designing some or all of the products they sell. They have become vertical retailers, with integrated product design and development. That means having much fuller capabilities in market research, product development, product testing and sourcing than most retailers have. However, given the high cost of owning manufacturing assets, most of these retailers have decided not to own the factories that produce their unique products. They would rather act vertical than be vertical. A number of them have stretched their concept of what a product is. It doesn’t have to be something they stock on a shelf. The offerings at PetSmart and Best Buy include highly profitable fee-generating services that make their products far more useful. Some 10% of PetSmart’s revenues today come from the likes of pet hotels, vet clinics, and pet grooming–services that discounters like Wal-Mart and Target can’t easily provide in their big boxes. Six percent of Best Buy’s $40 billion in sales comes from computer repair, TV installation and other services. And Apple’s $6 billion retail store business generates big revenue from fixing computers and training customers to use them. We’re still in the early days of this retail transformation. A small number of merchants have gotten it right, and they continue to shine in the recession. They include Aeropostale, a fast-growing $1.8 billion chain with same-store sales that continue to increase; PetSmart, which has had double-digit growth in revenue and profit over the last five years; Coach, with a 40-fold increase in annual profits over the last 10 years; Trader Joe’s, whose sales have more than tripled since 2003, to $6.5 billion, according to estimates; Walgreens, which has a heavy-private label business and has rushed into in-store health clinics; and Wawa, a highly successful $5 billion convenience store chain that is revered for its own brands of coffee and hoagies and immaculate stores. All of them have a growing number of proprietary products and services that make them unique, giving consumers a reason beyond price to shop with them. None of them is on the retail endangered list. What does this merchant metamorphosis mean for retailers that have been struggling? They must move swiftly to avoid becoming retail wreckage. Discounters must go deeper in certain categories than Wal-Mart or Target do, and find more convenient locations. Category killers must follow the lead of PetSmart and Best Buy and launch services that help customers use their products and generate big profits. Apparel retailers must tightly hone their target customer sets, produce truly compelling merchandise and provide superior environments for trying them on, as Aeropostale and Coach do. Department store chains have the biggest transformation to make. They can’t compete on price, and they largely sell other companies’ goods. They are neither here nor there. The largest department store chains, such as Sears, must use their clout with suppliers to dramatically increase their number of product exclusives. And they need to create stores within stores that adeptly merchandise the next great products and curb their most important suppliers’ desire to build their own shops. Had department stores merchandised Coach’s accessories better 10 years ago, Coach might not be selling 80% of its line through its own outlets today. Twenty years ago Coach was a struggling handbag manufacturer. Today it thrives, despite the recession, with $3 billion in annual revenue and 15% net profit margins in the latest quarter. And it no longer manufactures its products. The retail territory of the next 10 years is truly up for grabs. New retail concepts, and even manufacturers that want their own stores, have big opportunities to become the big retail success stories of the next decade. Those that dazzle their customers with distinctive offerings and environments for purchasing them will thrive alongside the Wal-Mart’s and Amazons of the retail world. Mass Merchants Web Sales grew 20% in 2008, says Top 500 Guide data What a difference a year makes, especially one dominated by a deep economic recession. The fastest-growing market in 2008 was mass merchants, a retail category dominated by Amazon.com and low-price big box merchants such as Walmart.com, Target.com and Sears.com. Overall online sales by mass merchants grew by 20% from $29.7 billion in 2007 to $35.5 billion in 2008, according to the 2009 Internet Retailer Top 500 Guide. In contrast, web retailers in the 2008 editionís fastest growing category, jewelry, showed only 1% growth from $1.04 billion in 2007 to $1.06 billion in 2008 as luxury purchases crashed in a conservative spending climate. The fastest growing Top 500 mass merchant was Kohlís Corp. No. 50 in the Internet Retailer Top 500 Guide, which lifted its 2008 web sales by 58.9% to $356 million from $224 million in 2007, followed by Costco Wholesale Corp. (No. 14) and ShoppersChoice.com LLC (No. 375), which grew their annual e-commerce revenue by 41.7% and 31.7%, respectively. The 800-lb. gorilla in the category was Amazon (No. 1), as usual, with 2008 web sales of $19.17 billion, up by 29.5% from $14.8 billion in 2007. The category and Top 500 leader accounted for almost 54% of all Top 500 mass merchant sales last year. Excluding Amazon, the combined sales of all remaining mass merchants in the category still increased year over year by a healthy 11.2% to $13.66 billion from $12.28 billion. The most dramatic year-to-year change in any retail category was jewelry. In the 2008 edition of the Top 500 Guide, the combined sales of online jewelry retailers increased about 36% in 2007 from web sales of $772.4 million in 2006. The category leader in 2008 was TheWatchery.com (No. 278), with 57% growth from $19.4 million in 2007 to $30.5 million last year. Flowers/gifts, also a victim of consumer spending pull-backs, matched the lowest growth rate at 1%. The category leader was Top 500 newcomer GourmetGiftBaskets.com (No. 446), with 2008 web sales of $12 million, up by 173% from $4.4 million in 2007. After mass merchants, the next three fastest-growing of the 14 merchandising categories in the Top 500 were toys/hobbies, specialty/non-apparel and health/beauty. All exceeded the overall Top 500 retailersí 11.7% growth rate last year, which increased from $103.69 billion in 2007 to $115.85 billion in 2008. Toys/hobbies grew to $1.2 billion in 2008 web sales, up by about 19% from $1.0 billion in the prior year. Consumers stayed home in droves in 2008, reflecting high gasoline prices. Many might have kept busy with online video games, as evidenced by the category leader Big Fish Games Inc. (No. 147), which reported 2008 web sales of $83 million, up 73% from $48 million in 2007. Online retailers serving the specialty/non-apparel and health/beauty markets both recorded 14% growth in 2008, with combined sales of $3.8 billion and $2.9 billion, respectively. The specialty/non-apparel leader was VistaPrint Inc. (No. 44), which used aggressive new product development to grow web sales by 56.6% to $400.7 million in FY 2008 from $256 million in FY 2007. Vitacost.com Inc. (No. 114) topped health/beauty market web sales with a 46% increase from $86.8 million in 2007 to $126.5 million last year. All but four categories exceeded the overall e-commerce growth rate of 4.6%, according to the Top 500 Guide. In addition to jewelry and flowers/gifts, the two categories where e-retailers fell short were housewares/home furnishings and office supplies, both registering 2% overall growth.