Holding Off The Monster
Amazon has taken advantage of showrooming, in which consumers shop at stores but make purchases online, right in the store.
By David Gill
"Every generation in retailing has a disruptive player," said a home furnishings industry veteran, "and Amazon is the disruptive player in this generation."
An Internet site which opened for business in 1994 as a seller of used books, Amazon.com has become one of the largest retailing machines in the marketplace for a growing variety of products--from apparel to toys to consumer electronics to food to baby products.
And, yes, home furnishings, too.
Amazon, and other retail web sites, have reconfigured the shopping process through low prices, sheer speed in product deliveries and enhanced customer service--all in a streamlined, easy-to-use format. The result has been many sleepless nights for traditional retailers who simply cannot keep pace with the company and are worried that their sales--and profits--will slide as more and more customers turn to Amazon and other digital sites for their shopping needs.
Perhaps even more threatening to traditional retailers is the fact that many suppliers--for obvious reasons--have jumped on the Amazon bandwagon. As this trend grows, many in the retail community worry that Amazon will get better deals from vendors and, simply put, they won't be able to match them. Add to that the fact that Amazon currently does not charge sales tax in more than 40 states, and the price difference is frightening. "It is coming down to convenience, assortment and price," said the operator of a Los Angeles area consumer electronics retailer. "And Amazon is beating us on all three fronts."
Perhaps the most glaring sign of Amazon's threat to brick-and-mortar is the phenomenon of "showrooming"--the process in which shoppers go to a store, scope out products, then surf the Internet for better prices than are available in the store and make the purchase online. Showrooming has already put a dent in sales at Best Buy, the formally high-flying consumer electronics retailer that is now closing stores and cutting the size of many of its remaining outlets.
The growing use of smart devices such as cell phones and tablets--including, most notably, Amazon's own Kindle--has further compounded the showrooming problem for brick-and-mortar retailers by enabling consumers to do their showrooming right in the store. There is now an app that allows consumers to get the best price of a product at Amazon while standing in the brick-and-mortar retail outlet.
Not surprisingly, some retailers are up in arms and are trying to do something about it. Walmart and Target, for example, have stopped selling Kindles, which for some consumers have become standard equipment for showrooming. In an article on forbes.com posted in September, staff writer Jeff Bercovici described the Kindle as the "Trojan horse" that converts Walmart shoppers into Amazon customers.
In what some view as a desperate attempt to win back vendor loyalties, Target sent a letter to its vendors in January asking for aid against Amazon and other websites in its battle against showrooming. Asked about the vendor letter at a Target event in New York City last month, Gregg Steinhafel, chairman, president and CEO of the mass merchant, said Target has been having "great discussions" with the vendors since the letter was issued. One concept that has emerged, which Target is testing in the fourth quarter, is its Holiday Price Match program, which offers shoppers the ability to match select online competitors' prices (including those on Amazon) between Nov. 1 and Dec. 16.
Vendors, meanwhile, are trying to play both sides of this equation. Many say that traditional retailers remain very important to their overall business model. At the same time, they note they would be foolish not to explore what Amazon has to offer. A number of vendors tell HFN that their sales at Amazon have increased dramatically in recent years and they expect that trend to continue. "My margins are better with Amazon than with my other customers," said one vendor executive. "They don't ask for opening-order discounts, rebates or sharing advertising costs. They just want to buy the goods. They are more profitable on a percentage basis for me than other retailers."
Thus it's no surprise that Amazon has grown from the 34th top home furnishings retailer in HFN's Top Retailer's list in 2006 to 15th last year. In that period, its estimated home furnishings sales have risen two and one half times to last year's total of more than $3.3 billion.
Target and Walmart are also testing quick-delivery programs for the holidays. At the same time, the two retailers may already realize that showrooming will be difficult for them to stop. Kathee Tesija, Target's executive vice president of merchandising and supply chain, hinted as much at the New York City event when she said, "Do we love being a showroom? Yes, when we can book the sale."
Other, smaller retailers are trying to even the playing field by stressing expertise of its produce line in-store and offering to match online prices. The price issue is a slippery slope, some observers said, because it is hard for small and medium-size merchants to maintain lower price points and remain profitable.
While Walmart and Target appear to be Amazon's most direct competitor, Bed, Bath & Beyond is squarely in the Internet company's sights as well. Bed Bath may be among the most vulnerable of the major players. "Our work suggests there is 89 percent direct product overlap with Amazon in kitchen electrics, 83 percent in cookware and 83 percent in cutlery, all key traffic-driving categories," said Matt Nemer, retail analyst with Wells Fargo.
Analysts said Bed Bath is more vulnerable to Amazon than Williams-Sonoma, Crate & Barrel and Pier 1 Imports--all of which are less price oriented and have less product cross-over.
Bed Bath is responding. The company appears to be trying to move its merchandise mix toward more exclusive products. Nemer cited the company's acquisition of Cost Plus earlier this year, which provided an entree for Bed Bath into specialty food; and its acquisition of the Wamsutta brand from Springs Global, which has given it its own label for home textiles.
Bed Bath has also redoubled its investment in e-commerce and information technology, with some of this capital going toward enhancing its website and the opening of an 800,000-square-foot e-commerce fulfillment center in Georgia. "The sheer size of the DC indicates to me that management feels e-commerce has great potential for their business," said Alan Rivkin, retail analyst with Barclays Equity Research, noting that e-commerce currently represents about 3 percent of Bed Bath's total sales.
In its approach to vendors, Bed Bath appears to be seeking similar help as that requested by Target in its vendor letter. "They are trying to get exclusives like everyone else to limit their vulnerability," Rivkin said. "They are probably trying to pressure vendors on pricing as well--although Bed Bath has always been notorious for pushing back on prices."
Bed Bath's competitive tactics probably won't stop there. "As the process goes along, I can see them trying in-store pickups and returns on web purchases, similar pricing on merchandise between stores and e-commerce, more exclusives and increased private label," Rivkin said.
So while the larger retailers can fight back on better pricing and, perhaps, their own websites, what does a smaller retailer do to fight off the Amazon challenge? That question has many of retail analysts puzzled, though many say an emphasis on service, product knowledge and convenience will help. "Having a unique product mix, backed by a strong knowledge of the products and consumer needs, will definitely help smaller brick and mortar retailers hold off Amazon," said Alan Mendelson, a business reporter based in Los Angeles. "But they really have to know their stuff and make it clear to consumers that they offer a clear advantage to Amazon."
Advertising is also crucial as is developing a merchandise mix that is directly focused at a certain demographic of consumer. The key, many observers said, is getting the word out to consumers that the chain offers something that Amazon does not and cannot.
But, in the end, Amazon is here to stay and retailers will have to adapt to its presence just as they have when the big box retailers and mass merchandisers arrived on the scene. As one vendor executive expressed it, "For traditional chain stores, the retailer they feel vulnerable to is no longer Walmart. It's Amazon."