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US bricks-and-mortar retailers seek online success

Barney Jopson
Friday, 27 Dec 2013 | 11:36 AM ET

When people buy more online, traditional retailers suffer—or so the well-worn narrative goes. The reality, however, is not so simple. Bricks-and-mortar stores lose out as e-commerce grows, but most old school retailers have now supplemented their shops with online businesses, and some are winning a growing share of the digital market.

At Best Buy, an electronics chain, U.S. online sales rose 15 percent to $499 million in the quarter to the start of November. At Home Depot, which sells DIY supplies, online sales rose 50 percent to about $600 million in the same period. Walmart expects its global online sales to rise 30 percent to $13 billion next year.

The rates of growth are impressive, but such figures are more easily achieved because they are coming from low bases. E-commerce often still represents a small proportion of total sales: 6 percent at Best Buy, 3 percent at Home Depot and less than 3 percent at Walmart.

Onur Kocamaz | E+ | Getty Images

By comparison, online sales are likely to make up 11 percent of all retail spending in the current quarter, which includes the crucial Christmas shopping season, according to ComScore. They are expanding at about 16 percent year over year.

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In a sector of merchants and marketers not renowned for their technological skills, traditional retailers have more to do to catch up with the way people are shopping.

Jonathan Ramsden, chief financial officer at Abercrombie & Fitch, a teen fashion retailer, says the challenge "is being competitive with the pure-play [online-only retailers] and the standards set by Amazon from a shipping and a customer service standpoint."

Abercrombie is closing more than 30 percent of its U.S. stores, which numbered about 1,000 at their peak, and it wants its website to replace those bricks-and-mortar sales. Its goal is for e-commerce to rise to 25 percent of total sales; it already makes up 17 percent.

Most retailers agree that the way forward is to be a "multi-channel" or "omnichannel" business. Those buzzwords encapsulate the need to let consumers glide seamlessly between the online and offline businesses, whether they want to do research in a store and then buy on their iPad at home, or receive discount coupons by email and go to a store to redeem them.

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"Very rarely is a customer purely online or purely bricks-and-mortar," says Kevin Hofmann, president of online at Home Depot. "You're bouncing between these different channels."

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For example, many buyers of Home Depot grills and patio furniture go to a store to get the advice of a shop assistant, but buy on their smartphones then and there so they can get home delivery and avoid carrying the items themselves.

Across the sector progress on synchronising the digital and the physical has been mixed, whether it is with advertising, pricing and demand forecasting or customer call centres and deliveries. In a June survey, Retail Systems Research asked retailers whether they were synchronised in 13 different areas and in each one fewer than one in five said yes.

Many retailers have been hampered by their first attempt at ecommerce several years ago, when they set up online operations as standalone businesses with separate technology.

Since then some of the biggest have sought to buy skills by acquiring tech start-ups. A year ago Home Depot acquired Black Locus, a retail analytics group, and this year Walmart bought four companies—Torbit, Inkiru, OneOps and Tasty Labs—whose software crunches large amounts of data and speeds up websites.

In October Staples, the office-supply chain, bought Runa, whose tools personalise special offers. "We're not a tech company, so we need to think like a tech company," says Faisal Masud, executive vice-president of global ecommerce at Staples.

Staples is ranked as the US's second biggest online retailer by the Internet Retailer website as its $10.3 billion in online sales globally last year—just over 40 per cent of its total—were second only to those of Amazon, whose total is expected to hit $75 billion this year.

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Popular initiatives include capturing consumers from social media websites such as Facebook and Pinterest, and creating in-store smartphone apps that let shoppers locate what they want, read reviews, and in some cases make a purchase.

But retailers are devoting more effort to deliveries, whose speed and reliability have become a key battleground in ecommerce today, due largely to the standard set by Amazon.

More retailers are using stores to fulfil online orders, either by letting customers "click-and-collect" from their nearest shop, or by shipping products from shops—as opposed to warehouses—to their homes.

Macy's, a department store chain that is building its fourth ecommerce warehouse, has also turned 500 of its 840 stores into additional shipping facilities, putting counters into store rooms where the employees who stock shelves also pack online orders into boxes.

Retailers say such moves are about offering maximum convenience to shoppers, but Sucharita Mulpuru, analyst at Forrester Research, points out that, as shipping costs become painfully high, using stores as mini-warehouses also saves money.

Mr Masud at Staples says: "Having stores and online is a huge benefit, but only if you leverage those resources . . . If you don't have a fully integrated experience, those assets are not utilised."

—By Barney Jopson with the Financial Times

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