Sunday, January 22, 2012

Showdown Over 'Showrooming'

It is only going to accelerate change as the equivalent store to Best Buy in Australia, Harvey Norman, has seen its profit slashed from 250k per store last year to 65k, mostly due to internet sales. Australia does not have the same transportation infrastructure as the USA so we will only see this trend accelerating here as people try to get more bang for their buck!

Aivars Lode

Target Asks Vendors for Help Keeping Comparison Shoppers

Target Corp. is tired of being used.
In one of the starkest signs yet that chain stores fear a new twist in shopping, Target is asking suppliers for help in thwarting "showrooming"—that is, when shoppers come into a store to see a product in person, only to buy it from a rival online, frequently at a lower price.
Last week, in an urgent letter to vendors, the Minneapolis-based chain suggested that suppliers create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform on their computers and smartphones. Where special products aren't possible, Target asked the suppliers to help it match rivals' prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise.

Vendors are likely to have little choice but to play ball with Target because of its clout as the second-largest discount chain.
"What we aren't willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands," according to the letter, which was signed by Target Chief Executive Gregg Steinhafel and Kathee Tesija, Target's executive vice president of merchandising.
Showrooming is an increasing problem for chains ranging from Best Buy Co. to Barnes & Noble Inc., at the same time that it's a boon for Inc. and other online retailers. This year store sales overall edged up 4.1% during the holiday shopping season, while online sales jumped 15%. And while online sales represent only 8% of total sales, that is up from just 2% in 2000.
Other retailers also are likely to take steps similar to Target's plan, according to Deborah Weinswig, Citigroup retail analyst, who mentioned the letter in a research note Friday and said it was likely to have gone to suppliers of consumer electronics, health and beauty products and food.
Vendors are likely to have little choice but to play ball with Target because of its clout as the second-largest discount chain. Major suppliers, including Kraft Inc., TV maker Vizio and Procter & Gamble Inc., either wouldn't confirm they received the letter or didn't return calls seeking comment.
Target declined to comment other than to issue a statement saying that it "has long prided itself on having truly collaborative vendor partnerships and we continually work with our vendors to remain competitive in the ever-evolving retail environment."
Some analysts said Target's new tactics are unlikely to reverse the showrooming trend, because they fail to address the root problems traditional retailers face. Online-only retailers have significantly lower labor costs and, at least, for the time being don't collect sales tax in most states.
More important, the growing competition from Amazon is based on a different business model entirely: Amazon can sell products so cheaply because it uses its other profitable units—such as cloud data storage and fees it charges others to sell on its website — to subsidize the rest of its business.
"The traditional retailers are still doing business the old way while Amazon has reinvented the model," says Sucharita Mulpuru, retail analyst at Forrester Research. "Wal-Mart and Target are willing to sell a few things at a loss. Amazon's whole business is a loss leader."
Consumer preferences are also moving to online. "That is where we're heading," said Adrianne Shapira, retail analyst at Goldman Sachs. "You can try and dance around it, but it's a fact."
Retailers like Target and industry giant Wal-Mart Stores Inc. have a lot of catching up to do, as analysts estimate their websites account for only 1% to 2% of their annual sales.
Target had a tough Christmas season, with sales at stores open at least a year rising just 1.7%, about half of what the company expected. As a result, Target recently lowered its fourth-quarter earnings per share range to between $1.35 and $1.43 from $1.43 to $1.53.
The company said sales were particularly disappointing in electronics, movies, books and music—products whose sales have migrated most significantly to the Internet. Those products accounted for 20% of Target's annual sales of $65 billion in 2010, down from 22% in the prior year.
This fall Target relaunched and upgraded its website, which had been operated by Amazon for the last decade. But the site crashed several times, most notably when shoppers rushed to buy a special line of items made by Italian fashion house Missoni.
Target has a long tradition of getting suppliers to provide exclusive products. It has teamed up for years with fashion designers to offer time-limited discount clothing collections, and it recently announced it will open a series of temporary boutiques featuring clothes, food and home furnishings from popular regional stores.
These programs set Target apart from less fashionable rivals such as Wal-Mart, but "they are completely immaterial" to the company's bottom line, said Colin McGranahan, retail analyst at Sanford C. Bernstein.
—Hannah Karp contributed to this article. Write to Ann Zimmerman at

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