Brick and Mortar vs. Online Retailers, a decade later…

For a long time the idea that internet businesses were going to eventually cause large brick and mortar businesses to go out of business sounded a little silly. During the dot-com crash, the idea of online retailers putting large brick and mortar businesses out of business sounded even more ridiculous, specially after seeing the fail of online retailers such as the following:

After the above online retailer failures and many more, it really looked as if online retailers didn’t really had a chance against brick and mortar businesses.

Brick and mortar fights back

At the same time, brick and mortar retailers started to invest more in their online presence with some success as it was the case of Staples, Inc when in the year 2000 announced the addition of new management for Staples.com. Other retailers that enhanced their online businesses around that time included Toys R Us, J.C. Penney, and Barnes & Noble.

It was an interesting time since brick and mortar retailers where finally getting serious about their online stores and at the same time even some online giant retailers where having some problems as it was the case of online retailer Amazon.com which in January of 2000 it announced the lay off of 150 employees (2% of its workforce at the time) in January of 2000, Amazon’s stock was also trading at $60 per share, about 45% lower than the previous month and, it had also lost about $560 million as of the third quarter of 1999 since it began doing business in 1994.

AMZN stock 1998 - 2000

AMZN stock 1998 - 2000

During that time, Amazon.com was growing rapidly and adding new product lines. Many analysts at the time weren’t necessarily too optimistic about the future of online retailers as it was the case of Jeff Matthews, general partner with Ram Partners in Greenwich, Conn. who said the following after Amazon’s announcement regarding the layoff of 2% of its workforce in January of 2000:

“What does it tell you? It tells you their business (Amazon.com) has matured and they’re hitting some kind of wall. Any other Internet company would take these people from one part of their business and plug them in somewhere else. It tells you that (Amazon’s) business model doesn’t work.”

Amazon is going in the right direction

Today, we all know that Amazon’s business model does work and the giant online retailer now has many new product lines, and it is neither ridiculous nor a joke that this online retailer has put many brick and mortar businesses out of business and it is now (allegedly) planning to put its foot down in a new category: outdoor sports through Quidsi which was acquired by Amazon in 2010 and it has opened several new websites focusing on specific types of products, including toys, pet supplies, cosmetics and now outdoor sports.

If Amazon.com does this, it will be competing directly with well-known large brick and mortar businesses such as REI, Inc, Cabela’s, Dick’s Sporting Goods and Hibbett Sports, analysts at Credit Suisse said Monday, according to this report by Reuters.

AMZN stock 2000 - 2012

AMZN 2000 - 2012

Other examples of brick and mortar retailers who filled for bankruptcy recently include Blockbuster, Circuit City, Borders, while at the same time the main two online competitors for those categories include Amazon.com and Netflix which both have been doing a lot better than their offline counterparts.

Is Best Buy really going out of business?

Another good example of a giant brick and mortar retailer that seems to be in trouble lately is Best Buy Co, Inc. Its stock (NYSE:BBY) has dropped sharply since last year and then there is also the article that Forbes Magazine published recently with the title “Why Best Buy is Going out of Business… Gradually” which it attributes to the poor performance of the company’s stock in the past year and other problems having to do with the lack of customer service, the focus on up-selling and cross-selling by sales clerks and the fact that as many other recently-failed retailers such as Virgin Megastores and KB Toys, Best Buy seems to be unable to cope with new channels and new consumer expectations.

BBY 2010 - 2012

BBY 2010 - 2012

Best Buy replied to the article with this: “We are shifting our focus to be more customer centric.” And the store says its big advantage will always be its “dedicated and knowledgeable sales staff.”

The article also mentions something that I agree with and it is that Best Buy is living the corporate equivalent of what psychologists call a state of denial… sounds familiar… remember Kodak?

A very interesting problem that Best Buy also has is that it has become Amazon’s showroom with the help of the price check iPhone app. Basically, people are now able to go to a Best Buy (or any retail store), find the item they want, scan it, share it and finally buying the item from Amazon because of the lower price… and if you are one of the many people that have signed up for Amazon’s Prime, then even the next day shipping might be free.

Double digit sales growth every year

Holiday shopping is still dominated by the brick and mortar retailers, a report from NRF shows that consumers spent 11.4 billion on Black Friday, of which $816 million was online. Therefore, roughly 8% of Black Friday sales were online purchases. This year, according to NRF, total brick-and-mortar sales may rise 2.8% to $465.6 billion. Therefore, brick and mortar made up 93% of sales in 2010 (versus 7% online) and 92% of sales in 2011 (versus 8% online).

According to NFR’s report the brick and mortar retailers are doing very well, at least during the holidays. However, if you look at the growth rate of brick and mortar retail sales which is 2.8% versus the growth rate of online retail sales which is 15% according to the National Retail Federation you’ll see that online sales is getting stronger every year, it is experiencing double-digit sales growth every year. The question here is, how long will the brick and mortar domination last?

Apple store, Mall of America

This past Christmas, it was the first year my wife and I decided to buy all of our gifts online, and interestingly enough, the only buy we made at a brick and mortar retailer was the purchase of an iPod Touch and an iPhone 4S at an Apple store in Austin, TX. The reason we bought it at the store as opposed to their website is because Apple has actually managed to provide its customers with a pleasant experience while at the stores… even during a busy time such as Christmas.

The success of the Apple retail store is very interesting, they basically went from having only the online store to open many brick and mortar stores across the globe and so far it has worked for them. According to MacNews.com, 110 million people visited the retail stores last quarter; that’s a year-on-year increase of 45%. On average there were 22,000 visitors per store per week.

Another company that has managed to provide a different experience and it seems to be working very well for them is IKEA, which sells ready-to-assemble furniture at big box retail stores. IKEA is the world’s largest furniture retailer, it was founded in 1943 by 17-year-old Ingvar Kamprad in Sweden. The company’s retail stores are well-known for their very large blue buildings, the “one-way” layout leading customers along “the long natural way” designed to encourage the customer to see the store in its entirety (as opposed to a traditional retail store, which allows a consumer to go directly to the section where the goods and services needed are displayed) and for some of its unique features such as restaurants featuring traditional Swedish food and play areas for young kids.

Brick and mortar businesses still have a chance

I believe that there are many opportunities for brick and mortar retailers to succeed in a world were people are becoming more accustomed to buying items online. They need to be innovative and find ways to attract people to the stores such as Apple and IKEA are doing very successfully. Long gone are the days where brick and mortar retailers had the benefit of being boring, they need to be different and creative, need to be willing to risk their way of doing business if they want to succeed and avoid being shutdown by their online competitors which are growing faster than they are.

The brick and mortar retailers need to change something in their model… it is not just about having a powerful online presence but it is also the need for them to innovate to make it fun for people to continue visiting their retail stores, otherwise they’ll continue to suffer a long and painful death.

This morning, another retail giant RadioShack, suffered from the lower than expected results causing their shares to go down 19% at $8.30 in after-hours trading Monday January 30, 2012…

What are your thoughts about this? Do you still do most of your shopping at brick and mortar retail stores or are you an Amazon Prime junkie? Join the conversation in the comment’s section below.

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