I have been paying attention to a couple of trends in how consumers’ (me included) purchase different items through different channels i.e. traditional go to the store versus online. The other trend that I have seen is how the traditional retailers like Wal-Mart have responded to the online opportunities, but have been a little slow in finding ways to match the dominate online retailer Amazon.com. With the state of the economy in the last several years retailers have been under tremendous pressure to lower operating costs, increase same store sales, and expand their revenue streams beyond general hard-lines and grocery. While a few years ago some retailers were focusing on SKU rationalization, which is basically reducing the variety of items that are offered in a particular category in order to optimize sale through and operating costs. The tide has turned and retailers have not only increased their SKU count to offer customers more variety, but many big-box retailers such as Wal-Mart, Sam’s Club, Costco and Target have expanded their offerings to the consumers through their online marketing channels. A person can buy appliances like washers and dryers, mattresses, furniture, electronics and much more through the .Com channel of these traditional retailers. The online retail space is projected to be a $250 Billion industry by 2014, and traditional retailers must learn to be leaders in the online channel as they have been in the traditional store channel, and the winner in this space by far is Amazon.com, not Wal-Mart or Target.
Retailers like Wal-Mart, Sam’s Club, Costco and Target have become powerful brands, and in many cases the Retailer’s brand is stronger than the product being sold. To give an example, I just bought a mattress for my son through Sam’s Club.com. The mattress was a brand that I have never heard of, but I have been a customer of Sam’s Club for years, and I trust their ability to source quality products at excellent prices, secondly, I know that if I am not satisfied with the product I can simply return it to Sam’s Club without any problem, so while I know nothing about the maker of the mattress I trust Sam’s Club, that’s brand power. This brings me to my point, which is traditional retailers have an obligation and a huge opportunity to become major players in the online space. The big box retailers have several things going for them; they have a traditional store footprint, they have tremendous scale and operational efficiencies, and they have powerful brand names. The one thing that retailers have not done well in my opinion is to make the make the online buying experience as easy and seamless what I would expect online. I think that the reason for this is because traditional retailers are very good at getting a lot of product to hundreds of stores; this expertise does not automatically translate to being good at getting one product to one customer’s home. Until recently the traditional retailers have used their regular supply chain channel to support their online channel. Sam’s Club has made major improvements in the past year; I can say this as a consumer who has been using samsclub.com for a while now. The retailers will have to learn how to develop another supply chain network to support their online channel because there is now way the economics in store replenishment are anywhere near the same as fulfilling one order to one customer.
Let’s take a look at Amazon.com, who by the way has been the reigning champion as an Online Mass Merchant for several years running. Amazon.com has been very successful in making online shopping very easy and cost effect for the customer, and think about this Amazon.com does 13.1% of the sales that Wal-Mart does in the U.S, but they don’t have a single store in the country. Amazon has done this by completing online channel for the customer. Amazon.com provides a very good and intuitive virtual shopping environment and then provides the customer with seamless delivery of the product to the customer’s home. We have to admit that buying online is a bit different than the traditional buying method that has been employed since the beginning of trade in human civilization. Consumers are giving-up the ability to touch and feel the item that they are about to purchase, so there could be less of a connection between the consumer and the product depending on their familiarity with the product, so when you sell an item online, you need to complete that connection between the customer and the product as quickly as possible. What Amazon.com has done well that other traditional Mass Merchants have not; is to get the product to the customer’s home as quickly and efficiently as possible. The traditional retailers have relied heavily on their store locations and DC to store supply chains to fulfill online orders, while this makes sense initially, long term this is not a good strategy for the big retailers for several reasons. First of all retailers’ don’t have those big back rooms anymore, and when you consider that Amazon did $34BB in sales in 2010, which is about 13.15% of Wal-Mart’s U.S sales of $258BB, then it becomes very clear that as retailers increase the strength of their .com channels they run the risk of increasing their inventories, increasing operating costs, and lowering customer service because the stores are just not set-up for or staffed to pick an pull customers’ online orders.
The opportunity as I see it is for the traditional retailers to apply their know-how and leverage their brand to complete the online buying experience all the way into to the customer’s home. If retailers like Wal-Mart can execute an online channel that allows customers to choose service levels such as home delivery, inside delivery, or even some light assembly at the customer’s home, then the traditional retailers will soon become as dominate in the online space as they have been in the traditional Brick & Mortar space.
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