Brick-and-Mortar Retailers Should Read the Writing on the Wall

by Susan J. Aluise | December 9, 2011 9:10 am

Sears retailIf fourth century Roman poet Claudian could come back as a retail consultant today, he’d give brick-and-mortar chains the same advice he offered his boss, General Flavius Stilicho, as the Roman Empire was crumbling around them: “Change or die.” Unfortunately, Stilicho stayed his course and was decapitated by political enemies — a fate that (figuratively) awaits traditional retailers who fail to change their business models to stave off the competitive onslaught of online retailers.

The latest sales stats are harbingers of bad news for brick-and-mortar chains. Black Friday shopping helped drive up November retail chain sales by 3.3% at stores open more than a year, according to Thomson Reuters. But that rate of growth is lower than the 5.5% gain the chains reported a year ago. What’s potentially worse: About 32% of people surveyed by America’s Research Group said they finished a majority of their Christmas shopping in November. That could throw a monkey wrench into hopes for a strong end to the holiday season.

The opposite is true for online retailers, who grew November sales by a whopping 15% over last year. Middle-income shoppers accounted for the strongest e-tail sales, with a growth rate of 19%; high-income shoppers’ purchases grew 16%, while growth among low-income customers was 9%.

That middle-income trend is particularly scary for chains like J.C. Penney (NYSE:JCP[1]) and Sears (NASDAQ:SHLD[2]), which already have struggled this year as mid-market retail sales slumped with shoppers effectively choosing between the upscale or bargain stores[3].

And online retailers aren’t about to ease up on the pressure. Amazon (NASDAQ:AMZN[4]), which already has been eating physical stores’ lunch, upped the ante with its Price Check app, which encourages shoppers to scan an item in a brick-and-mortar store to see if Amazon has it at a better price. To make matters worse, AMZN this Saturday is giving shoppers as much as $5 off for each item (with a maximum of three) if they buy from Amazon after using the app in a physical store.

Predictably, traditional retailers view Amazon as Kris Kringle’s evil twin: Instead of Macy’s “Miracle on 34th Street” Santa sending shoppers to rival Gimbels for a better price, he’s lurking in the digital shadows to lure paying customers out the back door. In response, legacy retailers are urging lawmakers to retaliate with e-commerce sales taxes.

“By continuing to evade collecting state sales taxes, Amazon’s exploitation of a pre-Internet tax loophole is resulting in a 6% to 10% perceived price advantage over their competitors on Main Street,” Retail Industry Leaders Association spokeswoman Katherine Lugar said this week. “Amazon’s aggressive promotion of its Price Check App shows the lengths they are willing to go to exploit this tax loophole, and is a stark reminder of why Congress needs to act to protect retailers on Main Street.”

RILA’s rage is understandable, but complaints and e-commerce taxes won’t quash the competitive threat posed by online retail. New taxes — which are an eventual fait accompli — will raise costs for Internet pure-plays like Amazon, but brick-and-mortar stores likely will not receive much benefit from it because consumers are growing addicted to convenience. And with the fastest e-commerce growth occurring outside the U.S., major global players are eying cross-border IT platforms that allow them to leapfrog establishing a physical presence in new markets.

The fate of traditional retailers likely will come down to Claudian’s “Change or die.” On the death side, consider the recent bloodbath in brick-and-mortar chains. “Digital Darwinism” devoured video retailer Blockbuster and bookseller Borders. Discount apparel retailer Syms and its Filene’s Basement unit recently suffered the same fate, failing to survive against online merchants and competing designer discount chains[5] like Ross Stores (NASDAQ:ROST[6]) and TJX (NYSE:TJX[7]).

Since no retailer wants to end up like Stilicho with his head on a pike, change is the better choice. Just ask J.C. Penney, which last month reported nearly a 5% drop in sales and a third-quarter operating loss of $171 million — compared to a $124 million profit for the same quarter last year. Under new CEO Ron Johnson[8], JCP is buying a $38.5 million stake[9] in Martha Stewart Living Omnimedia (NYSE:MSO[10]) — a move aimed at giving the battered mid-market chain a more upscale feel. A major part of the new venture will be an e-commerce site for cross-licensed Martha Stewart products, which JCP plans to launch in 2013.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.

  1. JCP:
  2. SHLD:
  3. between the upscale or bargain stores:
  4. AMZN:
  5. competing designer discount chains:
  6. ROST:
  7. TJX:
  8. new CEO Ron Johnson:
  9. buying a $38.5 million stake:
  10. MSO:

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