Retail is not Dead
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Some retailers are dying, but retail is not dead. The industry is getting more efficient and competitive, and technological innovation will have a determinant influence in the business during the following years. Some retailers will fail, or at least face important challenges, while those who understand the new industry dynamics will survive and keep growing in the long term.
Online retail is here to stay, and new technologies that allow for instant price comparisons at different retailers are changing the dynamics of the industry in a permanent way. Companies will need to have a competitive advantage in price or in quality to survive -- geographical proximity or store presence won't be an important success factor anymore.
Amazon (NASDAQ: AMZN) provides very low shipping costs and competitive prices for an enormous variety of articles, and the online retailer is perpetually adding new products to its catalog. Amazon has structurally lowers costs than traditional brick and mortar stores due to advantages in store cost, inventories and payroll among others.
The company is also launching a series of state of the art innovations targeted at reducing costs even further. Those who are going to compete in cost against Amazon will face a very tough challenge over the next year, and Best Buy (NYSE: BBY) is a clear example about how hard that competition can be. Even with competitor RadioShack out of the race, Best Buy doesn't seem to be able to find a sustainable path to growth and profitability.
The electronics retailer is reporting negative comparable store sales despites growing electronics markets in recent years. Electronics is becoming a commoditized business for many retailers, and the competition in prices gets really tough with Amazon on the other side. Consumers can instantly compare characteristics, critiques, and prices of many products online nowadays.
They can even see and touch the products at a Best Buy Store, and afterwards make the purchase via Amazon. Companies like Best Buy end up being the show room for Amazon, paying the expenses and losing the customers.
There is a sharp contrast to what has happened at the Apple (NASDAQ: AAPL) stores, for example. According to data from Asymco, the Cupertino giant is not only the company with higher sales per square foot in the retail space but also has the highest growth rate in the industry. Apple sells its products through many different channels, so the success of iPhone and iPad surely helps, but customers could easily buy them through other channels if they didn't like the Apple store.
Apple is doing so well at retail because it's not just selling products, it's providing a satisfying customer experience. Design, internal distribution, and product availability play a big role in this strategy, and customer service is absolutely central. Apple employees allow customers to touch the products and play with them, and they are always willing to help at understanding the different possibilities that those products provide.
Shopping is an experience, online shopping may be an experience too, but it's clearly not the same as playing with a new iPad or listening to your favorite song with some cool headphones at an Apple store. Apple stores don't compete in price, but the company knows how to compete in quality - the quality of the experience - and that has produced extraordinary results in the retail business.
The death of retail also hasn't reached Nordstrom (NYSE: JWN) yet, and the company will do just fine in the new retail environment as long as it keeps providing a pleasing customer experience. Nordstrom has always been famous for its flexible return policy and the attentiveness of its employees -- the American Customer Satisfaction Index places Nordstrom at the top of the list when it comes to customer experience rankings.
Total retail sales at Nordstrom increased by a 14.7% in March versus the same month in the previous year on the back of a robust 8.6% growth in same store sales. Nordstrom is expanding its store base; the company added 18 new stores in 2011 and is planning to open 16 new stores this year. The retail business is alive and growing at companies like Apple and Nordstrom.
Sears (NASDAQ: SHLD) on the other hand is a prime example of a declining American retailer. The company has not reported any increase in sales since 2007 and profit margins have been declining constantly. The competitive landscape has gotten much tougher, but management at Sears has been too busy squeezing every cent from the business to spend it in share buy backs and other financial maneuvers.
Sears hasn't spent much money or other resources in revamping the stores or taking care of customer experience, so the company's management has the main responsibility for the slow but steady decline. In such a competitive landscape, mistakes can be really expensive.
Retail is not dead, but those trying to grow without a solid competitive advantage in price or quality will be facing serious difficulties in the future. Having conveniently located stores or a wide variety of products may have helped in the past, but those times are over.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. Motley Fool newsletter services recommend Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.