3 Factors For Amazon-Proof Retailing

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite facing plenty of headwinds this year, Amazon.com (NASDAQ: AMZN) is still the biggest disrupting force in retail. Big-box retailers such as Target and Wal-Mart are certainly susceptible to the low-margin retailer that’s able to operate without the cost of physical stores. Even smaller retailers are feeling the pressure of the virtual store. There are retailers out there, however, that investors could consider “Amazon-proof.” Here are three traits that such companies exhibit.

High-end exclusive products

The easiest way to compete with Amazon is simply to keep your products off of its virtual shelves. If a retailer’s products are only available at its stores, Amazon can’t steal sales from it. Of course, this strategy is easier said than done.

GNC (NYSE: GNC), well known for its exclusive products, has increasingly struggled with keeping its products exclusive in recent years as it expands its franchising activity. Approximately 84% of GNC’s products are available on Amazon.com, up from 67% a year ago. Still, the company ultimately controls the distribution of its products, which is the key factor to battling Amazon.com.

Considering GNC saw franchise sales grew from 16.2% of total company revenue in 2011 to just 16.8% in 2012, rogue discounted Amazon sales don't appear to be an imminent threat to the company's bottom line. This is a number to keep an eye on, however, as GNC collects just 6% in gross sales from franchisees.

Another key factor to the exclusivity strategy is that the products are high-end. High-end products are less susceptible to copycat products that pop up on Amazon. Furthermore, Amazon’s moves in recent years to stock higher-end products underscores the fact that simply having one without the other (high-end without exclusivity) is not enough to stay Amazon-proof.

Few, if any, retailers out there pull off this combination perfectly. Perfection, however, is unnecessary. A subset of popular exclusive products draws consumers into stores, resulting in add-on purchases once they’re there.

Williams-Sonoma (NYSE: WSM) has increased its exclusive product offerings over the last few years. Former brand President Richard Harvey increased the percentage of products that are either vendor-branded exclusives or Williams-Sonoma-branded. Newly appointed Janet Hayes will look to continue his success with an increased focus on product exclusivity.

This focus on high-end exclusivity makes Williams-Sonoma one of the more Amazon-proof retailers. In the company's latest earnings call, CEO Laura Alber pointed out, "Our strongest performances were in those categories where we have the highest proportion of new, exclusive and innovative products."

Added Value Services

One thing Amazon is unable to offer to its customers is added value through services. This is one way Best Buy (NYSE: BBY), one of Amazon’s most well-documented victims, is surviving. The company’s Geek Squad has become a valuable part of the company, as it begins expanding its service beyond its own stores.

Last quarter, the company's comparable U.S. service sales grew 6%, generating about $750 million in high-margin sales. As technology becomes more complicated to set up, and the housing market recovers, Best Buy is offering new homeowners something Amazon simply cannot.

Another company differentiating itself through services is PetSmart (NASDAQ: PETM). Even as Amazon increases its presence in the pet supply business with its Wag.com venture, PetSmart, in my opinion, remains the best investment in the booming pet industry.

PetSmart’s services include grooming, veterinary care, training, and boarding. What’s more, the company invites pets into its stores, and the knowledgeable staff is able to give personal advice to pet owners based on what they learn about their furry friends.This level of service is unmatched by most pet stores, and simply untouchable for Amazon.

Last year, service sales at PetSmart grew 10% to $740 million, comprising about 11% of PetSmart's total sales. Unlike Best Buy, however, PetSmart services are a low-margin business, generating just 3.1% gross margin. The company, instead, uses its services business to draw customers to its high-margin merchandise, which consistently grosses about 40% of revenue.

Membership Rewards

More specifically, I should say well-executed membership rewards programs. GNC’s Gold Card membership is a great example of such a rewards program. It’s the main reason the company is not worried about its exclusivity problem.

The rewards program is a win-win for both GNC and its customers. Customers get a discount on GNC’s relatively high-priced products, and GNC gathers information about what kind of products its customers purchase and what they’re likely to purchase in the future. More importantly, since membership requires an upfront cost, members are more likely to go back to the store to reduce cognitive dissonance as to why they bought the membership in the first place.

In essence, well-executed membership rewards programs provide nearly instant and clear benefits to the consumer and long-term benefits to the retailer. Interestingly, Amazon has taken a page out of the traditional retailers’ playbook with its Amazon Prime membership, which provides many benefits traditional retailers can’t provide, such as online video streaming and free eBook borrowing.

For your consideration

As Amazon continues to expand its operations and product offerings, more and more retailers are finding themselves under pressure. When considering investments in retail, it’s important to keep the above three factors in mind. Alternatively, you could just do what I did – buy Amazon.

Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Costco Wholesale, PetSmart, and Williams-Sonoma. The Motley Fool owns shares of Amazon.com and Costco Wholesale. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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