When Dinosaurs Can't Evolve, They Go Extinct

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

Between 1995 and 2013, global Internet usage rose from less than 0.5% to 39%. As a result of that growth, traditional brick-and-mortar retailers have steadily lost market share to e-commerce retailers like Amazon or eBay. Retailers that could roll with the punches by increasing their online presence survived, and those that could not perished. Today, retailers must not only create engaging websites, but they must also address the rapid penetration of smartphones and tablets with well-designed apps.

Roughly 25% of smartphone users in America now use their mobile devices to shop online, according to research firm Forrester, and eMarketer stated that 11% of total e-commerce sales in 2012 came from smartphones and tablets - a number that is expected to double by 2017.

The United States, which accounts for nearly 34% of global e-commerce, is one of the fastest growing markets for online sales, thanks to a heavily wired population and rising discretionary income. Therefore, a digital rift has appeared between growing retailers and dying ones, and investors should recognize how certain companies create successful e-commerce initiatives, and how others fall flat. In this article, I’ll take a look at two big winners in e-commerce --Urban Outfitters (NASDAQ: URBN) and Nordstrom (NYSE: JWN)--and one huge loser--J.C. Penney (NYSE: JCP)--to see what defines a solid e-commerce initiative.

Urban Outfitters

Apparel retailer Urban Outfitters, best known for its quirky, kitsch print shirts and unusual gifts, has been one of the best performing stocks in the shaky apparel industry, rising 38% over the past twelve months. The company also owns Anthropologie, a casual contemporary female brand, and Free People, a Bohemian brand for young women. Over the past five years, Urban Outfitters’ e-commerce revenue has grown at an average annual rate of 25%. Even when its industry peers complained about cold weather and a slowdown in consumer spending last holiday season, Urban Outfitters’ direct-to-consumer channel (primarily comprised its online sales) saw 44% year-over-year growth.

Therefore, Urban Outfitters is in a solid position to cash in on the growth in the U.S. apparel and accessories industry, which accounts for 20% of the country’s online retail market. eMarketer estimates that annual online apparel sales will double from $45 billion to $90 billion by 2016.

The key to Urban Outfitters’ growth in online sales started in 2009 with the launch of its m-commerce (mobile e-commerce) platform using Acuity Mobile’s eMAP platform. This started an organized roll out of websites, video and apps promoted through its print catalogs.

The company’s Free People app, which was only recently released on iOS, was downloaded 24,000 times during its first week and immediately accounted for 7% to 10% of the site’s online sales that week after logging 100,000 user sessions. The new app, which the company hopes will replace its three year old mobile website, is noteworthy since it allows users to upload photos of themselves wearing Free People apparel to share with their friends. That social aspect, which also allows users to rate each others’ photos, draws heavily on the appeal of social pinning and sharing site Pinterest. Last quarter, Free People accounted for 15% of Urban Outfitters’ total online revenue.

Encouraged by Free People’s success, Urban Outfitters intends to update its Anthropologie app later this calendar year. Thanks to its dedication to bolstering its online presence, Urban Outfitters reported a 20% year-on-year increase in web traffic during the first quarter, which bodes well for the rest of the year and beyond.

Nordstrom

Another company that made a smooth transition into e-commerce is Nordstrom. The upscale department store managed to avoid the fate of J.C. Penney and Sears by investing $150 million in e-commerce infrastructure improvements last February. These improvements included a new mobile site and apps, a 50% increase in available online products, a 360-degree video for certain products, better recommendations and improved UI (user interface) features across the website.

As a result, Nordstrom’s total revenue rose 12.1% year-over-year, and its e-commerce channel grew 37%. The company’s e-commerce channel sales came in at $1.3 billion, accounting for 11.9% of its annual top line. Mobile revenue came in at $260 million, representing 20% of the e-commerce channel. Nordstrom’s mobile app, which was launched in 2011, is currently the third highest rated retail app in the Google Play Store. The app can locate nearby stores, check the in-store availability of desired products, scan bar codes in stores, track in-store events, and create and share wish lists with friends.

Nordstrom is also in touch with recent Internet trends. For example, it capitalized on the popularity of Pinterest by marking its most-pinned products with “P” tags at 13 of its 248 brick-and-mortar locations in a testing phase that will end in July. With 4.5 million followers on Pinterest, Nordstrom is the most popular department store on the social networking site, and it is using this lead to gather information regarding the popularity of items in certain geographic regions. The company intends to use pinned items to realign its inventory for different regions.

In addition, Nordstrom has also invested in Wantful, a gift suggestion site that uses personal data about the gift recipient to customize product recommendations, to create The Nordstrom Gift Collection by Wantful. This could help strengthen Nordstrom’s dedication to creating a more personalized online shopping experience for its customers.

J.C. Penney

Whereas Urban Outfitters and Nordstrom represent companies that have made staying in touch with customers, both offline and online, a top priority, ailing retailer J.C. Penney represents the polar opposite.

Many retailers are able to pump out gains in online sales despite reporting falling brick-and-mortar numbers. Yet J.C. Penney was able to achieve neither in fiscal 2012, reporting total sales that declined 24.8% year-over-year to $12.98 billion and same-store sales that fell 25.2%. E-commerce sales plunged 32.0% to $1.02 billion, and its share of total sales fell from 8.7% to 7.8%.

As this meltdown was happening last year, former CEO Ron Johnson managed to alienate customers by eliminating limited-time sales, confuse them with completely rearranged store layouts and turn them off with a minimalist re-branding effort. Controversial and sappy ad campaigns did little to save the ailing retailer as Johnson burned through more cash than the company could generate to make his new “JCP” a reality.

By focusing so much on brick-and-mortar stores, Johnson neglected its e-commerce sales. He notably stated, “The digital environment you can change quickly. The physical environment takes time.” But as we have seen with Nordstrom, it can’t change quickly as a mere afterthought--it’s a big investment that requires a lot of strategizing, time and effort.

By the time Mike Ullman was hired back as the company’s CEO, J.C. Penney was an irreparable mess. Last quarter, total revenue declined 16.4%, its loss doubled to $348 million, and same-store sales declined 16.6%. E-commerce sales, which Ullman did not discuss, plunged 30%.

The Foolish Bottom Line

For retailers, e-commerce and m-commerce are vital strategies that should not been taken lightly. There are far too many retailers that dismiss mobile apps as an afterthought, creating poorly designed apps that sully their reputations and inadvertently turn away mobile shoppers.

Over the next few years, companies such as Urban Outfitters and Nordstrom that have invested wisely in creating well-designed apps that connect with their customers will reap the rewards, while aging dinosaurs that have neglected e-commerce completely, like J.C. Penney, will crumble.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure