How Online Retail Threatens The Traditional Business Model

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

Competition between online and offline retailers has heated up over the years, and the upcoming holiday season is no exception. After e-commerce retailer Amazon (NASDAQ: AMZN) introduced an app that allows consumers to scan barcodes on products in retails stores, and then receive a 5% discount for the same order on its website, Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) refused to sell the Amazon Kindle. Now, Target has promised to match retail prices in both online and offline stores to beat the competition this holiday season.

Tactics like these signal the growing power struggle between traditional retailers and online businesses. With the convenience of online shopping, more and more consumers can expect fewer and fewer differences in terms of return/exchange policies, customer service before and after a sale, and selection. This means traditional brick and mortar businesses must try even harder to get people to visit store locations.

But this increase in online shopping does not definitively signal the end of traditional retail outlets. Many customers still enjoy visiting store locations - it's just may take a little more than a clever ad campaign or generous holiday sale prices to keep customers interested.

Convenience of Online Shopping

This holiday season, FedEx estimates shipping 280 million items ordered online. Even though the company has seen a steady decline on overall shipments this year, shipments of online orders are expected to grow about 13% compared to 2011.

When it comes to convenience, clicking a button and placing an order doesn't get any more convenient. For the busy holiday season, ordering gifts and other items online makes sense for those with work, family, and other obligations.

With less time to spend browsing through a store's inventory, those who enjoy online shopping can easily do so from a computer or smartphone. This means the ability to order items during lunch, in the morning or late at night.

In addition, online retailers like Amazon offer Super Saver Shipping (free standard shipping) on orders over $25.00. The company also offers Amazon Prime, which guarantees free two-day shipping for a yearly fee. Free shipping provides added incentive to shop online for both small and large items.

Online retail shopping has turned into a $162 billion industry by 2015, and online retailers may earn upwards of $269 billion. With an estimated 137 million online shoppers, both browsing and buying retail items, online retail poses a significant threat to traditional retail businesses.

Traditional Storefront Benefits

On the other hand, around 57% of shoppers still visit store locations. Of that, an estimated 65% will make a purchase. Brick and mortar stores like Home Depot (NYSE: HD) and Lowes offer in-store clinics for DIY projects and hire people who can answer questions and provide advice on home improvement and outdoor projects. For people that enjoy one-on-one attention, visiting a store as opposed to the store's website or a competitor's site makes more sense.

Creating a memorable and productive shopping experience helps brick and mortar stores maintain a steady stream of customers. Home Depot, for example, recently upgraded its in-store communication devices so employees can easily talk with each other and management staff to better answer customer questions and to find products quickly. This reduces the amount of time customers spend looking for products and ensures better customer service.

In addition to personalized customer service, customers can also browse through available products, take measurements, and handle items before making a purchase. Customers can also return/exchange items quickly instead of having to send an item back and wait for a replacement. It would be naïve of retailers to give up completely on traditional retail, as there are still many people that would rather visit a store to pick out what they want than flip through items on a screen.

Hybrid Retail

The argument between which generates more profit - online or offline retail - depends mostly on the types of products and services sold, target consumers, and intensity of the brand. Some retailers, including Target and Wal-Mart, have found maintaining an online and offline presence generates continuous profits. To compete with Amazon and other online retailers, many brick and mortar stores offer free shipping when customers spend a specific amount.

With different options to consider, retailers need to carefully consider their target audience to provide the best shopping experience possible. Clothing and undergarment retailers, such as Uniqlo and Spanx, currently offering products sold in department stores or online, recently announced plans to open store locations to better serve customers. Surprising, but these retailers must have seen demand from consumers for this type of service or they would not have made the investment in retail space.

In the End

In the end, it's up to retailers like Target, Wal-Mart, Home Depot, and Lowes to decide the best course of action when it comes to selling merchandise. I think both online and brick and mortar businesses can maintain profits, but must be realistic in how much each business model will generate. Depending on the merchandise sold, moving online or maintaining a physical location (or having both) may be necessary to hold on to customers that have gotten used to variety when it comes to shopping and purchasing goods and services. Either way, investors should watch retailers like those listed above to make sure they are following their customers.

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