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Looking Ahead

June 1, 2012 12:00 AM
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For the top executive of a major home improvements chain with nearly 1,800 stores in the U.S., Canada and Mexico, Lowe's Cos. Inc. CEO Robert Niblock spends a lot of time talking about e-commerce these days. And with good reason.

In 2011 online sales for Lowe's (No. 47) grew year over year 70%, while comparable-store sales for the chain's bricks-and-mortar locations were flat. Last year the web was the fastest-growing channel for Lowe's, with online sales that reached an Internet Retailer-estimated $510 million from $300 million in 2010. In comparison, total sales increased about 2.9% to $50.20 billion from $48.81 billion in 2011

To grow its web business in 2011 and going forward, Lowe's made several improvements to its e-commerce site, including rolling out MyLowes.com, a new interactive suite of tools that gives shoppers more customized ways to create and store room designs, check out available inventory across stores and the web, and create and store folders and lists to organize products, projects and ideas. In December Lowes also purchased ATG Stores, an online retailing company that operates more than 500 home improvement and related microsites, for an undisclosed amount. The acquisition did not have an impact on Lowe's growth online in 2011, the retailer says.

"We made incremental improvements to our e-commerce platform, fueling a 22% increase in traffic and a 35% increase in conversion rates, resulting in a big increase in e-commerce sales year over year," Niblock told Wall Street analysts in February on Lowe's year-end earnings call.

Lowe's has big plans in mind for e-commerce, and it's hardly alone among the largest chain retailers ranked in the latest Internet Retailer Top 500.

That's because consumers increasingly see less need to hit shopping malls and physical stores as they shift more of their shopping online, use more Internet-enabled mobile devices such as smartphones or tablets to check prices and buy, and cull product information and opinions from social media channels such as Facebook. Some numbers tell the story:

  • In 2011, the web remained the fastest-growing channel for 89.9%—62—of the chain retailers ranked in the Top 500 that break out store sales and other financials.
  • The web accounted for more than 20% of total sales for a dozen Top 500 chain retailers and more than 30% for five store merchants: Staples Inc. (No. 2) 42.4%; OfficeMax Inc. (No. 12) 40.7%; dELiA*s Inc. (No. 198) 38.2%; Williams-Sonoma Inc. (No. 24) 37.9%; and Office Depot Inc. (No. 6) 35.7%.
  • E-commerce sales are now the equivalent of lots of stores. At Staples, the biggest office supplies retailer, the company's 2011 web sales of $10.60 billion generates as much business as 1,687—73.5%—of the chain's 2,295 stores.

To grow—or for some brands even to survive—chain retailers need to do a better job of engaging customers across stores and online and in using their stores to generate more web sales. "The chains have to think way beyond just the stores," says Anne Zybowski, director of retail insights for research firm Kantar Retail. "Using the web to drive store sales is old-school. What counts now is keeping your brand relevant across any channel consumers want to shop and these days that's increasingly online."

Best Buy is closing about 50 stores and looking to grow its e-commerce base as it tries to compete with other online retailers that sell consumer electronics, notably the leading e-retailer, Amazon.com Inc. For Best Buy, the shift to even more e-commerce growth is critical. While web sales for Best Buy increased 18% to $2.95 billion in 2011 from $2.50 billion, total sales increased only 1.9% to $50.70 billion from $49.74 billion while comparable-store sales declined 1.7%.

To drive growth online Best Buy recently hired former Starbucks Corp. chief technology officer Stephen Gillett as president of Best Buy Digital and Global Business Services, a newly created position. The retail chain also will continue to diversify and accelerate its e-commerce growth with new initiatives such as devoting more time and resources to growing web sales in China. "Best Buy has to do everything it can to remain relevant to today's digital shopper," Zybowski says.

In 2011, as a group the chains ranked in the Top 500 generated an annual increase in comparable-stores sales of about 2.6% while operating a total of 114,957 stores. But in comparison the Top 500 chain retailers grew e-commerce much faster—by about 15% to combined web sales of $64.62 billion in 2011 from $56.35 billion in 2010. "More chain retailers are coming to the realization that they don't need to expand their store count or operate as many locations as they once did because more of their business is becoming web-based," says Will Ander, a senior partner with retail industry consulting firm McMillan Doolittle. "The smart chains are the ones looking to grow online because there aren't that many places left in the U.S. that warrant the cost of building another big-box store."

Indeed, a number of Top 500 retailers are looking to dramatically increase their spending on e-commerce while at the same time closing stores or opening new stores only selectively. Nordstrom Inc. (No. 31) told Wall Street analysts on its year-end earnings call in February that over the next five years about 30%—$990 million—of the company's planned $3.30 billion in capital expenditures will be spent on further developing its Internet infrastructure, including about $140 million in 2012. In comparison Nordstrom will only open one new department store in 2012 and about eight more in the foreseeable future.

"For full-line stores, we're at 117 right now, and we think there's an opportunity for around 125 in the United States," Nordstrom executive president Erik Nordstrom told analysts. "So our store count and new store count are dropping."

To remain relevant with its customer base, Lowes.com now offers nearly 250,000 products in its online inventory, with plans to double that SKU count. Lowe's in 2011 also rolled out a new online distribution program the chain calls "flexible fulfillment" to expedite order processing and shipping. Previously all orders purchased on Lowes.com were shipped only from the chain's distribution centers. If the item was unavailable, customers had to wait.

With flexible fulfillment, orders placed online are now shipped one of three ways to the shopper: from the warehouse, the closest Lowe's store with the available inventory or directly from a supplier's regional distribution center. Since the service went live in 2011, the number of orders picked, packed and shipped through the flexible fulfillment option exceeded 275,000, says Lowe's vice president of e-commerce Gihad Jawhar.

As a group, Top 500 chain retailers grew faster than other merchant types such as catalog/call center companies and consumer brand manufacturers in 2011. But chain retailers, like other merchant types, continue to lose ground—and sales—to Top 500 web-only merchants, which led by Amazon.com grew their combined web sales about 32% to $73.39 billion in 2011 from $55.68 billion in 2010.

Store merchants only have a very short time to make their e-commerce brand relevant with consumers. "I can easily see several brand names that won't be around in a few years if all they are counting on is comparable-store sales," Ander says.

mark@verticalwebmedia.com

 

It's not all about price: a Wal-Mart store undersells Amazon—and Walmart.com

By Robin Sherk

Price is often cited as a primary reason online retailers, and particularly Amazon.com Inc., are taking market share from stores. But a recent study by Kantar Retail shows that a Walmart Supercenter was lower in price on a basket of everyday items than Amazon.com or Wal-Mart's own e-commerce site, Walmart.com.

For this study, Kantar Retail compared prices of 36 national brand items from four areas: edible grocery, non-edible grocery, health and beauty, and general merchandise. In April 2012, Kantar Retail visited a Walmart Supercenter in New Hampshire, Walmart.com and Amazon.com, to analyze prices across the basket of identical items.

Despite its increasing competition from online, the Walmart Supercenter's basket was the least expensive across the three outlets. (Shipping costs were not factored into the online orders.)

Walmart.com's basket was 7% more expensive than the bricks-and-mortar Supercenter, though its general merchandise basket was the lowest priced of the three. The general merchandise sub-basket also had a more promotional approach online, with its web site-only offers designed to appeal to shoppers considering other online deals. In health and beauty aids, the store and Walmart.com offered identical prices.

Surprisingly, Amazon's basket was 21% more expensive than the Walmart Supercenter's. Amazon's non-edible grocery basket was the retailer's most competitive, beating Walmart.com's non-edible sub-basket by 12%, but it still was more expensive than the Supercenter's.

Several nuances arise when considering these results. In particular, Amazon's promotional tactics and business model impacted price propositions for two shopper scenarios:

Scheduled Stock-ups: Shoppers repeatedly purchasing the same items would find that Amazon offered more competitive prices on certain consumables through its Subscribe & Save program, which offers a flat discount for enrolling in replenishment on a fixed delivery cycle. For instance, a single can of soup at the Walmart Supercenter costs $1.44, but if shoppers purchased a pack of 12 via Subscribe & Save at Amazon, it would cost $1.33 per can. Subscribe & Save offers were not included in this study, but they are quite common; 27% of the items across Amazon's grocery and health and beauty baskets were eligible for Subscribe & Save. Shoppers hunting by item, versus a wide basket, would find many of Amazon's prices better than what its overall result suggests.

Multiple Options: Several of Amazon's general merchandise basket items offered a used version at a considerable discount. If shoppers selected a used copy of an audio CD, for example, it would have cost about 30% less than the new copy ($6.50 versus $9.16). Neither Walmart option provided this flexibility. Moreover, even Amazon's new CD was available from multiple sellers, with 35 options available. Third-party sellers are a key piece of Amazon's broad assortment proposition, as about half of Amazon's basket items were presented through third-party sellers.

Overall, Walmart.com asserted itself as a significant online price contender for a shopper's traditional basket. Still, its top online competitor is transforming customers' shopping experiences by introducing new purchase options. Other rising competitors are also designing new types of baskets online. For example, Bag Borrow or Steal offers rentals for handbags and accessories, while Dollar Shave Club offers monthly razor blade subscriptions at a discount.

As shoppers become used to these unique offers, traditional retailers like Walmart will need to reconsider their conventional basket propositions. At the same time, the evolution in how consumers shop means we need new ways to understand how consumers compare prices and to measure which retailers offer the lowest prices.

Robin Sherk is a senior analyst at Kantar Retail. She can be reached at robin.sherk@kantarretail.com.

 

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