Retail Strategic Issue: Showrooming

This past year online shopping continued to grow, taking a significant chunk of the Holiday spending. In the U.S. over 125 million Americans shopped on Cyber Monday, up 17% from the 110 million who shopped on Cyber Monday in 2010. Online purchases have continued to grow; U.S. online retail was $175 billion in 2007 and is projected to grow to $335 billion this year.

In an interesting strategic development, though, the so-called “bricks and mortar” stores are sometimes finding themselves providing a service to their online competitors or for the online side of their own organizations. Specifically the phenomena that some shoppers visit stores to see merchandise that they then purchase online, with all the convenience online shopping offers in terms of price hunting.

According to The Wall Street Journal’s Ann Zimmerman:

Target Corp. is tired of being used.

In one of the starkest signs yet that chain stores fear a new twist in shopping, Target is asking suppliers for help in thwarting “showrooming”—that is, when shoppers come into a store to see a product in person, only to buy it from a rival online, frequently at a lower price.

Last week, in an urgent letter to vendors, the Minneapolis-based chain suggested that suppliers create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform on their computers and smartphones. Where special products aren’t possible, Target asked the suppliers to help it match rivals’ prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise.

“What we aren’t willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands,” according to the letter, which was signed by Target Chief Executive Gregg Steinhafel and Kathee Tesija, Target’s executive vice president of merchandising.

Showrooming is an increasing problem for chains ranging from Best Buy Co. to Barnes & Noble Inc., at the same time that it’s a boon for Amazon.com Inc. and other online retailers. This year store sales overall edged up 4.1% during the holiday shopping season, while online sales jumped 15%. And while online sales represent only 8% of total sales, that is up from just 2% in 2000.

Some analysts said Target’s new tactics are unlikely to reverse the showrooming trend, because they fail to address the root problems traditional retailers face. Online-only retailers have significantly lower labor costs and, at least, for the time being don’t collect sales tax in most states.

More important, the growing competition from Amazon is based on a different business model entirely: Amazon can sell products so cheaply because it uses its other profitable units—such as cloud data storage and fees it charges others to sell on its website — to subsidize the rest of its business.

“The traditional retailers are still doing business the old way while Amazon has reinvented the model,” says Sucharita Mulpuru, retail analyst at Forrester Research. “Wal-Mart and Target are willing to sell a few things at a loss. Amazon’s whole business is a loss leader.”

Consumer preferences are also moving to online. “That is where we’re heading,” said Adrianne Shapira, retail analyst at Goldman Sachs. “You can try and dance around it, but it’s a fact.”

For other perspectives on this issue, please see:

Missoni for Target

Let Your Fingers Do the Walking