Is the web winning the battle for retail dollars?
Staples CEO Ron Sargent said retail stores have "consistently" fallen short of expectations.
Will there be a day when e-commerce stores will trump the brick-and-mortar shopping experience? News that Framingham-based Staples Inc. will close 225 North American stores by 2015, as it beefs up online selling, seems to play into that idea.
But according to those familiar with Staples and the e-commerce industry, the two shopping channels will not conflict, but rather work in concert for the foreseeable future.
It's certainly true that the numbers from Staples' retail locations have disappointed executives. Staples CEO Ronald Sargent said in a March 6 earnings call that retail stores have “consistently fallen short” of expectations in the past few years as customer demand has shifted online.
This prompted more aggressive action to “right size” the company's retail store footprint, Sargent said, with the 225 planned store closures accounting for 12 percent of Staples' worldwide retail locations; between 2012 and 2013, Staples closed 107 stores in North America and Europe. Meanwhile, Sargent said Staples will downsize many of its larger stores to a new, 12,000-square-foot format that's more suitable to the products sold today (think sleek laptops instead of bulky and cumbersome desktop computers).
Company staying in retail
“I want to make it clear that we're not getting out of the retail business. Our stores are an important differentiator, versus the competition,” Sargent said in the earnings call. “We know customers appreciate the convenience and service (that) stores provide. That said, stores have to earn the right to stay open and we are committed to making tough calls when it's necessary.”
As Staples consolidates its brick-and-mortar operation, it also wants to capitalize on increasing online sales. The company reported 10-percent online sales growth in the fourth quarter of 2013, and 4 percent in each of the first three quarters, while about half of its global sales occurred on its commercial websites, according to Sargent.
In 2013, Staples drove up its online offerings from 100,000 products at the beginning of the year, to 500,000 at year-end. Over the next year, Sargent said the company will triple the number of products sold online, to 1.5 million.
Scott Tilghman, a Boston-based analyst who covers Staples and other retailers for the investment firm B. Riley & Co., said that in embracing online selling and cutting some of its retail stores, Staples is embracing the omni-channel approach to retail, which seeks to reach customers through a host of selling platforms, a trend he said is permeating the industry.
“There's sort of a blend (of in-store and online selling) depending on who the company is and what the product category is,” Tilghman said. “By having that offering online, you're able to cater to people who don't have a store in their location… (or maybe) dealing with weather and can't get out.”
It's also relatively easy to rapidly increase your inventory online, according to Tilghman, because a retailer can rely on third-party inventory without having to invest in it upfront. Tilghman expects Staples will add its own inventory and rely on third-party vendors as it expands its offerings.
As for the store closures, Tilghman said the 225 number is “about right,” but time will tell if there are more to come.
“I think it's a moving target,” he said.
It's hard to say how purchasing trends will change over the next five years or so, but like Sargent, the CEO, Tilghman said brick-and-mortar stores will always be a part of the equation. That's because Staples' consumer customers prefer to visit stores.
“They want to see the product before they buy it, and that's true across a lot of different sectors,” Tilghman said.
Staples declined a request for an interview for this story, but in an email, spokeswoman Carrie McElwee alluded to the need for the omni-channel approach to selling that Tilghman referenced.
”As customers shift online, we are taking aggressive action to right-size our retail footprint. We are committed to providing great service and every product businesses need whether it's in-store, online or through mobile,” McElwee wrote.
TJX launch exceeds expectations
TJX Corp., also based in Framingham, is a good example of a retailer from another sector that has recently invested in e-commerce. In October, TJX quietly launched its e-commerce site, TJMaxx.com. It's the first time since 2004 that TJX — the parent of T.J. Maxx, Marshalls and Home Goods — took a stab at e-commerce. That 2004 attempt ended up being a losing venture.
But TJX CEO Carol Meyrowitz said in a fourth-quarter earnings call that customer response on the new site was better than expected. And an online store for T.J. Maxx seems to be benefiting retail locations as well. Meyrowitz said the majority of merchandise returns are being brought to stores, creating additional foot traffic.
“We see this as a great opportunity to introduce our stores to new customers,” Meyrowitz said.
In the months leading up to the launch, analysts speculated that TJX's second attempt at online retail would be more successful than its 2004 bid. That's because TJX acquired Wyoming-based Sierra Trading Post, a successful online apparel company, in order to leverage Sierra's e-commerce expertise. That deal has potentially made way for more TJX brand e-commerce sites, such as Marshalls.
“We will continue to take a deliberate approach to online growth,” Meyrowitz said.
Hiring, or acquiring a third party to operate an e-commerce site is smart, according to Andrew Lipsman, vice president of marketing and insights at comScore Inc., an Internet analytics company that covers major online retailers like eBay and Amazon.com.
“You just have to recognize that the Internet is so important. Even if (sales) don't convert, it's crucial to the process,” Lipsman said.
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