Brick and Mortars (Still) Can't Beat the Web on Price

 

Change is an arduous process. Whenever I have to make a big change in my life, I tend to go through three phases. First, I simply wish ("somehow it will happen"). When that doesn't work, I'll look for a quick Hail Mary fix. (Sadly, those specially formulated seaweed pills didn't help me lose 1 to 2 pounds a day). Finally, still stuck in the same situation, I realize that I have to confront the challenge and strategize to make things happen.

Brick and mortar stores have been muddling through similar stages in dealing with the emergence of low-priced web retailers. The facts are incontrovertible: due to lower costs, web retailers can profitably sell products more cheaply than their physical store — and with a few clicks, it's often more convenient for customers to buy online.

When first challenged, brick and mortar stores responded with a nebulous rebuttal of "we'll offer better service" as a counterweight to their price premiums. That hasn't worked very well. Next some retailers have tried a Hail Mary tactic: "We'll match the best price you can find on the Internet." The logic here is that without the price-match guarantee, the retailer was going to lose the sale, so sales gained by this policy are incremental revenue (which results in gross profit as long as the price at least covers merchandise cost). The downside is customers become trained to play the game of checking prices on the Internet first, which has negative long term effects — you can't make money when more and more of your customers start paying incremental prices.

The allure of cheap web prices has recently blossomed due to mobile phone apps that direct users to a lower price on the same product, generally at an Internet retailer. Many of these online retailers offer free shipping and, for the moment at least, many don't charge sales tax (which at 9.25% in Chicago, for instance, adds up). These apps encourage "showrooming," the practice of customers checking out merchandise in physical stores and then purchasing at a discount on the web.

Brick and mortar retailers need to realize that selling the same products as established web retailers do, even with price match policies in place, is not a viable long term growth strategy. To prosper, physical stores have to change their merchandise selection. The following four categories of merchandise create reasons — hence, value — for customers to visit stores:

Well-branded, highly differentiated, and exclusive: This was a centerpiece of Ron Johnson's plan for J.C. Penney — a strategy that I argued was brilliant but ultimately derailed due to other factors.

Non-exclusive with a twist of differentiation: Adding some type of uniqueness — even to common products — creates value and minimizes price comparisons. Target tried this last year, but no reports have since surfaced regarding its success.

Non-exclusive and non-differentiated but at a discount: With showrooming, manufacturers benefit from consumers being able to see and touch their products in physical stores. I've argued that stores should demand a physical store equalizer discount from manufacturers so at the very least, they can profitably compete on price against web retailers.

Non-exclusive, non-differentiated, no discount, but advantageous to buy at a store: Some products are easier to purchase in stores. Fashionable clothes, for instance, benefit from being tried on prior to purchase. The lower the product price, the less likely the web vs. store price differential will result in showrooming. "It's only a 10% difference" is more manageable on a $100 product than, say, a $1,000 one.

The optimal merchandise assortment is a mix of the above products as well as generic items that are also available at Internet retailers. And counter-intuitively, these generic products can be priced higher than what web rivals are charging. How is this possible? First, a large segment of customers simply prefer to shop in stores. As gas stations do, retailers can charge more for "full serve." Just as important, even discount-minded customers drawn to stores for unique products may out of convenience pick-up a few premium-priced generic products. After all, how many times have you visited a grocery store to purchase loss leaders but ended up loading your cart with products that aren't deals?

The brick and mortar vs. web battle has long been portrayed as one based on price. Viewed through this lens, physical stores simply can't win — it's time to forget about competing on price. Instead, the mantra for brick and mortar success should be "creating and capitalizing on value." Stores should offer products that provide reasons for customers to visit stores, leverage this differentiation to sell additional generic products, and focus on customers who prefer shopping in stores.

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