the Insiders


November 8, 2011 4:26 PM


The Online Tipping Point

This week, retailers begin their third-quarter dance with Wall Street....

This week, retailers begin their third-quarter dance with Wall Street.

It's a highly scripted step that starts with a press release, pivots to a conference call and ends with a twirl of analyst updates and news stories. Sales and earnings will be discussed and, if they're about as expected, forgotten entirely. Somewhat more importantly, trends for the holiday season and the fourth-quarter will be laid out and dissected mercilessly.

The immediate prospects of a company, as seen in the outlook, will more likely than not drive its stock.

But the good stuff, the details about burgeoning Web businesses that would speak to the broader evolution of retail and companies' longer-term prospects, will no doubt be glossed over, again.

So far, companies have gotten away with few Web statistics beyond the often eye-popping overall sales growth of 40 percent or more, even though the size and shape of retailers' budding online businesses and how they interact with their stores has become increasingly important. A recent paper from Harvard Business School professor Rajiv Lal and lecturer Jose Alvarez put the online revolution in stark terms, noting that the "category killers" now fiercely struggling against online competitors are only the first retailers to feel the pinch.

Chains such as Barnes & Noble, Best Buy and Staples took over whole segments of retail with sharp pricing, big stores and laser focus.

"Today, however, these same characteristics may prove to be the undoing of the big-box stores," Lal and Alvarez wrote. "We believe that retailing generally is at a tipping point, with category killers being the first significant casualties of the (r)evolution that is occurring. Retail store asset productivity has been in decline since the start of the recession in 2007, and we believe this trend will accelerate over the coming years."

Lal and Alvarez paint a picture of big-box stores on a slippery slope of sorts, with the economics of many stores derailing if the Web makes 5 to 10 percent of their floor space unproductive. "As entire sections of these stores die from online competition, category killers are being pressed to come up with solutions to keep their overall model afloat," the pair noted.

And they said the pressure from online players will only increase as younger shoppers who are more comfortable with the Web come into their own.

Lal and Alvarez prodded retailers to think about what needs cannot be satisfied online and how stores can offer a unique shopping experience. They suggest that retailers can face the future by creating a showroom experience, renting out space in their stores, developing service expertise à la Best Buy's Geek Squad and focusing on smaller, more flexible stores.

Wall Street is largely interested in the holiday season and early next year, which could be characterized by weaker trends despite the mostly upbeat vibe headed into Black Friday. A boost from the still-small online businesses will be welcomed and expected.

The future, though, is not going to grow out of the holiday sales trends. It's taking root in how these companies approach their digital businesses.

That's what I want to hear about.
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