In a modern fairy tale, the smart little pig would have built his house out of e-commerce, since it’s apparently much stronger than bricks. Brick and mortar retailers like Best Buy, Hhgregg, and Radio Shack are seeing sharp declines in profits as more customers shop online.
Last week, shares of Hhgregg plunged 30 percent when the company had to cut their full year forecast. The news also affected the price of Best Buy shares, whose share price was already down nearly a third from where they were this time last year. Similarly, Radio Shack shares are down almost 60 percent since the start of the year.
The trend of customers going to physical stores to look at products but then purchase them online is so prevalent that it has been nicknamed “showrooming.” A ClickIQ survey from February 2012 reported that 45.9 percent of US online shoppers researched products in a store but ultimately bought the item online.
Showrooming trends favor online retailers because they have extremely reduced overhead costs when compared to their brick and mortar counterparts. With fewer employees, reduced inventory requirements, and cheaper utility costs, online retailers are able to offer cheaper prices, more coupons, and greater selection than traditional retailers. Coupled with the fact the many online retailers offer fast or free shipping, it is clear why the online market share has grown from 5 percent to 9 percent in just five years.
“I think Hhgregg results really show that it’s become a difficult environment for traditional consumer electronics retailers,” Morningstar analyst R J Hottovy told Reuters.
“We’ve seen a significant market share shift to Amazon and to a lesser extent companies like Apple, Costco and Wal-Mart; so Best Buy too is facing pressure on a number of fronts.”
Some experts believe talk of the death of brick-and-mortar stores is greatly exaggerated. Similar claims were made about the rise of catalogues, home shopping networks, and in the early days of the internet, but traditional stores have continued to survive. In an unusual reversal of roles, Amazon is looking to open its first brick and mortar store in Seattle.
As the growth of e-commerce continues unabated, many sellers are trying to adapt to the change rather than fight it. For its part, Best Buy is trying to combat its decline by improving customer service and trying to integrate their online and offline stores. Walmart, Target, and Costco are all multi-channel retailers, offering sales through online and traditional stores. Other retailers, like DC Comics and Sony Pictures, have taken another route and allow Amazon to handle large tracts of their online sales.
Hhgregg is hoping to alleviate some of its problem by diversifying the types of products it has in stores. Hhgregg has begun advertising its special on appliances. Consumer electronics like televisions, laptops, and tablets are easy to shop for online and ship to customers at a low cost. Larger goods like appliances are harder to shop for online, as many consumers will want to speak to a sales associate before making a purchase that large, and the size of appliances requires much more expensive shipping.
Times have certainly been difficult for the brick and mortar stores of consumer electronics retailers. The 2009 bankruptcy of Circuit City, which was the second largest electronics dealer when it folded, showed that even established brands must be wary in the new economy. However, the fact that some retailers are surviving and thriving shows that there is still a place for traditional retail, but finding the balance is essential.
Online Sales Hurting Brick and Mortar Stores
Thomas Flexner, global head of real estate at Citigroup Global Markets, talks about the impact of online sales on so-called brick & mortar stores.