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The Evolution of Retail

Retail is not what it used to be. Hanging out at the mall was once the cool thing to do; now people seek convenience and turn to online shopping instead. This change in customer attitude forces retailers to evolve--and in an industry where a 5% decline in revenue can lead to a 50% to 90% drop in net profit, retailers who don't evolve, die.

Amazon takes the next evolutionary step
Amazon  (NASDAQ: AMZN  ) (NASDAQ: AMZN  ) (NASDAQ: AMZN  )  has focused on its infrastructure at the cost of profit. It developed an extensive system of over 40 warehouses, manned by both humans and now robots, thanks to Amazon's acquisition of robotics maker Kiva. After initial losses, it entered the black in 2002 and has been profitable ever since.

Amazon's investment not only built the business, but it also laid the groundwork for the future of retail. It discovered how to efficiently and conveniently show and send customers their goods. For example, its logistics system allows it to send packages at an average cost of $3 to $4 apiece. This is about half of what Wal-Mart (NYSE: WMT  ) (NYSE: WMT  ) (NYSE: WMT  ) must pay per parcel.

But what is truly impressive is Amazon's $61.1 billion in sales, representing over 26% of all online sales last year. What's more, analysts predict that number will grow to $74.4 billion in 2013. Because of Amazon's success, other retailers must evolve.

Macy's evolves with customer demands 
Macy's (NYSE: M  ) (NYSE: M  ) (NYSE: M  )  has established itself as a household name selling clothes, household goods, make-up, and much more. Macy's is currently upgrading its stature by implementing its own unique approach for the modern day retail environment.

Last fall, the department store announced it would revamp its stores.  Since then, Macy's has added interactive digital displays in many stores to enhance a customers' understanding of Macy's products. With the upgrade, customers can outfit a mannequin with the product in question. The result?  Macy's creates a "stickier" relationship with its customers, one that has evolved into more consultative selling.  In short, Macy's went from only selling products, to allowing customers to interact with those products before purchasing.

The store has also transformed how it distributes products to customers. Instead of shipping online purchases from warehouses, it will distribute an item from a stores overstock. This helps Macy's move merchandise that is not selling. Furthermore, the company ships online purchases to stores for customers who desire that method. Upgrading its stores and distribution channels allows it to meet customer's evolving expectations.

Wal-Mart slowly adapts
Wal-Mart had good intentions of transforming its e-commerce to resemble companies such as Amazon. But, good intentions mean little to the bottom line.

As online sales in the US rose 16% last year to $224.3 billion, Wal-Mart was only able to capture $7.7 billion of that. Its online sales were just 1.7% of its $443.85 billion total last year. To catch up, the company is attempting to copy Amazon.

Wal-Mart plans to build new warehouses specifically for online orders. And, like Macy's, it plans to ship items from excess inventory in its stores. Since Wal-Mart has 4,000 U.S. stores and 158 warehouses, this approach might work, but many analysts suggest this strategy will hurt profitability because it will tie up store employees with online orders.

JCP gets left behind
Billions were spent to update J.C. Penney's  (NYSE: JCP  ) (NYSE: JCP  ) (NYSE: JCP  )  stores. Just this past quarter, J.C. Penney burned through $970 million, most of which was spent on renovations. These changes failed on two levels.

First, management upset loyal customers with the wrong kind of changes. It tried Wal-Mart's "everyday low price" approach, yet its customer base responds to sales and coupons. Second, it hasn't done much to address its e-commerce division.

Department stores must learn how to upgrade their brick and mortar units while improving the online shopping experience. Had J.C. Penney done this, it could have pulled business away from other retailers and eventually decreased some fixed costs in its stores. Instead, it burned through cash for renovations, and sales still continue to decline.

Amazon ushered in the next phase of retail. Now, retailers must find new ways to compete. Stores like Macy's and Wal-Mart are making strides to satisfy evolving customer demands. J.C. Penney's changes have only hurt the business. For all these firms, adaptation is the key to avoiding extinction.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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