Three Ways that Retailers Need to Differentiate Themselves

The United States has significantly more retail space per capita than most other countries. As such, the retail industry has become over-saturated, or "over-retailed," particularly as online shopping continues to gain momentum and popularity.

Retailers need to adapt and continuously improve in three areas to experience growth: improved online shopping experience, international expansion, and implementation of new technologies.

Mobility, connectivity, and the online shopping experience
Mobility and connected devices will continue to drive the growth of online sales. Consumers can make purchases literally anywhere, including inside a store after sampling a product firsthand and quickly checking competitors' pricing for the same product.

Consumers also expect a visit to a local brick and mortar to offer the same shopping experience as they would receive online. This would include access to identical inventory and promotions, as well as a complete integration of the two businesses (for example, an item purchased online can easily be returned at a store). This presents a challenge to retailers, forcing them to develop "multichannel" strategies intended to harmonize functions between physical stores and online counterparts.

One company that is perfecting its multichannel approach is Best Buy (NYSE: BBY  ) . The company is making significant progress with its supply chain initiatives, which include more optimized retail and online distribution. Management is in the process of revamping and redesigning the entire store layout and completing the expansion of its online capabilities to the final three of its eight distribution centers.

Best Buy has also rolled out a buy online, pick up in store concept, as well as using its stores as a base to ship products that might not be available at a distribution center. Management is most optimistic about its buy online ship in store concept, and had the following comments during its most recent conference call:

As we mentioned last quarter, there are numerous reasons that we believe this initiative is going to have significant customer experience and financial benefits when rolled out at scale, including, number one, improving our online conversion, which is currently well below many other retailers; number two, more profitably selling returns and clearance inventory that is trapped in our stores; number three, reducing mark down risk on product transitions; number four, improving inventory management by increasing visibility to true multichannel customer demand; and number five, enabling more accurate demand planning.

This initiative has already shown promising results, including a 90 basis point average lift in July comps for the 50 stores involved in the trial. Management is planning to roll out this shopping experience to 200 stores in time for the all-important holiday-shopping season.

Best opportunities for growth are likely to be outside the U.S
Companies like Target (NYSE: TGT  ) offer consumers a broad set of everyday products at low prices. The company has limited growth opportunities within a heavily saturated U.S market with close to 2,000 stores already operating, and plans to open up only 16 new locations across the U.S in 2013.

At the end of the July quarter, the company had successfully launched 68 of the 124 stores it plans to open across Canada. Virtually all of those stores are in former Zellers locations, giving Target easier access to pre-existing infrastructure. The company is anticipating its 2014 capital expenditures in Canada to hit more than $1 billion as the initial roll out costs have already been spent.

Profitability from its Canadian operations are coming in below expectations . However, Target might see profitability in Canada beginning in 2014, according to analysts. This can be expected for a company entering a new market, as it only has had a few short months to optimize the business structure.

The company is also new to the Canadian scene and should roll out extensive marketing campaigns to highlight the daily advantages of its pricing. A study by analysts at Deutsche Bank found that Target holds a tremendous price advantage over Canadian competitor Loblaws, which could indicate that Target has a bright future in Canada.

Technology as a core tool
With fierce competition, effective implementation of technology will be a key driver for retail growth over the coming years as companies strive to differentiate themselves. Starbucks (NASDAQ: SBUX  ) has recently emerged as a champion for combining technology with customer experience, and has made technology a core tool in its efforts to build a better user experience.

The company has created one of the most-used mobile apps (excluding games) that can be used to complete a payment. A customer can download the Starbucks app and load funds onto a virtual card through a credit card or PayPal. The card is scanned at the cash register to complete a purchase in less time than a cash transaction. The company reported that mobile apps have been used in more than 10% of all U.S transactions, and this initiative has shown tremendous potential when it was initially rolled out in the international stage.

The continued widespread usage of the app holds tremendous benefits for not only the consumers, but for management. Increased use opens the door for further enhancements to Starbucks' loyalty program, better tracking of wait times, and ultimately, opportunities to further increase throughput.

Conclusion
Retailers are likely to adapt one or all of these strategies in the coming years. With these changes, investors will need to think about these retailers and the entire industry differently. Traditional metrics such as same-store-sales growth will become harder to track and analyze. Additionally, investors can likely expect market consolidation, which can include mergers and acquisitions as companies will rise or fall with the industry shifts.

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