This Retailer Will Survive the E-Commerce Threat

Competing with online competitors is no different from that of fighting brick & mortar peers. You either differentiate your products or sell the same merchandise at lower cost. Pier 1 has chosen the former as an effective strategy of fending off online threats.

Mar 6, 2014 at 2:59PM

Source: Pier 1

Brick and mortar retailers currently face stiff competition from their online counterparts which have the edge in terms of cost efficiency since they don't have a physical presence. They also have to deal with consumers who are increasingly "window shopping" at physical retailers to find out the latest trends and newest products, but making their actual purchases online retailers where prices are competitive. Pier 1 Imports (NYSE:PIR), a specialty retailer of imported decorative home furnishings and gifts, is less susceptible to such threats due to its unique products and evolution into a multi-channel retailer.

Unique merchandise
Winning the hearts and minds of consumers is about offering them choices (or the lack thereof). About 95% of Pier 1's products are exclusive and aren't available at any of its online or offline competitors. In other words, it's no longer an issue of price or distribution channel (online versus offline) when consumers can't buy the products they like elsewhere.

Pier 1 typically imports its products from foreign suppliers who hand craft their merchandise in small factories and cottage industries. Interestingly, it is precisely because these decorative home furnishings are handmade that they have an edge in terms of uniqueness over mass-produced items made in factories. Handmade products have little or no technology content, but they are largely the fruits of the creator's creative input; this makes imitation more difficult.

While a few retailers also differentiate themselves based on their unique merchandising strategy, Pier 1 stands out for its high revenue contribution from exclusive products and the fact that handmade products are tougher to copy and replicate on a larger scale. Pier 1's only risk lies with the fact that it is heavily reliant on its suppliers and their agents.

In contrast, specialty retailer The Container Store Group (NYSE:TCS) receives close to a quarter of its sales from storage and organization products manufactured by its wholly owned Swedish subsidiary Elfa. Elfa products aren't only exclusive to The Container Store, they are also its highest margin products. For example, products produced by Elfa's Custom Design Center boast an average ticket size 10 times that of The Container Store's average ticket size across its entire product portfolio. Including Elfa, more than 50% of its sales are generated from exclusive merchandise, giving it a distinct competitive advantage similar to Pier 1.

In Pier 1's case, it mitigates supplier risk by diversifying its sourcing among various vendors from different countries. Except for China, products sourced from other countries account for less than 15% of Pier 1's sales. Pier 1 also has long-standing relationships with many of its suppliers, having opened its first store in 1962.

Beating online retailers at their own game
If you can't beat them, join them. Pier 1 obviously believes in that, having launched its e-commerce website in July 2012. Looking ahead, it has set a target of deriving a minimum 10% of its sales online by the end of 2016. There are a few differentiating factors that will likely make Pier 1's e-commerce efforts successful in five years' time.

Firstly, there is a strong alignment of interests between its brick & mortar and online businesses. Every physical store will be credited with the online sales generated within their trade area based on postal codes. In this way, store managers will be motivated to encourage customers to buy online.

Secondly, most online stores fail because they don't stock as many SKUs as their physical stores. Pier 1 will make sure that all of its products that can be bought in stores are also available online. In fact, the number of SKUs online will exceed store SKUs by 2016. This goes back to the point about uniqueness: consumers will only shift their buying behavior online if the products in the online stores are either cheaper or differentiated.   

Source: Pier 1

Thirdly, Pier 1 also has the potential to expand into new product categories online. This will help it to reach its 10% goal faster. Due to space constraints, Pier 1 isn't able to showcase all its merchandise in its stores (especially the bulky items.) With its e-commerce website, however, Pier 1 isn't constrained by real estate limitations anymore. For example, Pier 1 introduced bedding products as a pure online offering in March last year.

Another brick & mortar retailer that has tackled the e-commerce threat head-on, albeit in a different way, is Target (NYSE:TGT). While Pier 1 is competing with online retailers on product uniqueness, Target has implemented online price matching to fight the low prices offered by other e-commerce players. Target will match the prices of both online and offline competitors, including the websites of Amazon, Wal-Mart and Best Buy, if customers find anything the bought was cheaper anywhere else within seven days of purchase. As a result, Target customers will be assured that they are already getting the best deal shopping at Target stores.

Foolish final thoughts
Pier 1 has managed to fend off threats from online competitors by stocking exclusive merchandise and expanding its online capabilities as well. In addition, I am confident that Pier 1's evolution into a full-fledged multi-channel retailer by 2016 will put in a good position to compete even more effectively in the competitive retail market.

Is Pier 1 the Fool's favorite stock?
In my opinion, a good retailer stock must be able to withstand online competition like Pier 1. The Motley Fool has its own top picks. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends The Container Store Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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