Retailers that limit themselves to selling online are not only limiting their opportunities for growth, but may be spending more than they can afford to acquire new customers.
That was the theme echoed repeatedly at this year's National Retail Federation expo, anyway. Most industry veterans and leaders at the event say the online marketplace has become so crowded, and so expensive to operate within, that brick-and-mortar stores have become a more cost-effective means of customer acquisition. The trick? Stores can't just be what they were in the 1990s and early 2000s -- a sea of lifeless racks and shelves.
It's an epiphany that some say could spell trouble for e-commerce giant Amazon.com (AMZN -0.16%) and its smaller rivals, though major online advertising platforms like Facebook are also on the wrong side of the shift.
More than a store
Several attendees at the National Retail Federation conference discussed it, but none hit the nail on the head as well as Retail Prophet founder Doug Stephens. He commented: "Buying advertising doesn't work anymore. Stores are not about the distribution of products anymore, they're about the acquisition of customers."
He's right, even if some of the most dominant online merchants and their investors don't want to acknowledge it. The cost of running an ad on Facebook nearly doubled between the end of 2018 and late 2019, with half of the social networking giant's advertising customers now worried they may be priced out of this all-important marketing channel.
But even the retailers that can afford to run ads on Facebook and its close competitor, Alphabet subsidiary Google, are quickly learning the power of a traditional physical presence that's given a modern, digital tweak.
Take Nordstrom (JWN 0.77%), for instance. It's arguably the quintessential old-school department-store name, yet it's thriving in an environment where most department stores simply fail to connect with consumers.
Yes, Nordstrom understands the power of entertainment and amenities. Stores in its "Local" program, with food, special events, and personal services, see consumers spend more than twice as much per shopping trip. But Nordstrom also understands that an e-commerce platform dovetails with brick-and-mortar operations. Online shopping can be a marketing tool that drives additional purchases once a consumer sets foot into a store to pick up an online purchase, so the retailer makes a point of spurring those add-on purchases with service and selection.
And Nordstrom isn't alone. Walmart offers a myriad of "pick up today" options at Walmart.com, which pulls patrons into its stores. Some lululemon athletica stores now offer yoga classes, and operate restaurants. Indeed, many retailers are quickly learning what Matt Alexander, CEO of retailer Neighborhood Goods, knows about marketing in the modern era -- "physical retail is more effective than a billboard."
The change works against online advertising platforms, but also leaves Amazon in the lurch.
Amazon is in the crosshairs
To be fair, not every store is equipped to push back against the e-commerce tide that rolled in at the beginning of this century. Enough of them are ready, however, to take a collective swipe at Amazon, which currently has a nearly 40% share of the U.S. online shopping market.
Ron Johnson, former Apple Store chief as well as former CEO of J.C. Penney, explains that "The best retailers have innovated, so that the physical store has the upper hand again." That's bad news for Amazon.com. He goes on to say that "I think the next decade is tough for Amazon, they are on their heels," acknowledging just how good some brick-and-mortar players have gotten at their craft.
Take that with a grain of salt. While Johnson is credited for making Apple's retail stores the success they are, Apple's products weren't exactly a tough sell. Johnson is also cited as the CEO who drove J.C. Penney to the brink of collapse, where the chain still finds itself.
Yet Johnson's spotted past doesn't mean he's wrong. Amazon.com won market share because its low prices on consumer goods and sheer convenience were more of a draw than the brick-and-mortar industry's unenthused service. That's changing now, partly by necessity -- it's cheaper to acquire customers with a store -- and partly for strategic reasons. As it turns out, physical stores induce online sales. Google's research indicates 61% of shoppers would prefer to buy from a company with a brick-and-mortar presence, even if those consumers choose to shop online. Online retailers, likewise, report a strong increase in web traffic from an area once a physical store has been established there.
The depth of the threat to Amazon (and to a lesser degree Facebook and Google) is still a bit fuzzy. Retailers of all ilks increasingly believe they can compete with online giants, but some of them are still learning how they can best do so. It's a learning curve that could take years for the industry to fully traverse.
Nevertheless, it's a paradigm shift that will undoubtedly chip away at Amazon's easy dominance of the e-commerce market. To the extent that Amazon stock is priced to reflect strong long-term growth, retailers' new understanding of their environment at least dampens the bullish case.