Approximately 72% of all showrooming (the act of browsing brick-and-mortar stores in order to purchase the same item online) consumers do are because better prices are available online. Online-only retailers will always have the upper hand in a price war compared to brick-and-mortar retailers because of their lack of high overhead costs. The TJX Companies (NYSE:TJX) and Pier 1 Imports (NYSE:PIR) show the rest of the retail sector how to beat online retailers like Amazon.com (NASDAQ:AMZN) without beating down their own margins in a price war.
Price wars may not be a survival tactic in an Amazon.com world
The first strategy for many brick-and-mortar retailers is to start price wars with online retailers like Amazon.com by price matching. Traditionally, price wars occur between competitors. However, the problem is that Amazon.com is not paying large overhead fees to be at the local shopping center and therefore it is not on the same playing field.
Brick-and-mortar retailer Best Buy has been able to generate more store traffic since implementing its Best Buy Low Price Guarantee. While more store traffic, especially this past Black Friday, might mean more sales, operating margin has taken a hit for the electronic retailer. In its most recent quarter, Best Buy's profit margin was just 0.58%.
Furthermore, price wars among clothing retailers have only increased the promotional environment where everyone eventually loses. Recent earnings from dozens of apparel companies have hinted that the promotional environment has hurt margins and their bottom lines.
T.J. Maxx and Marshalls are not Amazon.com showrooms
TJX Companies, which owns not just T.J. Maxx and Marshalls, but also HomeGoods, Sierra Trading Post, and HomeSense stores, has had an annual comp-store sales decline just once in 36 years. With over 16,000 vendors, TJX Companies is not susceptible to any one vendor impacting the company overall or causing supply chain problems.
Over the past five years, the company's stock has soared over 520% and year-to-date it is up over 45%. Recent earnings showed that the company is still growing with third-quarter net sales increasing 9% to $7.0 billion and net income at $623 million.
During the conference call, CEO Carol Meyrowitz raised full-year guidance based on the company's ability to succeed in all types of economic and retail environments. A big reason why margins also increased this past quarter was occupancy leverage. This means that store space is not being left idle with merchandise that isn't selling.
This is in contrast with other clothing retailers, which has led to the increased promotional environment.
Furthermore, you can't enter a T.J. Maxx or Marshalls and expect to find that same item on Amazon.com. The inventory is rotated out quickly. Also, because the business involves taking clearance merchandise off the hands of other retailers, customers choose not to take the chance of leaving the store without purchasing the items they want.
Pier 1 Imports has unique written all over it
With a unique selection of over 6,000 items that constantly changes throughout the year, Pier 1 Imports may have one of the most unique inventories in all of retail. The stock is up only 8% YTD, but up over 6,000% since its near-bankruptcy decline in late 2008 and early 2009.
Recent third-quarter earnings revealed that total sales were up 9.6% as comp sales also increased 6.9%. Net income of $26.8 million also beat the $23.7 million in the same quarter a year ago.
The biggest reason for the comeback is CEO Alex Smith, who joined the company in 2007. During a time when many retailers did indeed go bankrupt, Pier 1 Imports just went back to focusing on what made it a unique company -- its one-of-a-kind merchandise.
Instead of trying to compete with online merchants like Amazon.com directly in price wars, Alex Smith hired more buyers to focus on making its inventory distinct. Basically you can't showroom a Pier 1 Imports store because you can't find the same items anywhere else. Not every store carries the same merchandise either and this only adds to the uniqueness of each Pier 1 Imports location.
Having a business model that isn't susceptible to the promotional environment like TJX Companies or unique products that frequently rotate like Pier 1 Imports isn't possible for most retailers.
In that case, it is important for brick-and-mortar retailers to focus on realistic areas of improvement within their stores. First, you can never have too much customer service. Secondly, although Amazon.com continues to improve delivery time, nothing beats the instant delivery that occurs when a customer walks into a brick-and-mortar store and makes a purchase. In the end, Amazon.com is still mainly a distribution business that is far from invincible.
Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.