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One Retailer Is Well-Prepared for Online and Low-Cost Competition

By Mark Lin – Mar 10, 2014 at 12:50PM

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If you can’t be cheaper, you have to be different. That’s the retail mantra to which Williams-Sonoma adheres closely.

Source: Williams-Sonoma

All retailers face the twin threats of online competitors and low-cost discounters. Williams-Sonoma (WSM 0.04%), a leading home-furnishings retailer, is among those that have a better chance of surviving and even thriving in such difficult times.

Online competition
Unlike some retailers which have been slow to react to the threat from online retailers, Williams-Sonoma has always positioned itself as a multi-channel retailer. In fact, close to half of its revenue derives from its direct-to-consumer business (as opposed to retail), which comprises both e-commerce websites and direct-mail catalogs.

The real competitive advantage of an e-commerce platform lies in the ability to mine customer data and adapt to customers' preferences accordingly. In that aspect, Williams-Sonoma isn't inferior to any of its online or offline peers; it boasts a 50-million strong customer database.

Kroger (KR 0.04%), the largest supermarket chain in the U.S., is among the pioneers in such 'Big Data' efforts. It has the honor of sharing the customer analytics vendor Dunnhumby with Tesco, which is well-known for its customer data collection through its loyalty scheme -- ClubCard. As early as September 2010, more than 90% of Kroger's sales transactions involved the use of its shopper cards and close to 50% of U.S. households were card members.

The proof of the pudding is in the eating. As of the third quarter of fiscal 2013, Kroger had achieved 40 consecutive quarters of positive same-store sales. This consistent sales growth wouldn't have been possible without Kroger's insights into customer behavior.

Similarly, Williams-Sonoma mentioned on its most recent earnings call that it will "identify more highly responsive segments in our database." Going forward, Williams-Sonoma should benefit as it leverages its database for customer acquisition and segmentation.

Source: Williams-Sonoma 

Low-cost competition
In any industry or market, there is always only one company which has the lowest cost structure and the ability to successfully compete on prices. As a result, it would be suicidal for Williams-Sonoma to go down the route of price competition. Instead, Williams-Sonoma has rightly focused on product differentiation.

Firstly, about 85% of Williams-Sonoma's products are exclusive and in-house designs; this ensures that there is minimal merchandise overlap with online shops and low-cost discounters.  In addition, approximately three-quarters of Williams-Sonoma's upholstered furniture is custom-made to customer specifications.

Secondly, Williams-Sonoma manufactures close to 50% of its upholstered furniture in its North Carolina factory. This gives it an edge over peers which also rely on proprietary merchandise to attract customers. While substantially all of Pier 1 Imports' (PIRRQ) products (95%) are exclusive and handcrafted by small factories and cottage industries, it is more reliant on its suppliers than Williams-Sonoma. Pier 1's supplier risk is mitigated to a certain extent by its geographical diversification and long-standing relationships with many of its suppliers.

Furthermore, Williams-Sonoma can deliver new products from its North Carolina manufacturing facility in about three weeks, much faster than the industry standard of about three months.

The results speak for themselves. According to a Citigroup (part of Citi) survey published in September 2013, Williams-Sonoma's premium home-furnishings concept Pottery Barn performed the best among six furniture and home furnishings retailers. Only 17% of customers shopped at Pottery Barn and subsequently bought their products elsewhere, a phenomenon known as showrooming. This was much lower than the 25% average registered by the six retailers. The survey endorsed Williams-Sonoma's success in product exclusiveness and supply chain strength.

Foolish final thoughts
The basic principles for competing in the retail market haven't changed, despite the emergence of online and low-cost competitors in recent years. As long as you provide the best products, available from no-one else, in the shortest time possible, customers will stay. This is exactly what Williams-Sonoma has done.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Williams-Sonoma. The Motley Fool owns shares of Citigroup. 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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