Traditional Retailers Catch up to Online-Only Names

I recently shared an interesting article from Integrated Solutions for Retailers about how online retailers are realizing the benefits of having a brick and mortar presence. Now I’m pleased to share an article from CNBC about how brick-and-mortar retailers are beginning to capitalize on their robust physical footprints. It’s also nice to see one of our customers – Restoration Hardware – leading the pack.

Check out the full article.

The tide is starting to turn for bricks-and-mortar retailers.

Long the digital laggard to online-only shops, traditional stores are beginning to capitalize on their robust physical footprints—namely, by using them as souped-up distribution networks—as they continue to make their Web and mobile operations easier for shoppers to use.

Pedestrians pass a Restoration Hardware store in New York.

"Our analysis indicates traditional retailers' supply chain costs are roughly three times lower than [online] pure plays when leveraging store fulfillment capabilities," Cowen & Co. analyst Oliver Chen wrote in a note to investors Thursday.

In contrast to physical retailers, who can utilize their expansive store networks as points of distribution, online-only companies have to rely on a smaller system of warehouses that tend to be located outside of high-population areas, where the land is cheaper. Even the leader in online commerce, Amazon, has fulfillment centers only in roughly a dozen states.

On top of this advantage, Chen said traditional retailers can ship multiple items at a time to stores, as opposed to one-off packages that go directly to consumers. They also offers shoppers the option to pick up items in store, which removes incremental shipping costs. And again because of their store footrprints, bricks-and-mortar retailers have more opportunities to ship next-day packages on the ground, which is on average three to four times cheaper than by air.

"Beyond the profitability advantage, the convenience of buy-online, pickup in store should continue to gain traction with consumers, driven by mobile providing stores an advantage in years to come," Chen wrote.

Online-only retailers sill have their own advantages, of course. They aren't saddled with the expenses associated with running a physical store, including rent and higher labor costs, for example.

Who's winning online?

Though major mass retailers including Target and Wal-Mart are posting robust double-digit growth in their online sales, they're doing so from a low base. And even though Wal-Mart's online sales totaled $12 billion last year, that only accounted for 2.5 percent of overall revenues, Chen said. Similarly, Target's estimated $2 billion in online sales accounts for about 3 percent of total revenues.

Chen said the bricks-and-mortar retailers that are leading online tend to be those that sell items with a bigger price tag; appeal to higher-income shoppers; have integrated their mobile, Web and store operations; own their own brands and appeal to millennials.

Upscale home furnishings store Restoration Hardware, which features its products in large design galleries that many shoppers then purchase from their homes, leads the competition by a wide margin.

To see how other retailers fared, check out the following chart. (It's arranged by category: Luxury and accessories names are at top; followed by specialty and apparel stores; and then mass and department stores.)

E-commerce Penetration of Total Sales

ecommerce-penetration-of-total-sales