New Directions for Retailing, Part 1

Stephen DeAngelis

August 27, 2012

You only need to look at empty storefronts in some malls to know that brick-and-mortar retailers have been going through hard times. The main contributors to these hard times have been the economic downturn and the rise of eCommerce. In this two-part series, I’ll look at some tactics that brick-and-mortar retailers are using to meet the latter challenge.

Radio and television personality Clark Howard highlighted one aspect of the eCommerce challenge faced by traditional retailers this way: “A new trend called ‘showrooming’ can hurt brick-and-mortar retailers in an age when smartphones and other mobile devices allow anyone to comparison shop prices for anything anywhere at any time.” [“‘Showrooming’ helps buyers, hurts retailers,” Dayton Daily News, 9 January 2012] The trend gets its name from the fact that consumers are using brick-and-mortar stores as showrooms for products they eventually buy online. To counter showrooming, Target asked its suppliers last January to “create special products that would set it apart from competitors and shield it from the price comparisons that have become so easy for shoppers to perform on their computers and smartphones.” [“Showdown Over ‘Showrooming’,” by Ann Zimmerman, Wall Street Journal, 23 January 2012] Target’s battle against showrooming continued when it announced that it would no longer sell Amazon’s Kindle. [“Target, Unhappy With Being an Amazon Showroom, Will Stop Selling Kindles,” by Stephanie Clifford and Julie Bosman, New York Times, 2 May 2012]

Many large retailers are also supportive of state government efforts to collect sales taxes for online purchases since it will help level the playing field. Earlier this year, Declan McCullagh reported, “An alliance of state and federal politicians, with the assistance of deep-pocketed big-box retailers, is hoping to lighten your wallet by levying new Internet sales taxes. Their plan: to convince the U.S. Congress to approve a law that would allow states to force Amazon.com, Overstock.com, Blue Nile, and other online-only retailers to collect sales taxes from out-of-state customers.” State politicians have different reasons for wanting sales taxes collected for online purchases. [“Politicians, retailers push for new Internet sales taxes,” CNET, 17 April 2012] McCullagh notes that those supporting such efforts “claim that online retailers that don’t always collect taxes are unreasonably depriving states of revenue, and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.” As you can imagine, such efforts are highly controversial. McCullagh explains why federal politicians have to get involved in this effort:

“A 1992 Supreme Court ruling says that, in general, retailers currently can’t be forced to collect sales tax on out-of-state shipments unless they have offices in those states. And with something like 7,500 taxing jurisdictions, each with its own rules and ability to conduct audits, compliance with each is is not a trivial task.
The Quill v. North Dakota ruling came out the way it did in part because tax codes tend to be complex and vary among states and localities, with bewilderingly different tax rates associated with the same kind of product. In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not. Technically, of course, Americans in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15–the concept is known as a ‘use tax.’ But state tax collectors have long complained that in practice, that just doesn’t happen, and that the money has remained in taxpayers’ pocketbooks.”

The movement to collect online sales taxes recently gained momentum when Republican governors dropped their opposition to the idea. [“Tax Break Nears End For Online Shoppers,” by Monica Langley, Wall Street Journal, 16 July 2012] Langley reports:

“The move toward taxing online sales has broad implications. Online shopping will become more expensive for consumers. Brick-and-mortar retailers won’t have the price disadvantage they now have compared with online sellers. Strapped states suddenly could be flush with $23 billion in new annual revenue, according to the National Conference of State Legislatures.”

Another recent shot fired in the war against showrooming was the announcement by more than a dozen large retailers that they are establishing a joint venture called the Merchant Customer Exchange (MCX) to develop a mobile payment system for shoppers. MCX will compete head-to-head with systems like Google Wallet, Isis, PayPal, and Square. Back in January, Adam Blair reported that PayPal was testing a system with Home Depot and concluded, “If PayPal continues to move aggressively into the physical retail space, many more retailers could take advantage of their payment infrastructure to influence shopper behavior in their stores. It would be another weapon in retailers’ ongoing efforts to keep from turning into ‘showrooms’ for their lower-priced competitors.” [“Is PayPal’s Home Depot Pilot a Game-Changer? Retail Info Systems News, 24 January 2012] In response to MCX, PayPal has continued to move aggressively. Last week PayPal announced a deal with Discover Financial Services “that will allow shoppers to tap into their PayPal accounts.” [“PayPal, Discover Team Up on Mobile Payments,” by Andrew R. Johnson and Robin Sidel, Wall Street Journal, 22 August 2012] Johnson and Sidel report:

“The move pits PayPal, which has built a booming business over the past decade largely by facilitating online payments for consumers and small businesses, against the three giants of the credit-card industry. The deal is the latest twist in the payments industry, where companies are scrambling to find new ways to make money by devising a more-convenient alternative to the cash and checks on which many consumers depend. Banks and payment companies are already pouring billions of dollars into technology that transforms the mobile phone into a payment device. … Customers will be able to access their PayPal accounts at the cash register by entering a mobile-phone number and personal identification number on the retailer’s payment terminal rather than swiping a card or using cash. PayPal also is providing customers with physical cards that can be used at merchants that don’t have PIN-enabled payment terminals. Those transactions will still tap into the customer’s PayPal account.”

To read more about what’s happening in the mobile payment sector, read my post entitled Interest in Mobile Payments Increasing.

Another tool in the kit that retailers are going to be able to use to entice shoppers into their stores involves augmented reality. In a post entitled Beyond QR Codes: Augmented Reality Shopping, I noted that IBM was testing an augmented reality application for consumers that would enhance the in-store shopping experience. [“IBM Tests ‘Augmented Reality’ Shopper App,” by Jack Neff, Advertising Age, 2 July 2012] Along those same lines, Nola Donato, a scientist at Intel, has designed a high-tech mirror (called Magic Mirror) “that shows how clothes look on a consumer who simply stands in front of an LCD monitor.” [“Why shopping will never be the same,” by Jon Swartz, USA Today, 9 August 2012] Swartz continues:

“Parametric technology simulates body type and how fabrics fit — based on weight, height and measurements. Think of it as a digital fitting room. The concept is three to five years from fruition but could open the door for Intel in the retail market.”

Unfortunately, Swartz reports that analysts are convinced that the days of large brick-and-mortar stores are numbered. He writes:

“The convergence of smartphone technology, social-media data and futuristic technology such as 3-D printers is changing the face of retail in a way that experts across the industry say will upend the bricks-and-mortar model in a matter of a few years. ‘The next five years will bring more change to retail than the last 100 years,’ says Cyriac Roeding, CEO of Shopkick, a location-based shopping app available at Macy’s, Target and other top retailers. Within 10 years, retail as we know it will be unrecognizable, says Kevin Sterneckert, a Gartner analyst who follows retail technology. Big-box stores such as Office Depot, Old Navy and Best Buy will shrink to become test centers for online purchases. Retail stores will be there for a ‘touch and feel’ experience only, with no actual sales. Stores won’t stock any merchandise; it’ll be shipped to you. This will help them stay competitive with online-only retailers, Sterneckert says.”

Tomorrow I will continue this discussion by looking at other ways that technology is changing the face of retail.