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Showrooming and Product Customization

January 25, 2012


Radio and television personality Clark Howard writes, “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 it name from the fact that consumers are using brick-and-mortar stores as showrooms for products they eventually buy online. Howard explains:

“A recent Codex Group survey found that roughly four in 10 book buyers will go to a store and thumb through a book, decide they like it and then buy it cheaper on Amazon, according to what I read in The New York Times. But that trend has dangerous consequences for retailers of all kinds.”

Howard notes that new technology is making it easier to comparison shop and turn traditional retail stores into showrooms. He explains:

“I have an app on my smartphone called ShopSavvy that allows me to scan a bar code at a store and instantly get a list of retailers both online and local offering the same item for a cheaper price. If you want to check it out, go to Market.Android.com and search keyword ‘shopsavvy.'”

Obviously, retail stores are not happy with this trend, or with people who recommend it. Howard reports that on his “Clark Stinks” online message board, he recently heard from a female store owner who called him a freeloader and expressed a great deal of anger about showrooming. “And you know what,” Howard writes. “She’s right.” He explains:

“She has the cost of overhead and paying employees and can’t compete with a low-overhead retailer. It’s a very valid point. Will there be showrooms in the future, or will they go bust because everybody is showrooming? For example, Best Buy was expected to be king of the world when Circuit City collapsed. But it didn’t work out that way at all. In fact, Best Buy has had to morph its business to avoid dying a showroomer’s death.”

Does anyone really think that the death of traditional brick-and-mortar stores is a good thing? Local businesses provide jobs and bring in tax revenue that is lost through online sales. Money spent online doesn’t generally stay in the community. Little league teams and charities that rely on local business support also suffer when local businesses fold. When mega-malls were first developed, people lamented the fact that traditional downtown areas were turned into ghost towns. Today, many malls are suffering that same fate. Showrooming is an even greater threat to traditional stores than were the megamalls. Howard continues:

“If you own your business, people are showrooming. You need a compelling strategy for your business that when those customers come in, they will buy from you even if your price is higher than the low-overhead online seller.”

That is easy advice to give, but such a strategy is not easy to develop. Pleas to support local businesses continue to fall on deaf ears. Howard doesn’t offer any strategies that could be used. The first major retailer to strike a blow against showrooming is Target. [“Showdown Over ‘Showrooming’,” by Ann Zimmerman, Wall Street Journal, 23 January 2012] Zimmerman reports:

“Target Corp. is tired of being used. In one of the starkest signs yet that chain stores fear a new twist in shopping, Target is asking suppliers for help in thwarting ‘showrooming’—that is, when shoppers come into a store to see a product in person, only to buy it from a rival online, frequently at a lower price. … In an urgent letter to vendors, the Minneapolis-based chain suggested that suppliers 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.”

Targets plea to its suppliers adds a new twist to product customization and will inevitably add to supply chain complexity. In a previous post [Customization and the Supply Chain], I wrote:

“Trevor Miles asserts that supply chain portfolio complexity is increasing “due to mass customization and shortening product life cycles.” [“Visibility, the antidote to supply chain opacity,” The 21st Century Supply Chain, 2 May 2011]. Analysts at McKinsey and Company claim, “Executives expect that the most powerful effects on their companies will be increased innovation, greater consumer awareness and knowledge, and increased product and service customization.” [“Five forces reshaping the global economy: McKinsey Global Survey results,” McKinsey Quarterly, May 2010]. Researchers from Supply Chain Digest‘s research organization, Chief Supply Chain Officer (CSCO) Insights, insist that “‘build to stock’ will ultimately give way to ‘build or customize to demand'” in most industry sectors [“Building Sense and Respond Supply Chain Networks,” by Editorial Staff, Supply Chain Digest, 17 June 2010].”

While most those analysts had consumers in mind when they discussed product customization, Target offers one of the first strategies that could put a dent in the showrooming trend — customizing products for specific retailers. To make this strategy work, retailers and suppliers will have to collaborate even more closely than they have in the past. That is probably a good thing. On the other hand, having to create customized products for various channels of commerce could strain some relations. Zimmerman continues:

“Where special products aren’t possible, Target asked the suppliers to help it match rivals’ prices. It also said it might create a subscription service that would give shoppers a discount on regularly purchased merchandise. ‘What we aren’t willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands,’ according to the letter, which was signed by Target Chief Executive Gregg Steinhafel and Kathee Tesija, Target’s executive vice president of merchandising.”

Target surely realizes that it is asking a lot from suppliers. For their part, suppliers should take this opportunity to open a dialog about things they would like to see retailers change in a quid pro quo effort to combat showrooming. Frank and open discussions could usher in a new era of supplier/retailer collaboration. Zimmerman continues:

“Showrooming is an increasing problem for chains ranging from Best Buy Co. to Barnes & Noble Inc., at the same time that it’s a boon for Amazon.com Inc. and other online retailers. This year store sales overall edged up 4.1% during the holiday shopping season, while online sales jumped 15%. And while online sales represent only 8% of total sales, that is up from just 2% in 2000. Other retailers also are likely to take steps similar to Target’s plan, according to Deborah Weinswig, Citigroup retail analyst, who … said [Target’s letter] was likely to have gone to suppliers of consumer electronics, health and beauty products and food.”

Zimmerman claims that “vendors are likely to have little choice but to play ball with Target because of its clout as the second-largest discount chain.” On the other hand, Target only makes money if it has products to sell. In this situation, neither the vendor nor the retailer holds all the cards. Zimmerman reports that she had a difficult time determining exactly which of Target’s vendors received the letter. “Major suppliers, including Kraft Inc., TV maker Vizio and Procter & Gamble Inc., either wouldn’t confirm they received the letter or didn’t return calls seeking comment,” she writes. She continues:

“Target declined to comment other than to issue a statement saying that it ‘has long prided itself on having truly collaborative vendor partnerships and we continually work with our vendors to remain competitive in the ever-evolving retail environment.’ Some analysts said Target’s new tactics are unlikely to reverse the showrooming trend, because they fail to address the root problems traditional retailers face. Online-only retailers have significantly lower labor costs and, at least, for the time being don’t collect sales tax in most states.”

Although there will be a roar from the madding crowd if governments try to collect taxes for online purchases, I suspect that day will eventually come. It seems like a small price to pay to help keep local businesses profitable and available. I don’t really believe that people want to see empty malls and ghostly main streets, but that is vision of the future that is most likely to unfold if a successfully strategy to counter showrooming is not found. The more difficult nut to crack will be offsetting overhead costs that are borne by online merchants. Zimmerman continues:

“More important, the growing competition from Amazon is based on a different business model entirely: Amazon can sell products so cheaply because it uses its other profitable units—such as cloud data storage and fees it charges others to sell on its website — to subsidize the rest of its business. ‘The traditional retailers are still doing business the old way while Amazon has reinvented the model,’ says Sucharita Mulpuru, retail analyst at Forrester Research. ‘Wal-Mart and Target are willing to sell a few things at a loss. Amazon’s whole business is a loss leader.'”

The bottom line is that no single strategy is likely to emerge that, if followed, will save traditional retailers from the onslaught of online merchants. Offering customized products (i.e., slightly different merchandise than can be found online) is only part of the solution. Zimmerman continues:

“Consumer preferences are also moving to online. ‘That is where we’re heading,’ said Adrianne Shapira, retail analyst at Goldman Sachs. ‘You can try and dance around it, but it’s a fact.’ Retailers like Target and industry giant Wal-Mart Stores Inc. have a lot of catching up to do, as analysts estimate their websites account for only 1% to 2% of their annual sales. Target had a tough Christmas season, with sales at stores open at least a year rising just 1.7%, about half of what the company expected. … This fall Target relaunched and upgraded its website, which had been operated by Amazon for the last decade. But the site crashed several times, most notably when shoppers rushed to buy a special line of items made by Italian fashion house Missoni.”

Will Target be successful in getting suppliers to work it to develop a anti-showrooming strategy? Zimmerman believes there is a chance. She writes:

“Target has a long tradition of getting suppliers to provide exclusive products. It has teamed up for years with fashion designers to offer time-limited discount clothing collections, and it recently announced it will open a series of temporary boutiques featuring clothes, food and home furnishings from popular regional stores. These programs set Target apart from less fashionable rivals such as Wal-Mart, but ‘they are completely immaterial’ to the company’s bottom line, said Colin McGranahan, retail analyst at Sanford C. Bernstein.”

Traditional brick-and-mortar stores still appeal to people who want instant gratification from making a purchase. Unfortunately, people are getting used to waiting or paying a premium for overnight shipping. This storyline is just beginning and it will be a story worth following.

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