Barry Ritholtz had an interesting post this morning, posing the question of whether Best Buy had simply become Amazon's showroom. This is a topic I've discussed with a number of people in the past 6-12 months - what is the future of brick and mortar retailers in a world driven by ecommerce?
Already today there are a number of product segments where physical stores are irrelevant. Music is the obvious one. It's much easier to discover, explore and purchase music online than offline. And since the primary use of CDs now is to burn them to get music onto your iPhone or iPod, the physical media just becomes an unecessary step.
The same applies to books. A few years ago, I'd wander into a Borders (BORD) or Barnes & Noble (BKS) to flip through books, then once I'd decided which to buy, I'd typically order it from Amazon (AMZN), as the cost savings was typically 20-40%. Today, that browsing step is largely unneeded. The other day I wanted to pick up an introductory book on Python programming. After reading Amazon reviews, I narrowed it to three potential choices, downloaded the free first chapter of each onto my iPad, then bought the one I liked best.
As the Ritholtz post points out, the most effective and economical way to purchase electronics is to look at or listen to them at a Best Buy, then order them from Amazon. With free shipping (especially for Amazon Prime customers), aggressive prices and favorable return policies, there's little benefit to buying them at a physical store. The one possible exception today is big screen TVs where Best Buy (BBY) can provide value add through installation and setup.
The only barriers to this model that stores have today are either impulse purchases (you'll see the typical item on the checkout line has a huge markup - a USB hub that sells for $18 at Amazon was priced at $30 at Best Buy) or price ignorance. That $30 USB hub might have seemed attractive had I not been able to find the Amazon price using my iPhone. As more users have smartphones, it will be harder for retailers to count on ignorant consumers.
So, what will happen to the brick and mortar stores going forward? Some, of course, will simply vanish, following in the footsteps of Tower Records, Blockbuster and Borders. Others may develop more value-add services that help drive sales (tailoring for clothes, etc), while I think we may see a new "showroom" category emerge.
There are definitely products that you need to physically see before purchasing. Luggage is a good example. You can take three different 21" upright wheeled bags with the same approximate capacity and they will be arranged very differently. Ebags and its peers do a good job, but I think most people will want to see how their stuff will fit. The same applies to a lot of clothing. My wife walks through women's clothing stores touching all the materials before picking something out. I can order shirts or slacks online at Brooks Brothers but for many items, especially women's fashion, there is a need to touch the item first.
But you don't need to stock a complete inventory of every size for this. A showroom, where users could see and feel the items, could drive a lot of sales. I wonder if the economics could work to enable mall showrooms which are really just "super affiliates" for Amazon. I don't think the standard Amazon affiliate commission would cover all the costs of an offline presence, but if there were a higher affiliate rate I don't see why it couldn't work for select items.
Another area where this could work would be eyeglasses. I find it obscene the markup that LensCrafters and other vision stores charge on a pair of glasses. More outrageous is the "with and without" insurance rates - where they offer special pricing but not with your insurance coverage. So, while my daughter's primary glasses come from Lens Crafters, she buys her spare pairs (camp, prescription sunglasses, etc) from Zenni Optical. Optically, the Zenni glasses are the equal of the mall store versions, but they're priced at $20-40 rather than $300-400. The frames vary in quality but are solid overall. But the problem is that it's really hard to choose a pair of eyeglasses without trying them on first. My daughter will try on 12-15 pair before selecting the ones she likes. So, it would make sense to open mall kiosks that act as Zenni affiliates. Try on all the frames, pick the pair you like, provide your prescription and have your glasses shipped to you in a week for about 10% of the cost you would have otherwise paid.
To be economically feasible, showrooms may have to be funded in part by manufacturers (as they are in the automotive industry). But, between manufacturer incentives and affiliate programs, there's certainly room for this new model.
What do you think?
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