New Rules Of The Retail Game

Price comparing shopping bots have turned traditional retailing on its head. But are low prices all that customers want? Not really.

Some web-wise merchants have responded to the Internet’s new retail rules by including comparison shopping on their own sites. Others put their heads in the sand.

Leading the list of slow-to-get-online retailers is Home Depot, which recently issued “a Godfather-esque” directive to its suppliers selling goods online (see Fortune, August 16, 1999). The gist of it was to “stop selling online or you won’t be selling to us.” What Home Depot is really worried about is its customers going straight to the manufacturer and bypassing the retail level.

Going head to head with Home Depot won’t be simple for any company. Stanley Tools, for one, scrapped its e-commerce plans in the face of Home Depot’s threat. After all, this is one of the “category killers” that put thousands of mom and pop hardware stores out of business. “Who’s to say,” Fortune reporter Katrina Brooker muses, “that it can’t do the same to pesky suppliers with dot.com dreams?” Web shoppers, that’s who!

There are several factors that come into play:

  • Online shopping does not provide instant gratification. Sometimes, all a customer wants is to buy something and use it right now.

  • People are still willing to pay more for superior service, even online.
  • Few retailers will be able to sustain prices so low that they can’t make a profit.
  • Although low prices might bring customers to a site, discounts alone won’t necessarily keep them there or convince them to return.
  • Online, a store that provides complete information from a variety of sources can be more valuable than a single site that provides only its own or partial information.

Shopping With Bots

Online comparison shopping is available at a wide range of sites. These sites promise: “You’ll never miss a sale again,” “40 to 60 percent off retail in 13 categories,” “daily or weekly sales updates,” and “email bargain newsletters tailored to your shopping interests.” Some claim to scan 50 million products.

Each of these services is powered by shopping bot software. Some even provide shoppers with the ability to search, compare and buy in a secure e-commerce environment. The majority accept advertising, but a few, like Price Scan claim to be unbiased and objective because it eschews advertising.

Providing Great Service

What makes a shopper decide that price isn’t all that matters?

Extraordinary service – the very same quality that allows some stores to charge more for their items because it makes shopping convenient, pleasant and reliable – still can win over price. Superior service makes fancy cars, designer duds and luxury travel appealing. It also allows L.L. Bean, Nordstrom’s, and a handful of other merchants to charge more for their products than bargain merchandisers selling essentially the same goods. And great service is not going out of style any time soon.

In terms of costs, online retailers seem to have obvious advantages over bricks and mortar retailers. Traditional retailers need to spend $3 to $5 million to open a store. They usually can only pull from a 25-mile radius, meaning they need to make a fair margin. While online merchants can set up shop for less, and sell internationally, many have set prices so low that it’s impossible for them to make a profit. Therefore, the good deals consumers now expect won’t be sustainable over the long haul. Only the retailers with the deepest pockets can hold out, and one begins to wonder why they would want to.

Retailers are dealing with online sales in different ways. Barnes & Noble made the mistake of not being first in its category to get online. Like so many other traditional merchants, it finally realized it could not afford to ignore the brand reinforcement of the Internet. Now it charges more for the same books in its bricks and mortar stores where overhead prohibits Amazon-like bargain prices. It’s betting that the instant gratification of talking to informed sales help and being immediately able to read a selected book in soft in-store chairs is worth a higher price. It may be right.

Meanwhile, like Amazon, a handful of online merchants acknowledge the need to emphasize superior service. Although low prices might bring a customer to a site, discounts alone won’t necessarily keep them there or get them to return. “We recognize we’re a price leader, but we don’t say to ourselves every day, ‘Let’s just slash and burn,’ ” says online electronics retailer NECX director of operations Brian Marley. “I think it would be irresponsible for all of us just to compete on price, without doing the heavy lifting that goes into creating a value-added service,” Marley told The New York Times.

Teaming With Competitors

One very innovative online approach comes from Fruit of the Loom, that provides not only its own t-shirts and underwear but also its competitors, inside its e-commerce storefront.

The company got 24 of the nation’s top 30 t-shirt wholesalers in the $5 billion industry to commit to its electronic commerce platform. Fruit of the Loom provides consulting and software to t-shirt wholesales setting up online stores. The stores’ customers then search for t-shirts from any number of manufacturers. Fruit of the Loom only demands that its products are the first replacement option offered when another company is out of stock. Online, a store that provides complete information from a variety of sources can be more valuable than a single site that provides only its own or partial information.

NECX lets customers compare their prices to other stores on the same item. Customers will compare prices anyway, they reasoned, why not help them. The result? NECX is losing customers but making money. Sales are up 20 percent even though the comparison engine is the site’s most common point of departure.

Still, bricks and mortar merchants have the distinct advantage of giving customers what they want when they want it – an experience that can supercede low price. Online shopping, no matter how pleasant, cannot (yet!) provide the immediate reward of buying something, and then wearing or using it an hour later.

There is a long way to go before Internet commerce shakes out. At this point, I’m betting that at end of the road the lowest price won’t be the winner.

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