TORONTO – The abrupt closure of half the Future Shop chain over the weekend illustrates just how tough it can be for specialty retailers to serve customers who want to buy both online and in stores while continuing to turn a decent profit.
Customers expect any decent retailer of scale to have a comprehensive website showcasing its products and prices, and retailers know a robust online presence is necessary to stay competitive in a cutthroat market.
The conundrum for retailers is that it requires them to make expanded and fairly steady capital investments across two very different, albeit interconnected, business platforms. If a retailer does not gain any new customers in the process, or if existing ones do not start buying more goods, the business becomes increasingly more expensive to operate while sales growth stays about the same.
“There’s no question that the productivity of physical stores is being challenged, and it’s being challenged particularly in sectors that have the highest propensity to do online purchasing,” said Antony Karabus, chief executive of Northbrook, Ill.-based retail consulting firm HRC Advisory. With Canadians making an estimated one-third of their electronics purchases online, “a fairly massive chunk is being pulled out of retail stores,” Mr. Karabus said.
That said, maintaining a physical store presence in the market is critical for retailers as a self-contained marketing platform and to serve customers who like shopping at bricks and mortar stores. That’s why many successful Web-only retailers, from Etsy to Frank & Oak, have opened up stores or pop-up shops to showcase their wares.
Retailer HMV Canada has managed to stay afloat and maintain a fairly steady store count over the years by scaling down in size, while numerous music chains and Blockbuster video closed down as the industry migrated to digital entertainment. With 110 stores across Canada, HMV has just three 25,000 square-foot superstores left in its network, and has scaled back to an average store size of 3,500 to 4,000 square feet from an average of 5,500 to 6,000 square feet six years ago.
“I definitely anticipate more retailers shrinking their footprints and expanding online presence,” said Jim Smerdon, vice president at real estate firm Colliers International in Vancouver. For every $10,000 a retailer makes in online sales, it renders ten square feet of floor area is unnecessary, he said. “When a retailer looks at tens of millions of dollars moving online, there are both push and pull factors leading to store closures — much more efficiency online, and lower sales supporting their bricks and mortar.”
Keith McIntyre, chief executive of the marketing firm Kmac Group, noted Best Buy has been making the transition to smaller stores for the last four years and conducting extensive research about its customer base to determine what sells the most at each location.
“They looked at their top eight personas of customers and sought out how to target them,” he said, including parents with children at home, “angels” — early adopters who liked to line up outside stores on the first day of a hot product’s release, and a group that relied heavily on the chain’s Geek Squad, a fleet of in-house experts who help set up in-house electronics and computing systems and troubleshoot customer problems.
“The micro-stores have a 2,000 to 3,000 square footprint and very specialized staff to meet the needs of those customers in that geographic location,” he said. He believes a smaller-store formula will work for Best Buy in the long term, even though spending and restructuring costs will lower annual earnings per share by about 8%, according to analyst estimates.
“If a retailer provides fewer choices to a specific customer group and it knows those customers well, it will probably become more profitable. Too many choices paralyze customers.”
Financial Post
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