Yahoo News – by Shelly Banjo and Drew FitzGerald, Wall Street Journal
Best Buy Co. on Thursday became the latest retailer to chime in with weak holiday results. Like other chains, the electronics retailer blamed the race to offer the deepest discounts, a game of brinkmanship that hurt profit margins and held back revenue.
But there is a deeper malaise at work: A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.
The fast rise in e-commerce is a challenge that brick-and-mortar retailers have wrestled with for years. Across a number of retailers, their defensive strategies don’t seem to be panning out. Best Buy, for example, overhauled its store layouts and marketing in the past year, even inviting shoppers to “showroom” the electronics retailer—co-opting the term for people who try out products in stores and then buy them for less online.
Despite those changes, visits to Best Buy dropped off after Thanksgiving weekend, Chief Executive Hubert Joly said in an interview. Not only are more people shopping online, the Web has eroded demand for former consumer-electronics staples, such as compact discs, he said.
“There is a phenomenon that impacts traffic to the physical stores,” Mr. Joly said. “There is no doubt about it.”
Traffic to U.S. retailers was hurt during the financial crisis and recession, when job losses soared and shoppers kept a tight grip on their dollars. But nearly five years into the recovery, it appears many of those shoppers may never be coming back.
Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.
Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don’t seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak’s data shows.
Retailers said traffic declines are likely to persist well past the holidays. “The reality is, we just don’t see that changing,” Urban Outfitters Inc. CFO Frank Conforti said at an investor conference this week.
Shoppers like Sara Rhein see little reason to spend much time in brick-and-mortar stores. “I love to shop, but since having three kids the mall is the biggest waste of time I can think of,” said Ms. Rhein, 37 years old, who works at a Washington nonprofit. “My weekends are one long to-do list, so I’ve gravitated to online retailers that make it easy for me to shop without having to go into the store.”
Anthony Dolphin, 23, a mechanical engineer from Westborough, Mass., said he likes to look up deals online before making the trek to stores. Even so, he only made three or four short trips to stores over the holidays.
“I just buy the essentials and pay off student loans with the rest,” he said.
It isn’t just the mall. Traffic has weakened at Wal-Mart Stores Inc. and Target Corp. since the summer of 2012, according to analysts at Cowen & Co., even with tamer gasoline prices, which typically allow consumers to shop more.
Wal-Mart declined to comment ahead of its February earnings release.
A Target spokesman said shoppers are making fewer trips as “traffic has been impacted by the uneven economic environment,” but are spending more when they do show up.
Online sales accounted for just 5.9% of overall retail sales in the third quarter, according to the Commerce Department, but they have an outsize impact on how shoppers use stores and what they will pay.
Retailers are missing out on chances to spur impulse purchases as consumers turn to the Web to browse or research big ticket items, while online replenishment programs like Amazon.com Inc.’s “Subscribe & Save” are reducing the need to visit stores for everyday items like diapers and toilet paper.
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Meanwhile, online stores have further sharpened purchase decisions and prices, leading some shoppers to come into the stores only when they can cherry pick discounted items.
“These retailers are fighting an uphill battle,” said Cowen & Co. analyst Faye Landes. “If people don’t come to your stores, it reduces the possibility shoppers will buy anything.”
The decline in shopper traffic spooked retailers including Express Inc. and prompted them to aggressively boost promotions and slash prices during the holidays, a move that dented profit margins and weighed on earnings forecasts, retailers said.
In general, the change in foot traffic at brick-and-mortar stores is among the reasons retailers such as Home Depot Inc. cut back on new store openings in favor of shifting that investment toward online operations. Meanwhile, Sears Holdings Corp., Gap Inc. and others have closed hundreds of stores over the past couple of years.
On Wednesday, J.C. Penney said it planned to close 33 underperforming stores and trim 2,000 positions to focus on locations that generate the strongest profits.
Such closings could accelerate: Leases for big retailers typically last between 10 and 25 years, meaning many were negotiated before e-commerce really took off.
Only 44 million square feet of retail space opened in the 54 largest U.S. markets last year, down 87% from 325 million in 2006, according to CoStar Group, Inc., a real-estate research firm.
Macy’s Inc., which last week announced plans to close five stores and lay off 2,500 employees, said store closures weren’t caused by traffic declines. But the shift is causing the department store chain to rethink its brick-and-mortar stores to make them more productive by serving online sales.
“Traffic habits are changing, but it’s not leading us to close more stores,” Chief Financial Officer Karen Hoguet said in an interview Thursday. “Now we can supplement store traffic with Internet sales.”
For instance, the department store chain has converted more than half its 840 physical stores to be able to fulfill online orders. That allowed it to keep the majority of its inventory of popular cashmere sweaters on store shelves and in front of customers during the holidays, rather than stocking them in faraway warehouses.
Best Buy took similar steps over the holidays, expanding its ship-from-store program to more than 400 locations. The electronics retailer said its U.S. online sales rose 24% to $1.32 billion during the holidays. But those gains weren’t enough to stave off an overall decline.
In the nine weeks to Jan. 4, Best Buy’s sales excluding newly opened or closed stores fell 0.9% in the U.S. The company said the discounting it employed to win those sales took a heavy bite out of its operating margins. The report prompted a selloff in its shares, which fell nearly 29%, or $10.70, to close at $26.83 on Thursday.
Best Buy said on a conference call with analysts Thursday that expanding its online presence will be a top priority in 2014. Chief Financial Officer Sharon McCollam said the company will invest more in online marketing and customer databases this year to catch up with its competitors.
“We were out-competed from an online marketing standpoint,” she said.
—Suzanne Kapner contributed to this article.
Write to Shelly Banjo at shelly.banjo@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com
http://finance.yahoo.com/news/stores-confront-world-reduced-shopper-005900645.html
So I guess the elites excuse for attempting to divert the crisis of store closings and less shoppers at the stores is to blame it on the online sales, rather than the economy, depression and rising unemployment. Pathetic.