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Traditional Retailers Leveraging Store Base to Compete With Amazon

As Amazon wages an ongoing battle for e-commerce market share with traditional U.S. retailers, those companies continue to flex their brick-and-mortar muscle and leverage their store base as a same-day delivery weapon.

In a new report from Moody’s titled, “As Online Battle Escalates, Retail Keeps Leveraging Its Secret Weapon: The Store Base,” the financial research firm’s retail analysts said despite Amazon’s disruptive force in the retail sector, traditional physical stores remain important. One key is the different ways retailers are embracing online strategies to achieve omnichannel sales and distribution.

Changes in technology and pressure from Amazon have forced merchants to re-examine how consumers want to shop, and how to use their stores more effectively to meet these needs, the report said. These realities have retailers investing in online and supply chain capabilities to improve delivery.

Department stores, in particular, have made e-commerce inroads quickly. The sector, which has struggled the past few years, also has been among the most aggressive in harnessing e-commerce and digital innovations as a key part of their recovery, the report noted. They are increasingly offering free delivery, mobile applications for faster access, price checking, payment ease, rewards program management and order tracking.

Department stores also are striving to make their supply chains more efficient and provide customers with greater integrated front-end experience. All of this is translating into a substantial increase in their online sales, with the sector now transacting more than 22 percent of sales online, above the estimated 13 percent average penetration for the broader retail industry for fiscal 2018.

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Apparel specialty stores have been racing to catch up on digital capabilities, according to Moody’s. Specialty apparel chains, such as Gap Inc. and Abercrombie & Fitch, have led with visual technology and social media, Moody’s said, which has improved their marketing ability.

“We estimate that online penetration for the rated apparel retail sector—excluding pure-play online issuers—will grow to 20 percent in 2019,” Moody’s said.

Amazon is busy adding to its more than 70 private label apparel brands that compete in targeted apparel categories, mainly at low- to mid-price points. In addition, smaller online players, including ASOS, Boohoo, Stitch Fix, Rent The Runway, Everlane and Lulu’s “have carved out successful niches,” while  companies such as Cole Haan and Nike have started selling a selected assortment directly on Amazon.

“However, that puts brands at risk of commoditization, since they have less control over the customer experience,” Moody’s said. “This channel also tends to be less profitable than selling through their own websites or stores.”

Among discounters and warehouse chains, including Walmart and Target, “online penetration will remain on the lower side,” the report said, due to the sector’s meaningful grocery businesses. Even though these retailers are “making big strides getting up to speed with their online capabilities,” Moody’s said, it sees current penetration of around 4 percent, rising to 5 percent in 2019.

The power of Amazon has come from its many delivery and shipping initiatives, including its meaningful spend on fulfillment centers in 2017. Amazon has been investing heavily to obtain more proprietary control over deliveries in general, Moody’s noted.

The company has expanded its “Amazon Air Force” to avoid seasonal “overflow” problems with third-party carriers UPS, Fedex and the USPS, and the company said it was forced to expand its van total from an initial 4,000 vehicles to 20,000 in just a few months due to unexpectedly strong demand following a recently created program enticing entrepreneurs to deliver packages.

Part of this program is to fill the last-mile delivery gap. Moody’s noted that Amazon’s general fulfillment “stops a crucial step short of fulfilling the ultimate goal—owning the last mile—because the company relies exclusively on third-party carriers to carry the ball over the goal line.”

“We think the company likely ‘absorbed’ over $10 billion in shipping costs during 2017, though a meaningful amount is offset by Prime membership fees,” the report said. “We see its acquisition of Whole Foods, with its over 460 locations, as a sensible move, but also a telling admission that it has to have a brick-and-mortar presence to scale its nascent food business. That said, Amazon’s lead in ‘pure’ online retail is insurmountable for any individual retailer to overcome.”

In contrast, brick-and-mortar stores “maintain total proprietary control over their last mile by virtue of their stores. Because they use centralized sorting, third-party carriers are ill-equipped to provide same-day delivery services for retailers, which broadens the advantage that brick-and-mortar wields,” according to Moody’s. “Despite the inroads and expansion of Amazon’s burgeoning Prime Now service, the only way for consumers in most of the U.S. to get same-day product availability remains actually going to the store.”

Moody’s said Amazon’s initiatives are reducing the inherent advantage of traditional retail, “but we do not see these efforts stealing retail’s competitive edge any time soon.” That’s because Amazon “continues to lack the basic physical infrastructure and deep customer base that retailers relish, with roughly 85 percent of retail sales still getting rung up in physical stores.”

“If anything, many of these retailers are turning up the heat with their own same-day initiatives to widen their competitive advantage over Amazon,” the report said. “This is proving costly for many, and the outcome of these efforts remains unclear. However, for now we see Amazon’s seemingly ‘offensive moves,’ such as delivery promotions, as more defensive and aimed at avoiding the expense of developing or acquiring a meaningful brick-and-mortar presence.”

Some of the largest heritage catalog retailers, such as Lands’ End, J.C. Penney and J. Crew, are acting to update their digital infrastructure to include features such as mobile applications, mobile price check, visual search, order tracking and history, and online chat. Lands’ End, which has operated predominantly as a direct-to-consumer catalog retailer since its inception in 1963, has until recently experienced topline and operating challenges. The company is now prioritizing investment in its digital capabilities through a new partnership with Amazon and the launch of its iPad shopping app in an effort to engage existing customers and grow its customer file.

J. Crew also has taken steps to rectify its shortfalls in omnichannel capabilities through various initiatives, including enhanced same-day in-store pickup, ship-to-store options and frictionless checkout.