Operations At A FedEx Ground Facility Ahead Of Earnings
Bloomberg via Getty Images/Andrew Harrer
The traditional big-box retailer is a dead man walking, right?

That's been the conventional wisdom ever since Amazon.com (AMZN) began to take over the retail world, with its cheaper prices and speedier-than-thou delivery times. How could traditional retailers, saddled with overhead from brick-and-mortar stores, hope to compete?

Just Browsing, Thanks

Showrooming has taken a chunky bite out of the business of traditional retailers. In a poll conducted by Gallup in November, 6 percent of respondents said they bought merchandise online after showrooming in a retail store, with an additional 3 percent saying that they intended to do so. That's nearly 10 percent of the customer base.

In a sector that has always subsisted on thin margins, those are sales that brick-and-mortar operators can't afford to lose. One famous victim of the trend is electronics superstore Best Buy (BBY). Due in no small part to showrooming, the company's results have taken serious hits over the last few years. From fiscal 2010 to 2013, sales stagnated around $50 billion, while the bottom line dived into the red.

It hasn't been easy, but several brick-and-mortar retailers have quietly been trespassing across Amazon.com's online space. And they've been doing it with the one asset the conventional wisdom states is a liability in this age of e-commerce -- their stores.

From Warehouse to Your House

To some extent, big-box retailers are fighting Amazon at its own game by opening their own Web fulfillment centers. Just last October, Walmart Stores (WMT) announced it would open one in Texas and another in Pennsylvania.

That, alas, doesn't compare to Amazon, which since 2010 has spent nearly $14 billion to build its fulfillment center network. However, Amazon's real competition in this new battle isn't Web fulfillment centers -- it's the brick-and-mortar stores again.

The big-box guys have begun to fill online orders from the stock of their brick-and-mortar outlets in a process known, naturally, as "ship from store." This has several beneficial results. Most critically, it adds a large number of distribution centers to a retailer's network. Walmart, for example, has nearly 4,200 outlets across the country. This puts a good two-thirds of the population within five miles of one of its stores.

Proximity like that means retailers can get goods to customers quickly, not to mention cheaply. Amazon.com promises free two-day delivery for members of its Prime service. But that can easily be matched by retailers shipping from the store just a few miles away from your home. Not to mention that "ship from store" is a often a hybrid service that gives customers the choice of picking up their purchases from the store themselves -- if they're in stock -- within hours. Right now, according to Walmart, 10 percent of the items ordered on its website are shipped from one of the retailer's stores, with "the majority" delivered in two days or less. Sounds a lot like Amazon Prime, right?

Ship from store also helps enormously to reduce inventory. In many ways, success at retail derives from how well a company manages the goods in its warehouse. It's a difficult art to get right; a retailer with too many unwanted products wastes valuable warehouse space, eventually leading the guilty party to chop prices (and hence profit margins) in order to get rid of the stuff. Too few goods, and disgruntled customers facing stock shortages leave the store -- possibly never to return -- to buy what they want from a competing business.

Ka-ching!

We're still in the early days of this retail tug-of-war. Some of the big names in retail have adopted ship from store, although many are still relatively new to the game. And, again, dealing with inventory is tricky, so it'll probably take some time for even the most grizzled retail veterans to find the fulfillment center/store warehouse mix that works for them.

Walmart is enthusiastic about the system, but has cautiously rolled it out in a mere 35 or so of its many locations.
Gap (GPS) only began leveraging its 2,600-strong retail store network to boost its online business in 2012, while higher-end department store Nordstrom (JWN) has been at it for a (relatively) long time, having launched its ship-from-store efforts in 2009.

There's plenty of money to be made for those who can finesse the mix. An analyst from investment bank Credit Suisse (CS), cited in a USA Today article, estimates that beleaguered Best Buy stands to make an additional $5.8 billion in annual sales and $168 million in profit with ship from store. That's something like 12 percent of the company's most recent annual top-line figure, and a slightly higher percentage of the net profit the last fiscal year the company was in the black (2011). It's no exaggeration to say that this could mean the difference between survival and extinction for such a company.

For a retailer with a heavy real-world presence, those numbers look very enticing indeed. In this virtual era, physical stores have come to be seen as more a liability than an asset. But, if utilized in concert with online shopping technology, they can not only be an asset, but also provide a strong competitive advantage against pure e-tailers.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com.


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toosmart4u

I buy online because I cannot get American made merchandise in any store. Never had a problem with any merchandise.

February 21 2014 at 6:02 AM Report abuse rate up rate down Reply
julie

Walmarts delivery system is a joke... eclipsed only by its disappointing customer service. They can't ship from the store, because their system doesn't update the stock they have on hand appropriately... so orders are charged, and then canceled. They have a long road to go before they can compete with Amazon. Some of the folks I've been dealing with recently are darn lucky to have a job at all.... ugh.

February 20 2014 at 9:01 PM Report abuse rate up rate down Reply
Iselin007

If you see damaged cartons on the shelves of stores it's and indication of the poor treatment of workers. Often you don't see the many pallets of merchandise returned to the store because of poor quality, breakage, or other reasons. Believe me your not saving any money if the workers need food stamps and other public assistance.

You think you saved money at first but the loss of high paying manufacturing jobs means higher property taxes and public assistance as revenue losses are shifted to the very same consumers that thought they saved money with imported goods! You can pay more when you earn more.

February 20 2014 at 8:08 PM Report abuse rate up rate down Reply
Iselin007

High productivity can easily caused poor handling of products as they are shipped to a store or wharehouse. Employees have to move faster and are often under staffed by lazy managers trying to make a name for themselves. Your item will likely be damaged because of the pressure put on the workers afraid of losing their jobs. I can imagine how many billions of dollars in returns occur each year due to under staffing of workers who have to rush to move merchandise in and out of trucks haphazardly crammed to get the most use of trailer space! As pallets of merchandise move often into over crowded aisles in the back room items fall or are slammed into other pallets of merchandise! The real life behind the scene are rarely scene by the consumer. The products may go through abuse before they even make their purchase .

February 20 2014 at 7:48 PM Report abuse -1 rate up rate down Reply
Iselin007

The store that carried the airconditioner made for their brand name was Sears. Regardless where you buy merchandise whether it is made for a chain or carries it's own factory name be sure to inspect your purchase before leaving a store.

If your buying a guitar from stock at a music shop ask to see several models in the same color if your a collector planning on re-selling the item. Mass produced Items especially ones that are manufactured in factories that keep moving from one country to the next to keep wages low have problems of maintaining quality. Buying in store means you inspect stuff then and there eliminating returns and poor quality.

February 20 2014 at 7:32 PM Report abuse rate up rate down Reply
Iselin007

Shame is sometimes big heavy items are dropped at the factory then sealed up in boxes. On the outside of the carton there is no apparent damage to alert a customer or employee so whether your at a store or Ordering Online you still face having to return the item.

One time I had to go through four cartons of portable airconditioners brought out to me by a employee at a store 3 out of 4 airconditioners were crushed although the boxes were in perfect condition! I can only assume the factory had closed and the workers had packed everything up and shipped the inventory to a warehouse where it was distributed to a storechain. Damaged merchandise in perfect cartons tells me the employees were angry possibly because they had been notified their jobs were going to be outsourced. Many airconditioners that were built by Fedders or Emerson Quietecool and stamped with a store brand name were outsourced.

February 20 2014 at 6:58 PM Report abuse -1 rate up rate down Reply
1 reply to Iselin007's comment
Iselin007

I forgot to mention the airconditioner that was brought home the first time was also damaged in the box so the total was 1 out of 5 airconditioners damaged at the factory! Believe me I was upset to have to go back an then find everything but one unit was undamaged.

February 20 2014 at 7:12 PM Report abuse rate up rate down Reply
simplesins

I am an Amazon Prime holder and with advancing years and bad weather, I have bought quite a bit from them, but Walmart has been expanding what they offer on-line and given that their prices are often much less than Amazon, I find myself buying more and more of my "routine" things from them. Walmart does charge shipping for purchases under $50, but over is free, and between items too big and/or too heavy to carry in and convenience, it's pretty easy to get to that $50 point. I still shop at Amazon for the wider variety on everything, from clothes to gourmet foods. But as more places jump on board, Amazon may not be the only game in town, especially if they follow through with the proposed plan to add at least $20 to the price of Amazon Prime.

February 20 2014 at 5:46 PM Report abuse -2 rate up rate down Reply
sirgaf9

BBY WHY aren't we pursuing this wholeheartedly?????? Shareholder..

February 20 2014 at 5:04 PM Report abuse rate up rate down Reply
SEXY BABE SARA

Sorry, I had to redo my comment because there is no where to delete or edit anything.

February 20 2014 at 4:57 PM Report abuse rate up rate down Reply
SEXY BABE SARA

Wal-Mart will not match their own online prices but will match other stores. Wal-Mart would not match the price on a video game that they had on line. So I went home and ordered it from Amazon with no sales tax and free shipping. If I would have gone home and ordered it from Wal-Mart I would have had to drive back to the store and pay sales tax. If I would have had it shipped to my house, I would have had to pay sales tax and shipping costs. I was willing to pay sales tax had they worked with me and matched their own online price. They lost a sale from me and no one seemed to care, Go figure

February 20 2014 at 4:55 PM Report abuse rate up rate down Reply