Correction to Keywords Column

By Christopher Mims Features Dow Jones Newswires

With brick and mortar stores shuttering at a record pace, retail in the U.S. feels like it's at a tipping point. Many of the stores that once filled the malls of America have become "zombies," while online retailers capture ever more of the most valuable consumers -- the young and affluent.

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Legacy retailers are trying to play catch-up, but they're saddled by huge fixed costs, investors who prefer dividends to innovations, and CEOs incentivized to focus on the next quarter, not the next decade. It's only a matter of time before Amazon.com's army of physical retail formats turn into an existential threat to everyone from Mom and Pop to Kroger and Wal-Mart.

That doesn't mean retailers are taking this lying down. As online brands begin to build physical shops, the old guard is taking notes -- and in many cases, writing checks. Wal-Mart, for example, has been on an acquisition binge of late. It's now in talks to buy men's clothier Bonobos for $300 million.

After surveying analysts and CEOs, I learned the three biggest lessons physical retailers are grappling with as they face this rocky transition.

Data is King

When I asked Target, Walgreens and grocery chain Giant Food about loyalty programs and the fate of customers' purchasing data -- which is the in-store equivalent of your web browsing history -- they all declined to comment. Why so cagey? Perhaps because of the uproar that occurred when Target sent coupons for baby clothes and cribs to the home of a teenage girl, alerting her family she was pregnant, says Michelle Evans, an analyst at consumer research firm Euromonitor.

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Data has been a vital part of Amazon's retail revolution, just as it was with Netflix's media revolution and Google and Facebook's advertising revolution. For brick-and-mortar retailers, purchasing data doesn't just help them compete with online adversaries; it has also become an alternate revenue source when profit margins are razor thin. For example, Unilever might buy store sales data to figure out which products are in high demand and when people buy them. (Ms. Evans says that when retailers sell data, it's anonymized and not linked to individual consumers.)

Physical retailers must catch up to online retailers in collecting rich data without making it feel so intrusive. Why, exactly, does my grocery store need my phone number?

Personalization + Automation = Profits

There's a debate in the auto industry: Can Tesla get good at making cars faster than Ford, General Motors and Toyota can get good at making self-driving electric vehicles? The same applies to retail: Can physical retailers build intimate digital relationships with their customers -- and use that data to update their stores -- faster than online-first retailers can learn how to lease property, handle inventory and manage retail workers?

Online retailers know what's popular, and how customers who like one item tend to like certain others. So Amazon's physical bookstores can put out fewer books with more prominently displayed covers. Bonobos doesn't even sell clothes in its stores, which it calls "guideshops." Instead, customers go there to try clothes on, and their selections are delivered through the company's existing e-commerce system.

Amazon's upcoming Go convenience stores, selling groceries and meal kits, don't even require cashiers. That's the sort of automation that could position Amazon to reap margins -- or slash prices -- to a degree unprecedented for retailers in traditionally low-margin categories like food and packaged goods.

While online retailers are accustomed to updating inventory and prices by the hour, physical retailers simply don't have the data or the systems to keep up, and tend to buy and stock on cycles as long as a year, says George Faigen, a retail consultant at Oliver Wyman. Some legacy retailers are getting around this by teaming up with online players.

Target stocks men's shaving supplies from not one but two online upstarts, Harry's and Bevel. Target has said that, as a result, more customers are coming in to buy razors, increasing the sales of every brand on that aisle -- even good old Gillette. Retailers have long relied on manufacturers to drive customers to stores by marketing their goods and even managing in-store displays. The difference is this: In the past, new brands had to persuade store buyers to dole out precious shelf space; now the brands can prove themselves online first.

Legacy Tech Won't Cut It

Perhaps the biggest challenge for existing retailers, says Euromonitor's Ms. Evans, is finding the money to transition to this hybrid online-offline model. While Target has announced it will spend $7 billion over the next three years to revamp its stores, investors fled the stock in February after Target reported 2017 profits might be 25% less than expected.

When Warby Parker, the online eyeglasses retailer, set out to launch stores across the U.S., the company looked for in-store sales software that could integrate with its existing e-commerce systems. It couldn't find a system up to the task, so it built one from scratch.

These kinds of systems allow salespeople to know what customers have bought both online and off, and what they might be nudged toward on that day. "We call it the 'point of everything' system," says David Gilboa, co-founder and co-chief executive.

Having this much customer knowledge available instantly is critical, but it's precisely what existing retailers struggle with, Mr. Faigen says.

Even Amazon is experiencing brick-and-mortar difficulties. In March, The Wall Street Journal reported that the Go stores would be delayed because of kinks in the point-of-sale software system.

Andy Katz-Mayfield, co-founder and co-chief executive of Harry's, is skeptical that traditional retailers like Wal-Mart can make the leap, even if they invest heavily in technology.

The problem, he says, is that selling online isn't just about taking orders through a website. Companies that succeed are good at selling direct to consumers -- building technology from the ground up, integrating teams skilled at navigating online marketing's ever-shifting terrain and managing the experience through fulfillment and delivery, Mr. Katz-Mayfield says.

That e-commerce startups are so confident about their own future doesn't mean they are right about the fate of traditional retailers, however. A report from Merrill Lynch argues Wal-Mart is embarking on a period of 20% to 30% growth for its e-commerce business. A spokesman for the company said that in addition to acquisitions, the company is focused on growing its e-commerce business organically.

It isn't hard to picture today's e-commerce companies becoming brick-and-mortar retailers. It's harder to bet on traditional retailers becoming as tech savvy as their e-competition.

With brick and mortar stores shuttering at a record pace, retail in the U.S. feels like it's at a tipping point. Many of the stores that once filled the malls of America have become "zombies," while online retailers capture ever more of the most valuable consumers -- the young and affluent.

Legacy retailers are trying to play catch-up, but they're saddled by huge fixed costs, investors who prefer dividends to innovations, and CEOs incentivized to focus on the next quarter, not the next decade. It's only a matter of time before Amazon.com's army of physical retail formats turn into an existential threat to everyone from Mom and Pop to Kroger and Wal-Mart.

That doesn't mean retailers are taking this lying down. As online brands begin to build physical shops, the old guard is taking notes -- and in many cases, writing checks. Wal-Mart, for example, has been on an acquisition binge of late. It's now in talks to buy men's clothier Bonobos for $300 million.

After surveying analysts and CEOs, I learned the three biggest lessons physical retailers are grappling with as they face this rocky transition.

Data is King

When I asked Target, Walgreens and grocery chain Giant Food about loyalty programs and the fate of customers' purchasing data -- which is the in-store equivalent of your web browsing history -- they all declined to comment. Why so cagey? Perhaps because of the uproar that occurred when Target sent coupons for baby clothes and cribs to the home of a teenage girl, alerting her family she was pregnant, says Michelle Grant, an analyst at consumer research firm Euromonitor.

Data has been a vital part of Amazon's retail revolution, just as it was with Netflix's media revolution and Google and Facebook's advertising revolution. For brick-and-mortar retailers, purchasing data doesn't just help them compete with online adversaries; it has also become an alternate revenue source when profit margins are razor thin. For example, Unilever might buy store sales data to figure out which products are in high demand and when people buy them. (Ms. Evans says that when retailers sell data, it's anonymized and not linked to individual consumers.)

Physical retailers must catch up to online retailers in collecting rich data without making it feel so intrusive. Why, exactly, does my grocery store need my phone number?

Personalization + Automation = Profits

There's a debate in the auto industry: Can Tesla get good at making cars faster than Ford, General Motors and Toyota can get good at making self-driving electric vehicles? The same applies to retail: Can physical retailers build intimate digital relationships with their customers -- and use that data to update their stores -- faster than online-first retailers can learn how to lease property, handle inventory and manage retail workers?

Online retailers know what's popular, and how customers who like one item tend to like certain others. So Amazon's physical bookstores can put out fewer books with more prominently displayed covers. Bonobos doesn't even sell clothes in its stores, which it calls "guideshops." Instead, customers go there to try clothes on, and their selections are delivered through the company's existing e-commerce system.

Amazon's upcoming Go convenience stores, selling groceries and meal kits, don't even require cashiers. That's the sort of automation that could position Amazon to reap margins -- or slash prices -- to a degree unprecedented for retailers in traditionally low-margin categories like food and packaged goods.

While online retailers are accustomed to updating inventory and prices by the hour, physical retailers simply don't have the data or the systems to keep up, and tend to buy and stock on cycles as long as a year, says George Faigen, a retail consultant at Oliver Wyman. Some legacy retailers are getting around this by teaming up with online players.

Target stocks men's shaving supplies from not one but two online upstarts, Harry's and Bevel. Target has said that, as a result, more customers are coming in to buy razors, increasing the sales of every brand on that aisle -- even good old Gillette. Retailers have long relied on manufacturers to drive customers to stores by marketing their goods and even managing in-store displays. The difference is this: In the past, new brands had to persuade store buyers to dole out precious shelf space; now the brands can prove themselves online first.

Legacy Tech Won't Cut It

Perhaps the biggest challenge for existing retailers, says Euromonitor's Ms. Evans, is finding the money to transition to this hybrid online-offline model. While Target has announced it will spend $7 billion over the next three years to revamp its stores, investors fled the stock in February after Target reported 2017 profits might be 25% less than expected.

When Warby Parker, the online eyeglasses retailer, set out to launch stores across the U.S., the company looked for in-store sales software that could integrate with its existing e-commerce systems. It couldn't find a system up to the task, so it built one from scratch.

These kinds of systems allow salespeople to know what customers have bought both online and off, and what they might be nudged toward on that day. "We call it the 'point of everything' system," says David Gilboa, co-founder and co-chief executive.

Having this much customer knowledge available instantly is critical, but it's precisely what existing retailers struggle with, Mr. Faigen says.

Even Amazon is experiencing brick-and-mortar difficulties. In March, The Wall Street Journal reported that the Go stores would be delayed because of kinks in the point-of-sale software system.

Andy Katz-Mayfield, co-founder and co-chief executive of Harry's, is skeptical that traditional retailers like Wal-Mart can make the leap, even if they invest heavily in technology.

The problem, he says, is that selling online isn't just about taking orders through a website. Companies that succeed are good at selling direct to consumers -- building technology from the ground up, integrating teams skilled at navigating online marketing's ever-shifting terrain and managing the experience through fulfillment and delivery, Mr. Katz-Mayfield says.

That e-commerce startups are so confident about their own future doesn't mean they are right about the fate of traditional retailers, however. A report from Merrill Lynch argues Wal-Mart is embarking on a period of 20% to 30% growth for its e-commerce business. A spokesman for the company said that in addition to acquisitions, the company is focused on growing its e-commerce business organically.

It isn't hard to picture today's e-commerce companies becoming brick-and-mortar retailers. It's harder to bet on traditional retailers becoming as tech savvy as their e-competition.

Corrections & Amplifications

This story was corrected April 24, 2017 at 1:10 p.m. ET because it misidentified Michelle Grant as Michelle Evans, a different Euromonitor analyst.

The Euromonitor analyst interviewed for this article was Michelle Grant. "Keywords: Three Hard Lessons for Traditional Retailers," at 0714 ET on April 23, misidentified her as Michelle Evans, a different Euromonitor analyst. (4/24/17)

(END) Dow Jones Newswires

April 24, 2017 13:13 ET (17:13 GMT)