My wife and I used to go our local Borders Bookstore and have coffee and read magazines and books. Inevitably, we'd leave with a bag of our favorite books and magazines. Sometime in 2009, that all changed. We'd still go to bookstore to read and have our coffee but I had purchased T-Mobile G1 smartphones and I started checking the prices of each book I liked by scanning the bar-code on the back. To my surprise, I found that in the majority of cases, I could buy the book on Amazon (AMZN), shipping included, for less than half the retail price in the bookstore. Our purchasing pattern changed quickly to coffee only with the books showing up a week later by mail.
The practice of reviewing products at a brick and mortar store and then buying the same product online for less is called show-rooming. When Borders' bankruptcy hit the news, I realized that practice was not only a significant factor in the demise of the Borders chain but also the key to a paradigm shift in retail. In fact, this change is coming so quickly that I predict a large number of retailers won't have a chance to change in time to survive. Darwinian evolution at its most brutal; adapt or die.
After the Borders bankruptcy and the closing of our favorite local hangout, what did we do? We moved on to Barnes and Nobles (BKS) and started doing the same thing. But there was a difference. In the front of each Barnes and Noble bookstore, you were barraged with a massive push to buy the Nook eBook reader. Since I was already a loyal Amazon customer, I purchased a Kindle instead and a new practice started. I would go to the bookstore, browse the books and buy the same book on my Kindle for half the price.
But as with all epics, the story is not over. The practice of online price-comparison extends to most retail stores with the exception of grocery stores and retailers that sell perishables (like Starbucks) will continue to have an dramatic impact on revenue. Best Buy (BBY) is in trouble from this practice and is trying to adapt to avoid the fate that befell Borders.
Target (TGT) recently announced that it will match the prices of online retailers such as Amazon, Best Buy and Wal-Mart (WMT). While this shows clear evidence that the retailer is not going to go away without a fight, it will also put tremendous pressure on the margins and help force the paradigm shift. As margins shrink, the pressure mounts to reduce expenses, especially costs directly incurred by carrying these online shrinking-margin products such as books, electronics, clothing, sporting goods, furniture, office supplies, and any product category that isn't perishable.
My wife and I still visit Barnes and Nobles, we still drink coffee and occasionally we buy books and magazines that we can't get for a better price online but I can't help wondering how long before enough of their retail customer base shifts to online purchasing to make Barnes and Noble begin closing their bookstores.
When that happens, where will we go? We'll take our Kindles and Nooks to Starbucks (SBUX) and have our coffee and do our reading online using the free Wi-fi but retail and specifically the big-box retailers will be changing dramatically. Any retailer that doesn't have a strong online strategy will likely die but just as important, any investor tracking retail should also look for a strategy for making their brick and mortar revenue more efficient to minimize the drag this part of their business will have on their profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.