Discount Retailers Online Threaten Other E-Commerce Players

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A new trend is emerging where value-seeking consumers in a recession-hit economy are increasingly shopping at the Web sites of leading bricks-and-mortar retailers at the expense of leading e-commerce players.


Behavior analyzed by intelligence service Compete Inc. of shoppers across a range of retail sites in November shows that consumers are gravitating toward Walmart.com and target.com, the online stores of the nation's leading mass merchandisers.


Under threat from this trend are Amazon.com and specialty retailers like Barnes & Noble.com, BestBuy.com, buy.com and KBToys.com -- sites tracked by the Boston-based Compete.


"If you're looking at overlap, they're sharing more customers than ever before with Wal-Mart and Target [online]," said Stephen DiMarco, vice president of market development at Compete.


"And you'll see Wal-Mart's and Target's overall customers and their overall conversion rates are increasing," DiMarco said. "So that's a pretty clear sign to me that Wal-Mart and Target are stealing customers away from Amazon and other retailers for certain products."


A key reason for this change in online consumer behavior is the recession and the resultant belt-tightening. Insecurity in the wake of the terrorist attacks is another factor. Add to that the lowest consumer confidence levels in years.


Still, that has not stopped holiday shoppers from buying and exchanging gifts. Only the online outlets they shop from is changing, DiMarco said.


"They're buying," DiMarco said. "They're just looking at those outlets where they know that they're getting the bang for their buck, which is value-oriented retailers like Walmart.com and target.com."


Compete, which analyzes clickstream and shopping data of 9 million online consumers from Internet service providers and browser companions, calls this a down-shopping trend.


In a way, the online trend is mirroring what has been happening offline for years. And it is a danger specialty retailers online and Internet-only stores should realize, DiMarco said.


Many times, he found that Amazon and target.com, both alliance partners online, sold the same products but target.com sometimes sold it for less.


"Something to me says that if Amazon is really serious about what's going on and becoming profitable this year, they have to do a better job of catering to customers' focus on value," DiMarco said.


"It all goes back to understanding how the customer segments are shifting their behavior, understanding competitive maneuvering in the industry while the game's being played, not historically, and then matching your marketing messages and merchandising strategies accordingly," he said.


Retailers typically get a large share of sales in the holiday season. This is true in popular categories tracked by Compete such as toys, books, music and software, electronics and gifts. All the specialty retailers sell these items and so do Walmart.com and target.com.


To hold their own, brands like Amazon, BestBuy.com, buy.com, Barnes & Noble.com and KBToys.com should forecast marketing and merchandising decisions much better. Decisions for holidays are made in the spring or summer.


Of course, none of these retailers could have foreseen the Sept. 11 terrorist impacts. So that element was not factored in that holiday strategies. Those that have not still factored in the changed environment may be out of step with their online customer segments.


Discount retailers with online stores could step into the breach, thus eroding specialty retailers' and higher-end stores' market share.


"I think that it is as serious a threat, if not more of a threat, than it has been in the past," DiMarco said. "Because there's a phenomenon called the experience curve and the moment you do something, the better you get at it," DiMarco said.


"These discount merchandisers have already learned to steal customers from department stores in the offline world and combine their proficiency in the offline world with the online and it represents a serious challenge for anyone who does not have critical mass yet."


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