Chasing Amazon, retailers are in a never-ending arms race
Retailers are trying everything they can to keep up with Amazon. Macy’s offers same-day delivery and in-store returns for online purchases. Black Friday deals are already starting at Kohl’s. And craft cocktails are served in the women’s shoe department at Nordstrom.
By one measure, these strategies are working. After years when it seemed as if Amazon was swallowing the industry, many large old-school chains like Kohl’s and Macy’s have largely stabilized their lagging sales.
But those victories may be short-lived because retailers are caught up in a seemingly never-ending race against Amazon. The more they spend to compete, the more their profits are sapped. And even when they succeed in attracting customers, Amazon responds with new ways of delivering inexpensive items as quickly and conveniently as possible.
“Is this an arms race that never stops?” asked Christina Boni, a senior credit officer at Moody’s focused on retailers. “That has still to be determined.”
And it’s not just Amazon that has been shaking up the roughly $3.6 trillion retail industry. Dozens of startups, backed by private investors not concerned with immediate profits, have been chipping away at department store offerings, section by section.
The costs are weighing on many retailers, even in a relatively strong economy when consumers are expected to spend heartily during the holiday shopping season, which begins in earnest this week. Just last week, Kohl’s said that its quarterly profit had dropped 24% and that profits for the year would be less than previously thought.
These same online forces have led in recent years to record store closings and prominent bankruptcies like Sears, Toys R Us and Barneys New York and they are pressuring a wider circle of retailers that have seemingly adapted well to the era of online shopping. The result may be that Americans find themselves with fewer places to shop.
“Some retailers are in a tough spot,” said Jay Sole, a retail analyst at UBS. “Sales have gone up, but profit margins have gone down.”
Especially hard hit are the big sellers of apparel and accessories like Nordstrom, which are grappling with the dual costs of running fast and efficient e-commerce operations, while also keeping their stores inviting and relevant.
Last month, Nordstrom opened a giant new store just south of Central Park, the single largest project investment in the company’s 118-year history, featuring 19-foot ceilings and specially commissioned artwork. On opening weekend, the crowds were so thick that shoppers trying on shoes had to take numbers as if they were at a deli counter.
The seven-floor colossus — bigger than a Walmart Supercenter — adds to the retailer’s range of efforts in Manhattan like Nordstrom Rack outlets, new hubs for online returns and a men’s store. Still, as it tries to be all things to all shoppers, Nordstrom’s operating profit margin is nearly half what it was eight years ago. Last week, Nordstrom said its margins had improved slightly in the third quarter as it cut expenses, although sales fell.
At Kohl’s, the strategy to win over customers is less flashy, but no less costly. The department store chain is ramping up discounts to drum up sales ahead of the holidays.
And unable to beat Amazon, Kohl’s is trying to join it. Kohl’s now accepts Amazon returns at many of its 1,100 stores — packing, labeling and shipping the items free — in an attempt to get more people to walk through its doors. The retailer’s chief executive has called the partnership its “single biggest initiative” of the year.