Though online retail accounts for a mere 8% of all sales, it is doing markedly better than offline retail. For example, while store retailers saw sales increase a relatively modest 4.1% during the last holiday season, online retailers' sales jumped by 15% for the same time period. This online explosion, led by Amazon, is being fueled by the so-called practice of "showrooming," in which shoppers use their smartphones to compare prices while in the store.
Recently, Target, in an attempt to circumvent this practice, reportedly wrote a letter to its vendors and asked them to help fight commoditization and price wars by developing exclusive products. Proprietary products increase points of differentiation as well as decrease product-on-product price competition. In cases where exclusive products aren't possible, manufacturers are being asked to help Target match its competitors' prices. "What we aren't willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands," according to the letter signed by Chairman, President and CEO Gregg Steinhafel and Executive Vice President of Merchandising Kathee Tesija.
"Realistically, a brick-and-mortar retailer like Target has no chance of competing with Amazon based purely on price as their heavier overhead structure just won't allow it," said Andrew Swedenborg, executive vice president of King Retail Solutions. "In addition to doing all it can to price match, Target must find other points of differentiation in order to compete, and developing proprietary products seems like a savvy avenue for this."
However, analysts aren't hopeful that Target's plea will do much to reverse the showrooming trend. "The traditional retailers are still doing business the old way while Amazon has reinvented the model," Sucharita Mulpuru, retail analyst at Forrester Research, told the Wall Street Journal. "Walmart and Target are willing to sell a few things at a loss. Amazon's whole business is a loss leader."
When you see the big boys of retail quaking in their boots, you know something significant is going on. And it is. The balance of power is shifting from the retailers to the manufacturers as pressure from online competitors forces them to up their game. Now manufacturers who are able to deliver customized programs that help retailers differentiate themselves and add value above and beyond the online experience will be in the catbird seat.