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How to Play Tech’s Retail Dilemma

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“I give them two years before they’re turning out the lights on a very painful and expensive mistake…”

That’s a quote from a pessimistic analyst in a Bloomberg Op-Ed dated May 20, 2001 — just one day after Apple opened its first retail locations.

The arguments against brick-and-mortar retail are sound, for the most part. It’s an expensive proposition to open a retail location that could quickly become nothing more than a showroom for Amazon.com. And almost everywhere you look, old-school retailers are getting crushed as consumers opt for the convenience of online purchases.

Yet Apple has proven that if you do it right — and if your product line is good enough — retail can thrive, even in the tech space. Twelve years after its first foray into upscale malls in high-rent districts, Apple’s retail juggernaut brought in the sales. Apple makes roughly $6,050 for every square foot of store space. That’s more than twice high-end jeweler Tiffany & Co.’s $3,017 per square foot, according to consulting firm Retail Sails (via Forbes).

But the billion-dollar question goes to Google:

Can the king of search make retail work?

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Google topped $800 for the first time last Wednesday. Over the past five months, it has separated itself from Apple, helping to lead the Nasdaq higher while Apple steadily slipped. Now rumors are swirling that Google is planning to open stand-alone retail locations — possibly as early as the holiday season.

Google stores could be a boon for the company. It’s already proven it can innovate (working prototypes of Project Glass and self- driving cars come to mind). But if Google can demonstrate the worth of its new innovations at retail locations to an endless supply of potential customers, a new period of growth could be in its future.

Don’t bet against them…

Instead, if you’re looking for failing retailers… look no further than the traditional ones that are experiencing a slow, painful death.

Shares of J.C. Penney plummeted 17% after the company reported a fourth-quarter net loss of more than $550 million. Despite some fairly drastic attempts at a turnaround, J.C. Penney looks like it’s headed in the direction of fellow old-school retailer Sears.

To some degree, big retailers have always been high-end flea markets. Different brands display their wares using sub-let space. But J.C. Penney extended this idea as part of the turnaround effort, creating coffee bars and hair salons inside its store. Basically, JCP is becoming a mall-within-a-mall.

Get it?

No? That’s ok. Neither does anyone else, which is partly why JCP posted a 25.2% decline in comparable store sales…

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Of course, the more generic a retailer, the more likely it is that the company is going through tough times. It’s nearly impossible to compete with Target and Walmart on the discount side. For all the other stuff, Amazon and niche shops are stealing business left and right.

Best Buy is another embattled retailer suffering a similar fate. Amazon has clobbered the electronics big-box retailer over the past year, making Best Buy nothing more than a showroom for its rival’s online business. Best Buy has recently tried to keep its head above water with price match guarantees (which have helped in the short term, judging by today’s earnings release that just hit the wire).

However, I don’t see this strategy as a viable long-term solution. Gimmicks and coupons won’t drive bottom-line growth. And they won’t keep Amazon at bay forever.

You should remain skeptical of these two turnaround efforts moving forward. Despite the quick benefits of short-term fixes, they’ve already lost the war…

Regards,

Greg Guenthner

How to Play Tech’s Retail Dilemma was originally featured in the Tomorrow In Review.


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