Opening Case

Brick-and-Mortar Retailers Fight the Amazon Effect The increase in electronic commerce sales has been remarkable, and it accelerated in 2020 as a result of the coronavirus pandemic. In 2019, e-commerce sales accounted for only 16 percent of overall retail sales. However, those sales were growing roughly five times faster than sales at traditional stores. In 2019, more than 9,000 brick-and-mortar stores closed, a 60 percent increase from the previous year. The Amazon Effect refers to the disruption of traditional brick-and-mortar retailers by electronic commerce. Despite the seriousness of Amazon's impact, references to the death of physical, brick-and-mortar commerce seem to have been premature. As we see in this case, Costco (www.costco.com) and Best Buy (www.bestbuy.com) are thriving in the face of intense competition from electronic commerce. Let's take a closer look at what each company is doing to achieve outstanding results.

Costco Strategy. Founded in 1983, Costco's goal is to reduce operating costs where possible and pass along the savings to its customers and employees. In essence, Costco prioritizes the interests of its customers and employees over those of its shareholders. As of August 2020, Costco was one of the world's largest retailers, with 785 locations and 214,000 employees. The retailer's huge purchasing power enables it to negotiate deep discounts with vendors. Costco then passes along these savings to its shoppers. According to the company's 2019 Annual Report, the markup on a typical item in the store is only 11 percent, compared to the 25-50 percent markup in other retail outlets. In fact, Costco's prices are so low that the company just barely breaks even on its merchandise sales. Since 1990, the percentage of corporate profits in the United States going to stockholders has increased from 50 percent to 86 percent, resulting in higher prices for customers and low wages for employees. Not surprisingly, then, since Costco went public in December 1985, investors have complained that the chain should increase margins and prices for goods and reduce benefits for its employees. Costco's leadership, however, has resisted those demands, and the value of its stock has increased by almost 400 percent since 2000. So, how does Costco make money? Costco's sells annual memberships$60 for "Gold Star" and $120 for "Executive"which people pay because they believe that having access to Costco's economies of scale and bulk quantities justifies the upfront cost. In 2019, Costco had 98 million members, 90 percent of whom renew each year. The majority of Costco's members are affluent (more than $100,000 annual income) and college educated. Membership fees in 2019 totaled $3.35 billion. Supply chain. Conventional wisdom in retailing is that excess choice is good because shoppers want to be able to choose from many varieties and brands. Costco, however, limits brand selection and stocks massive volumes of fewer products. Costco adopted this strategy because it realizes that it makes more financial sense for a shopper to spend $400 once per month than $100 in four trips. The process saves customers time and money by eliminating multiple trips while reducing Costco's costs at the same time. Costco's average store stocks only 3,700 stock keeping units (SKUs), less than 10 percent of the 40,000 to 50,000 items found in most supermarkets. Often, Costco provides only one or two brands in a given category. Analysts note that Costco knows their customers very well, and that knowledge enables the chain to limit choices to items that their customers most likely want. With its retail process, Costco solves the "paradox of choice"a problem that consumers face when too many options cause them stress and delay their decision making. The company has an economic incentive to stock fewer items. Fewer selections require less labor. In retail operations, every person who touches an itemreceiving, stocking, organizing, rearrangingincurs costs. Costco's supply chain is designed to minimize contact. Items are taken from trucks and driven directly to the aisles on forklifts, where they sit on giant pallets, ready for customers. Costco is very careful about the vendors it selects. When the chain finds a product that it likes, it works closely with the vendor and its factories to both reduce the price of an item and increase its quality. One Costco buyer found a toy he liked that retailed for $100. Costco had the option of buying each unit for $50 wholesale and selling it for $60, but that did not satisfy the chain. Instead, Costco worked with the vendor to redesign the toy, analyzing every part of the process for ways to cut costs. In the end, Costco convinced the vendor to reduce the price by 50 percent, and they sold it for $30. Costco's profit margin of $30 per toy was the same as what the company would have made at the $60 price point. Human resources. Retail workers are among America's lowest-paid employees. They rarely receive full benefits, and their employers often view them as expendable. Turnover rates in the retail industry approach 65 percent. Costco realizes that it is more cost effective to retain happy employees and pay them a livable wage than it is to have to manage high employee turnover. As of August 2020, the average pay for Costco employees was between $14 and $15 per hour. Costco provides excellent benefits for its employees, including health care, 401K contributions, and paid time off. The result is that Costco has an amazingly high employee retention rate of 94 percent. Electronic commerce. Traditionally, when Costco's leadership was asked about the chain's e-commerce strategy, they would reply that they wanted to do "everything possible" to get customers into the stores. Costco realizes that its website is a useful channel to reach and satisfy its members. For example, the retailer relies on its website to drive more of what the chain calls "white-good sales"bulky home appliances like refrigerators, washers, and dryers. In 2016, Costco sold about $50 million in white goods. Three years later that number had increased to $700 million. Since 2018, Costco customers can order online from all Costco store. The retailer has been adding lockers to its stores to make the buy online and then pick up in-store processcalled click-and-collectmore efficient. In addition, Costco has added self-checkout areas to 250 of its stores. Like Walmart, Costco generates more than half of its revenue from groceries. Therefore, the chain has partnered with Instacart to offer same-day grocery delivery to shoppers near Costco locations and free two-day delivery on nonperishable items with a $75 minimum purchase to a larger part of the country. Costco's app. In 2019, Costco added new features to its mobile app such as pharmacy order management, a photo-ordering center, easier shopping during member savings events through a "$ Savings" function, and the addition of various push and pick-up notifications. It has also started to make more products from popular national brands available on its website. Results. Costco's e-commerce sales increased by 66 percent during the first half of 2020, largely due to the COVID-19 pandemic. The retailer reported a revenue for 2020 of $167 billion (10 percent increase over 2019) and a net income of $4 billion (10 percent increase over 2019).

Best Buy In 2012, Forbes announced that Best Buy was "going out of business." Since that time, the retailer has defied expectations by focusing on what it could offer that online commerce could not: engaging physical stores, knowledgeable staff, and a Geek Squad who will install and synchronize electronics in your home. Best Buy stores and staff. The success of Best Buy suggests that customers still value the physical experience of stores. However, these stores must offer a vibrant experience combined with integrated services that customers need and value and cannot be easily duplicated online. Best Buy stores are welcoming, and they allow customers to touch, use, and experiment with electronic devices. They also have knowledgeable staff members who are passionate about what they explain and demonstrate. Best Buy also implemented an In-Home Advisor program. Through this initiative, Best Buy sends consultants to customers' homes to offer advice and assist with purchasing decisions. Best Buy encourages advisors to establish long-term relationships with customers, rather than simply trying to close a one-time sale. In-home advisors do not need to track weekly metricsfor example, number of customers visited and sales closedand they are paid an annual salary rather than an hourly wage. House calls are free and can last up to 90 minutes. Best Buy instructs its advisors to "be comfortable not closing a deal by day's end." The Geek Squad. Best Buy has identified the customer pain point in shopping for electronics; namely, installing, synchronizing, and integrating devices without having to waste time dealing with technical customer service. To accomplish this mission, Best Buy can send its Geek Squad to help set up those systems in customers' homes or offices and recommend other products and services. Human resources. In 2012, Best Buy CEO Hubert Joly visited many Best Buy stores and even worked at one store for a week. After speaking directly to employees he:

Fixed broken systems, such as an internal search engine that provided poor data about which products were in stock Restored the employee discount program for purchasing products Invested heavily in regular employee training

His initiatives worked. In August 2020, workplace review website Glassdoor stated that 80 percent of employees would recommend working at Best Buy to a friend. Strategy. Best Buy turned showrooming into a competitive advantage. Showrooming refers to the practice in which customers enter a store to test products and then purchase them online from competitors. Joly used that practice to Best Buy's advantage by instituting a price-matching system. The strategy took advantage of the fact that customers want to see expensive items such as big-screen televisions and smartphones before they make a purchase. If the store was willing to price-match, then why not buy then and there? Best Buy also partnered with large electronics companies such as Apple and Samsung to feature their products. These companies rent square footage within a Best Buy location to highlight all of their products together in a branded space. This arrangement gave Best Buy a new revenue stream. Joly and his team also made changes that allowed stores to serve as mini-warehouses for online customers. This process enabled customers to order a product online and then choose whether to pick it up at a store (click-and-collect) or have it shipped to them. Results. For the second quarter of 2020, which ended August 1, 2020, Best Buy reported domestic e-commerce revenue of $4.85 billion, an increase of 242 percent over the same quarter of 2019. Best Buy's net income for the quarter was $432 million, an increase of 81 percent over 2019. A final note: other traditional brick-and-mortar retailers are also having success competing with the Amazon Effect. Notable examples are Target (www.target.com) and Tractor Supply (www.tractorsupply.com). Sources: Compiled from J. Bowman, "Walmart Just Did Something that Amazon, Home Depot, and Target Couldn't," The Motley Fool, May 20, 2020; "Costco Earnings Hurt by Purchase Limits; eCommerce Sales Spike," PYMNTS.com, April 10, 2020; F. Ali, "A Decade in Review: Ecommerce Sales Vs. Retail Sales 2007-2019," Digital Commerce 360, March 3, 2020; Z. Karabell, "Best Buy Bucks the Trend That's Crushing Other Retailers," Wired, December 11, 2019; Z. Crockett, "How Costco Gained a Cult Followingby Breaking Every Rule of Retail," The Hustle, June 30, 2019; A. Hensel, "'There Are Some Real Sales to Be Had There': Costco Is Finally Figuring out Its E-commerce Strategy," Digiday, June 3, 2019; D. Kalogeropoulos, "How Costco Crushed It in 2018," The Motley Fool, April 19, 2019; J. Bariso, "Amazon Almost Killed Best Buy. Then, Best Buy Did Something Completely Brilliant," Inc.com, March 4, 2019; J. Grill-Goodman, "Costco's Plans for Its E-Commerce Operations in 2019," Retail Information Systems, March 11, 2019; S. Berfield and M. Boyle, "Best Buy Should Be Dead, but It's Thriving in the Age of Amazon," Bloomberg BusinessWeek, July 19, 2018; M. Segarra, "Were Retail Jobs Always Low Wage, with Few Benefits?" Marketplace, February 9, 2018; J. Fox, "How Shareholders Are Ruining American Business," The Atlantic, July/August 2013, L. Downes, "Why Best Buy Is Going Out of Business...Gradually," Forbes, January 2, 2012; www.costco.com, www.bestbuy.com, accessed August 4, 2020.

Questions

1.Analyze and describe what happened throughout the case.

2. Describe the nontechnological initiatives that traditional brick-and-mortar companies are employing to compete against Amazon and other electronic retailers. 3. Describe the technological initiatives that traditional brick-and-mortar companies are employing to compete against Amazon and other electronic retailers. 4. Given your answers to the first two questions, which iniatives are more effective: nontechnological or technological? Provide specific examples from this case to support your answer.