Retail chains are embracing their online stores

When shoppers at JCPenney Co. stores can't find what they want, sales clerks are steering them to the Internet — not at their home computers, but at new online kiosks right inside the stores.

Action sports retailer Zumiez Inc. has opened more than 200 stores over the last four years. But this year, it has scaled back its openings to focus on building its e-commerce sales.

Even Macy's Inc. is doubling down on its dot-com. The company whose name is almost synonymous with "department store" has seen its online sales rocket more than 50% in the last two years. It recently junked its standard cash registers for 50,000 high-tech ones that can check online for items that are out of stock in the store and place orders directly for customers.

Welcome to Online Retailing 2.0. Traditional brick-and-mortar retailers once outsourced their online sales to specialty "fulfillment" companies. Today they are running their own online operations — and increasingly challenging their executive brainpower to find more sophisticated ways to compete with online-only retailers such as Inc.

"When you look at the big retailers, they clearly have not grown online at the same rate as Amazon has," said Marshal Cohen, chief industry analyst at market research firm NPD Group. "The online business has been the redheaded stepchild. That's starting to change."

To be sure, online revenue still accounts for a small percentage of total retail sales. Although online sales totaled $134 billion last year, the National Retail Federation estimates that's only about 7% of all retail sales.

But growth has been rapid, with online sales soaring nearly 400% since 2000.

Macy's, for example, said online sales last year topped $1 billion for the first time, accounting for about 4.3% of total revenue. That's up from about 3.3% in 2008.

Analysts say economics is driving the trend. It costs less to process online orders than to lease retail space and field an army of sales clerks. There are almost no limits on inventory, and bulky items such as luggage can be shipped from a warehouse instead of taking up precious floor space.

Time-starved consumers also are finding it more convenient to browse items online instead of driving to the mall, where they may or may not find the right size shoe or the exact color bed sheets they want.

Jay Hou, 34, says he does 95% of his shopping online these days, as his job at a telecommunications company and his 14-month-old daughter take up so much of his time. When he needed a suit for his wedding, he turned to designer apparel website

"I ordered four because they had a good return policy," the Santa Monica resident said. "I hung the suits up on the wall for about a month and kept looking at them and tried them on as the weeks went on. Then I decided on one and shipped three back."

To get more customers like Hou, retail executives are spending much of their brainpower on the challenge of boosting online sales. To better compete with Amazon, for example, book giant Barnes & Noble Inc. shook up its top management this year, replacing its chief executive with the head of its online division.

And besides offering more discounts and deals such as free shipping, they also are moving into more sophisticated models of online selling. Those include combining e-commerce and store divisions and expanding online selections and services.

"It's gotten to the point where you can't think about online retail the way retailers have thought about it in the past," said Kasey Lobaugh, a principal at Deloitte Consulting who advises major retailers on developing their online channels.

Lobaugh said his advice centers on making the buying process faster. He recommends systems that recognize customers and feature fewer clicks, such as a single-page checkout.

"It's actually a massive undertaking for most retailers because they've built up their organizations with separate operations for the stores and for e-commerce," he said. "All of that has to be redone and recast."

Gap Inc. is expanding its e-commerce network to Canada and Europe in the fall; Ann Taylor Stores Corp. is expanding its online selection, implementing a faster checkout process and adding personalization capabilities to its website; and Kohl's Corp., like JCPenney, is adding do-it-yourself online kiosks to its stores.

The transition is not without challenges.

Nordstrom Inc., for example, has long focused on customer service to sell its pricey products. When the retailer found that many online shoppers had questions because they couldn't touch and feel the merchandise, Nordstrom added a live Web chat feature and staffed it with specialists in beauty, designer brands and other categories.

The Seattle chain also found itself turning away customers online when its fulfillment center was out of stock on their desired items. So Nordstrom expanded the warehouse by 300,000 square feet and began filling online orders with inventory from its stores when possible, which increased merchandise availability.

And to better integrate the store and online sides of its business, and to respond to Web shoppers' desire to get their products quickly and without having to pay shipping costs, Nordstrom, like other traditional retailers, implemented a "buy online, pick up in store" feature.

"The main thing is, does the customer feel like it's one Nordstrom, versus these kinds of silos of business units?" President Blake Nordstrom said. For online sales, "our challenge now is things are accelerating."

For its fiscal first quarter, Nordstrom said its direct sales division, which includes its online and catalog businesses, rose 38.7% from a year earlier and accounted for 7.2% of the company's total sales.

In some cases, this is increasing competition between online-only outlets and old-school retailers that are no longer content to lose market share to Internet rivals.

As brick-and-mortar retailers seek a bigger market share online, they're up against tough pure-online competitors such as Amazon and shoe seller, which have honed their websites through years of trial and which don't have to collect sales tax in states where they don't have a physical presence.

Henderson, Nev.-based Zappos began selling shoes 11 years ago and has since expanded to clothing, accessories and housewares; last year, it was purchased by rival Amazon in a stock deal valued at more than $1.2 billion at closing.

During an interview at Zappos' headquarters, Chief Executive Tony Hsieh said that although physical stores are better able to "form an emotional bond" with their customers, purely online sellers have an edge because they are singularly focused on their websites and don't have the overhead of running physical stores.

With those savings, Zappos can allow customers to return purchases with no shipping or restocking fees for up to 365 days. Hsieh said that has been a huge selling point for people who are wary of buying shoes online without trying them on first.

The company also set up its distribution facility — which stocks more than 4 million products — in Kentucky to be near the primary hub of UPS. The location enables Zappos to ship items faster and do surprise overnight-shipping upgrades.

"It's innovation versus lack of innovation," Hsieh said. "In the online world, there's just much more of a culture of embracing change and experimenting."

As e-commerce continues to grow at robust rates — the sector posted a 10% year-over-year sales increase in the first quarter, according to market research firm ComScore Inc. — experts have predicted that online sales could grow to as much as 30% of total retail sales over the next few decades.

"The entire retail industry, in one way or another, is becoming driven by digital, and the days of just going to the store and shopping are really declining," said Andrew Lipsman, senior director of industry analysis at ComScore. "We're really at the tip of the iceberg."

No one expects physical stores to disappear. Even overnight shipping can't deliver the instant gratification of bringing home a purchase right away, and in some cases, consumers still want to see an item in person before buying it.

But retail experts said stores are likely to wane in importance. Some say they might evolve into showrooms where shoppers try on or test out products before ultimately purchasing them online.

"To expect the consumer to come in and to convince them to buy a product that's folded on a shelf is irrelevant," said Cohen, of NPD Group. "No one shops like that anymore."

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