Winning the fight against Amazon.com

Offer exclusive products, make the most of your retail brands online and accentuate the positives of your store touch points.

Those items are high on the project lists of home improvement retailers desperate to counter the threat of pure-play online competitors that price-cut them on their very selling floors via the magic of mobile communications. Leading the assault is Amazon, which in its 18-year history has left its tire tracks on retail segments, including books, electronics, music and office supply. The Seattle-based online retailer now has its sights set on home improvement, as evidenced by its debut at No. 10 on the HCN Top 300 in this issue.

Amazon sent holiday shivers down the spines of traditional retailers last year with the introduction of a Price Check app that allowed Christmas shoppers to scan a bar code — or merely take a picture of a product — and get a 5% lower price (up to $5) from the online player. “Showrooming,” or using Home Depot and Lowe’s as the place to examine a new drill before ordering it online for less, is one of a pair of bogeymen Amazon unleashed on the brick-and-mortar set. The other is its ability to sell products minus sales tax.

The latter monster appears ready to be vanquished. Retailers, including Walmart, Target and Home Depot, joined with the Alliance for Main Street Fairness to challenge the issue in several states, and Amazon has relented. The online retailer has signed sales tax pacts with seven states, including Texas and Nevada in May, and is in talks with five others. And while Amazon has long skirted the issue by supporting an unpassable federal online sales tax law, its aggressive expansion of fulfillment centers — 30 new facilities in 2011 and 2012 — should dull the controversy. A physical presence entails charging sales tax in most states.

It’s the monster No. 1 that home improvement retailers will be wrestling with for some time to come as they re-examine and reshape their business models to engage a digitally empowered consumer base. All those new DCs are evidence of Amazon’s success in conquering new categories. First-quarter sales reported by Amazon rose 35% to $17.4 billion, with sales of general merchandise — including home improvement — up 43% to nearly $8 billion. The company added 28,000 employees in the past year, a 75% increase in payroll, in large part to staff the DCs and gird for more orders.

“For any of the big companies, the challenge is to become better than the pure-play online retailers are,” said Lowe’s board member Leonard Berry, professor of marketing at Texas A&M University. “It’s not only a worthy venture, it’s an essential one.”

Former Home Depot chief marketing officer John Ross, who now studies the habits of mobile and online shoppers as CEO of Atlanta-based Shopper Sciences, said the battle is regular retail’s for the winning.

“It’s lame for retailers to be whining about showrooming,” Ross said. “Their charge is to offer best product at the best price. That’s what they are there for. In reality today, the trade radius of the store is global. If they are just looking at the local DMA for business, they’re not living in the 21st century.”

Juggernaut though it may be, Amazon is not likely to repeat in home improvement what it accomplished in books and music. Home improvement, especially when one considers the varied business mix of a Home Depot or Lowe’s, is a complex and segmented marketplace not completely penetrable by an online pure-play.

Whereas 6% to 7% of electronics and small appliance shoppers check out products in-store before purchasing online, only about 2% to 3% of home improvement shoppers currently partake in showrooming, according to a study by NPD Group, a Port Washington, N.Y.-based consumer researcher. Some product categories, such as lumber, are exempt from the trend, while others rate moderately on NPD’s showrooming index. Power tools hit the high end at 9%.

“The impact is pretty low right now,” said Kevin Gilbert, director of home improvement at NPD.

While Amazon’s brief history illustrates it is willing to stretch to gobble up anything in its path, home improvement could prove too big a meal to swallow. “The question is, how does [Amazon CEO] Jeff Bezos think about the home improvement world?” said retail analyst Colin McGranahan of Sanford C. Bernstein & Co. in New York City. “It’s a $300 billion to $400 billion category. It dwarfs electronics. What is he after?”

McGranahan estimates that only 20% to 25% of what’s sold in a home improvement big box is currently vulnerable to Amazon’s online sales machine. “Power tools, lighting, ceiling fans — Amazon will play well there,” he observed. “But it’s hard to ship somebody a door. Quikrete would be a tough equation to make work.”

Jim Robisch, director of retail research at the Farnsworth Group, an industry consultant based in Indianapolis, believes that only about half of home improvement retail’s business will ever be within reach of Amazon‘s outpost off the information superhighway. “Contractors are not going to buy online, and even specialty contractors like to take their customers to a showroom to look at options,” he said.

Still, Robisch believes Amazon will become a significant player in the industry. “There are plenty of people who like to go to stores, but they’re dying away. It’s becoming second nature to buy everything online,” he said. “So for traditional retailers, this is a distribution issue. They’ve got to get the cost out of the distribution, not the product. Delivering to the end user is where they’re going to get beat.”

Texas A&M’s Berry said traditional retailers will work hard to improve efficiencies, cut waste, and demand exclusive products and low prices from suppliers in response to discount online competition. Ultimately, he sees them moving into digital commerce in a big way, while adhering to their core values of informed customer service.

“The physical retailer will become a multichannel retailer,” Berry said. “The Lowe’s, Home Depots and Menards can no longer afford to think of themselves exclusively as bricks retailers. They need to say to consumers, ‘We’ll do business with you any way you want to work with us.’ ”

Ross, who spent more than a decade at Home Depot, thinks traditional retailers will prevail because of the specialized knowledge they have of their businesses and customers.

“Home improvement stores are not item factories, but project factories. It‘s a unique draw,” Ross said. “The advantages brought to the party by online are limited.”

Amazon’s upselling proposition — the “You might also like” addendum to a sale — does not fully translate to the home improvement category. “If I buy a faucet, I won’t be needing another one for a while, so the Amazon model is laughably off in this case,” Ross pointed out. “The stronger Amazon gets in this category, the more the home improvement guys will invest in online. They will be the ones to figure out how to do it right.”

The MyLowe’s initiative knocks loudly on this door, forging ongoing home improvement relationships with customers by tracking their purchases and projects, as well as home details, such as floor plans, decorative styles and yard size. The value of such information can transcend a single customer. “If one homeowner moves out, another moves in,” Ross said. “The history of that dwelling remains with the retailer. It will know when the new owner needs a new roof.”

Amazon is on a mission to rule the retail world from its cyber-charged selling platform in Seattle. It helped cause the demise of such chains as Borders, Circuit City and Tower Records. Expensive retail real estate is unnecessary to its business, so its return on invested capital is more than double that of the average retail chain. According to a recent report in Harvard Business Review, Amazon’s market value is about $100 billion — or roughly that of Target, Sears, Best Buy, Nordstrom, Macy’s, Staples, J.C. Penney and Kohl’s combined.

Amazon is the 300-gazillion-pound gorilla sitting in the middle of your selling floor, and it isn’t going anywhere. But the behemoth may be denied run of the house in home improvement centers if penned in by a latticework of artful customer initiatives woven with the customer insights of experienced marketing associates.

Ross, for one, is betting on the Lowe’s, Home Depots and Menards. “As they learn to harness their customer base,” he mused, “we will enter a golden age of home improvement retailing where they will leave the Amazons in the dust.”