“Internet retailers present a significant competitive challenge for independent brick-and-mortar stores, one that is in many respects more severe than that of big-box and other chain retailers.” That quote came from a white paper commissioned by the American Specialty Toy Retailer Association (ASTRA), researched by the Institute for Local Self-Reliance (ILSR), and published in June.
The white paper, “The Growth of Internet Retailing: Implications and Strategies for the Specialty Toy Industry,” which includes information from two surveys of 47 specialty toy manufacturers and 93 brick-and-mortar retailers, as well as in-depth interviews with 14 manufacturers and five retailers, elucidates a number of startling facts that many in the hobby and specialty toy industry have either surmised or known for some time.
Citing recent findings from the NPD Group and Forrester Research, Internet sales in the specialty toy market has grown substantially, with the online sales of toys exploding by 22% in 2010. The specialty toy manufacturers who participated in the survey say that Internet-only retailers apprise 14% of their sales, with company websites adding another 4%.
The biggest advantage for online retailers is their price advantage, but convenience is also playing a bigger role, especially during the holidays, the paper says. Retailers reported holiday sales declines “continued into the 1st quarter, with 42% of respondents reporting that their sales are down for the first three months of 2011.”
The study indicates that the tried and true methods independent retailers have used to combat chain and big-box stores, like a better selection of products not found in those stores or an exciting experience, aren’t necessarily the answer to the Internet quandary.
It also highlights the difficulties for both retailers and manufacturers as dramatically discounted prices online have led to both deteriorating brick-and-mortar sales and degradation of perceived market value for many products. This race to the bottom, often started by a single online retailer and then mimicked by others as computer algorithms automatically begin to lower prices, can damage brand image and cause confusion among shoppers as prices across a wide range of websites and real-world stores vary. This confusion leads to consumer distrust and the notion that prices are artificially inflated.
Among the solutions offered for fighting the depredations of Internet sales, ILSR suggests manufacturers should develop sales strategies that balance web opportunities while protecting brand image and the “viability” of brick-and-mortar stores.
Invoking the U.S. Supreme Court’s 2007 ruling, Leegin Creative Leather Products, Inc. vs. PSKS, Inc., the white paper suggests that greater price controls afforded by minimum advertised pricing (MAP), Authorized Retailer and Authorized Distributor agreements is one route that should be explored. However, it does not touch on the continued ill-effects incurred by a manufacturer selling via the web at or under its own MAP, and points out that such policies and agreements are only useful so far as a company is willing to enforce its rules and eliminate violators.
The ILSR report suggests that retailers and manufacturers work together to develop solutions for leveraging brick-and-mortar competitive advantages that includes community presence and in-store expertise; using in-store web kiosks and manufacturer-fulfilled drop shipments for better selection and convenience; and the creation of mobile apps to drive traffic and sales to brick-and-mortar stores.
Finally, the white paper proposes that the passage of laws such as the federal Main Street Fairness Act and other state-level legislation to require online retailers to collect state and local sales tax — which can be as high as 10% in some areas — would eliminate a “significant competitive disadvantage.”