What can your business do to counter the threat of Internet superstores?
|Karl Freske, co-owner of Film Is Truth 24 Times a Second, on Holly Street, said the trend toward through-the-mail DVD rentals like Netflix and downloadable movies spells the eventual demise of his movie-rental store; it’s not a question of if, but a question of when, he said.|
Why drive to a store when so many goods are available at the click of your finger?
It’s a question many consumers have answered by signing up for Netflix, ordering books through Amazon.com or downloading tracks on iTunes.
It’s also a question many local independent retailers are considering, as they work to survive and adapt to the growing e-commerce trend. Some have answered it by adding their own online options, while some have bolstered their niches in the community. For others, their best option is to know when to quit.
Whatever the future may hold, many local independent business owners realize they have at least one common trump card: a loyal customer base and human-to-human contact — qualities that will, at the very least, prolong their existence in the community.
The online trend
Most local book, music and DVD-rental stores have noticed a shift toward online services in their industries, but to varying degrees.
Since Karl Freske opened Film Is Truth 24 Times A Second with co-owner Emily Marston in 1997, the DVD-rental industry has trended dramatically toward through-the-mail DVD-rental services like Netflix and Blockbuster Online. He said business for the DVD-rental store on Holly Street has begun to plateau in the last few years because of this trend.
Film Is Truth is not alone. By 2009, online rentals will make up 25 percent of all DVD-rental spending in the United States, according to a report by market research firm Screen Digest.
Freske thinks even this type of online ordering and mail delivery will eventually be replaced by downloading movies straight from the Web, a service Netflix recently announced it would pursue.
These online options will result in the eventual demise of brick-and-mortar DVD-rental stores, Freske said. Large chain companies, like Blockbuster, may be able to adapt and switch to online services, but small, independently owned stores, like Film Is Truth, don’t have the capacity to do so.
“I would be surprised if video stores lasted as long as another 10 years,” he said.
Chris Lamb, general manager for Avalon, a music store on Railroad Avenue, said the CD industry has also undergone serious changes since he began working there in 1998. With the rise of online music downloads, as well as stiff competition from big-box stores, CD sales at Avalon have been down since 2000.
The trend has affected music stores everywhere, he said.
“Every year and every quarter sees a decline in number of CDs sold,” he said.
CD sales nationwide were down by 20 percent in the first quarter of 2007, according to Billboard magazine. However, digital-album sales are on the rise, currently representing nearly 10 percent of album sales, as compared to 5.2 percent at the beginning of 2006.
While the writing on the wall seems fairly clear for DVD-rental and music stores, the effect of online services on independent bookstores is less clear.
The first online booksellers surfaced on the Web in the early-to-mid ‘90s, most notably with Amazon.com, said Village Books owner Chuck Robinson.
But Robinson said that while Internet book sales pose a threat to his bookstore, they are not the main cause of concern. Retail outlets such as grocery stores and gift shops hold that slot. Those stores’ share of the bookselling market increased from 30 percent in 1994 to 55 percent currently, Robinson said.
Today, online book sales make up only about 15 percent to 20 percent of the market, he said, which is significant, but no greater than independent bookstores’ share of the market.
While Robinson said Village Books is doing more business than it did 10 years ago, the last several years haven’t seen as much growth. He attributes this trend to an overall decline in book purchasing nationwide, as reading declines as a form of entertainment.
“I don’t know that competitors are our biggest challenge,” he said. “It’s the market stagnation for books that is our biggest challenge.”
Even though he sees a decline in the market as his biggest hurdle, online sales could become more of a threat to local booksellers in the future.
“I’m sure online sales will gain more market share, but I’m not sure where that will max out. In the next 10 to 15 years I’d be pretty surprised to see them take half of the market,” he said. “By no means are (online book retailers) our biggest challenge, but they’re part of that whole landscape.”
Local independent retailers are responding to the e-commerce trend in a variety of ways.
Robinson said he is constantly improving the Village Books Web site, which he started even before Amazon.com hit the scene. He may consider offering e-books — downloadable electronic books — on the site in the near future. He also competes with other online retailers by offering a choice of home delivery or pick up, as well as gift-wrapping options.
Elsewhere in Bellingham, Michael’s Books sells about 15 percent to 20 percent of its sales on the Internet through its own site, as well as through several other book-listing sites, according to owner Michael Elmer. He doesn’t anticipate ever switching over entirely to online sales because as a used bookstore, he depends on having a storefront for people to bring in books to sell.
“I wouldn’t call (online booksellers) a threat. I am trying to be sensitive, to be flexible, in the way I buy, sell and deal books to people,” he said. “I try and watch what’s happening, and when I see trends change, I try to swim with them.”
Freske, however, is less hopeful about Film Is Truth’s survival.
“Once business starts going down, it will be very tough to keep paying rent,” he said. “Our lease here is up in two years and we’ll look at the numbers.”
To add insult to injury, Freske is further challenged by the fact that because his type of business will soon become obsolete, he won’t be able to sell it as an entity, he said. In fact, the longer he stays in business, the fewer options he has to liquidate the store and make any money off it, he said.
“Ultimately, video-rental store owners will need to just try and sell off their stock and get a new job,” he said.
Freske seems circumspect about his industry’s reality. He can see how online DVD rentals are a benefit for small-town customers who want to rent more than just the most popular blockbusters.
However, at his store, customers have the benefit of spontaneously deciding which movie they’re in the mood for (although this will be satisfied by the oncoming downloading option) as well as the tactile nature of choosing a movie in its case and talking with the store’s knowledgeable staff.
These benefits, as well as a loyal customer base, may give local independent retailers, like Freske’s store, an advantage in surviving longer as a storefront in the face of e-commerce.
Lamb, a self-described Luddite, said Avalon has only a very small online presence with a MySpace page and an e-mail account. He has no desire to incorporate online services into the business.
Instead, Avalon has created a niche destination by doubling its LP stock and focusing on special CD orders, a service Lamb said is one of his store’s greatest advantages.
Echoing other local independent retailers, Lamb said his local customer base is one of his greatest strengths in surviving e-commerce.
“The fact that this town is so progressive in its support for local business is the best thing we’ve got going,” he said. “We have a more tactile, face-to-face experience. There will always be enough people, especially in a town like this, that will want that.”
E-commerce: By the numbers
Amazon.com’s net sales for 2005, according to the company’s 2005 annual report.
Amount of increase in Amazon.com’s net sales from the previous year, according to the company’s 2005 annual report.
Number of Netflix subscribers at the end of 2006, according to the company’s investor relations page.
Netflix’s total estimated rental revenue at the end of 2006, according to the company’s investor relations page.
The compound annual rate at which Netflix’s number of subscribers has grown since the company launched in 1999, according to the company’s investor relations page.
Decrease in United State album sales in 2006 from previous year, according to Billboard magazine.
Time number of albums sold in the U.S. has dropped below the 600 million mark since 1993, with only 588.2 million albums sold in 2006, according to Billboard magazine.
Number of digital music albums downloaded in the final week of 2006, the first time digital albums topped the million-sales mark in one week, according to Billboard magazine.