Retail's big advantage vs Amazon not foolproof

Finding a way to beat Amazon (NASDAQ: AMZN) just got even more urgent.

Though the company's fourth-quarter earnings fell well short of analysts' expectations , a third straight quarterly profit from the formerly money-losing retailer served as a fresh warning sign for its bricks-and-mortar competitors: We can keep pricing you out of the market.

So as traditional retailers overhaul their businesses to more fiercely compete against Amazon, the rollout of "click-and-collect" capabilities — which allow shoppers to purchase an item online and pick it up in store — have been touted as a key advantage in stemming their sales bleed.

The benefits are multiple. First, the service brings shoppers into stores, increasing the likelihood they'll scoop up extra items on their visit. Second, it streamlines distribution, often eliminating the cost of shipping, and getting orders in consumers' hands more quickly. But perhaps most importantly, it allows traditional retailers to leverage the key advantage they have over Amazon: Their physical stores.

Analysts and retailers agree that the click-and-collect service has potential to be a game changer for traditional players; but less talked about is the drag it can have on their profitability when it isn't executed properly.

According to a forthcoming study by JDA Software, 42 percent of retailers surveyed listed preparing online purchases for in-store pickup as one of their highest costs for fulfilling orders. While that ranked last among the five practices in question, experts said these expenses have nonetheless caused retailers to consider the pros and cons of click and collect — particularly as it becomes more popular with consumers.

"Retailers are really putting [in] a lot of effort right now to make it the most profitable," said Jim Prewitt, vice president of retail industry strategy at JDA Software. That includes potentially charging for the service, as was implemented last year by U.K. retailer John Lewis.

The ability for click and collect to save retailers money depends largely on where the product is located, and retailers' ability to find the cheapest way to get it to the consumer.

The economics are simple when an item is already in stock at the requested store, as the shipping cost is entirely eliminated. If it's on a shelf at a nearby store, it could also be cheaper to send it to another location, particularly if it were going to be marked down.

But if the product is sitting in a distribution center a few states away, and the retailer would have otherwise charged the customer for shipment to their home, the company now has to foot the bill to transport it for free in-store pickup.

The additional labor cost that's often required for the click-and-collect service — which can include taking workers off the floor to find the items and pack these orders — can also weigh on the service's profitability.

"Any time you touch the product, obviously you're adding cost," Prewitt said.

Jim Manzi, chairman of MasterCard's APT analytics software company, said the answer to rolling out buy online, pick up in store is not one size fits all. That's because the sales boost a retailer generates from the service — as well as the cost of implementation — can vary greatly depending on the products they sell, their customer base and even their location.

Generally speaking, Manzi said retailers that cater to younger, wealthier shopper bases see greater demand for the service, and tend to net more positives from rolling it out. But it can even be a catch-22 for these brands. For example, Manzi said it is not unreasonable to think that the service could be profitable in one-third of a retailer's stores, but not in the remainder.

"Then it becomes a question of, 'is this part of our brand value proposition or not?'" he said.

Although buy online, pick up in store is still in its infancy, consumers are rapidly taking advantage of the service. According to a recent study by the International Council of Shopping Centers, 32 percent of shoppers used click and collect during the holiday season, and nearly 69 percent of them purchased additional items in that store when they went to pick up their order.

According to Slice Intelligence, which studied the electronic receipts of 12 major retailers in 2015, buy online, pick up in store accounted for 6.7 percent of digital sales, up from 6.4 percent in 2014.

Slice found that Sam's Club shoppers were the most likely to take advantage of the service, with click and collect accounting for 30 percent of its online sales last year. Kmart (NASDAQ: SHLD) came in second, at 23 percent, followed by Toys R Us, Best Buy (NYSE: BBY) and Home Depot (NYSE: HD).

Most of the information retailers share about the click-and-collect service pertains to the subsequent sales that get rung up when shoppers pick up their items, or the fact that consumers love the convenience.

In November, Kohl's (NYSE: KSS) said 20 percent of its shoppers who used buy online, pick up in store ended up making additional purchases while they're there. And while Wal-Mart (NYSE: WMT) does not provide specifics for its in-store pickup service, which it first launched in 2007, Jaeme Laczkowski, who heads up media relations for the retailer's e-commerce division, said its customer retention and satisfaction numbers are trending higher because of the service.

Despite consumer demand for click and collect, surprisingly few retailers have rolled out the service in earnest. According to a recent study by customer service analytics firm StellaService, which examined the performance of 40 retailers over the holiday season, only 16 offered the option to buy online and pick up in store. Along with Kohl's and Wal-Mart, those retailers include Best Buy, J.C. Penney (NYSE: JCP), Nordstrom (NYSE: JWN) and Macy's (NYSE: M).

As the rollout of click and collect matures across the industry, both APT's Manzi and JDA's Prewitt predict retailers will figure out a way to make the service more profitable for their businesses — mainly because they have no choice. Similar to the way consumers now expect free shipping on their online orders — regardless of the pressure it puts on retailers' margins — the time will likely come when shoppers also expect retailers to offer this capability.

"You're seeing now everyone feels like they have to have the service to compete," Prewitt said. "They need to find ways to make all of these things profitable, and that's what every retailer is working toward."

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