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Why Apple and Amazon Win at Retail and Best Buy, J.C. Penney and K-Mart Lose

Rick Newman

Retail is an industry in decline--but only for traditional retailers. For companies that have become successful doing something else, opening a chain of stores can bring millions of new customers and the profits that go with them.

This paradox of the retail marketplace is evident in some of the biggest names at the mall. Traditional retailers such as Best Buy, J.C. Penney, Sears and K-Mart are struggling to reverse losses, turn themselves around and give shoppers new reasons to think they're relevant. The recently announced merger of Office Max and Office Depot is just the latest example of a retail glut that has already sunk Border's, CompUSA, Circuit City and many others.

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Yet Apple, a technology company and newcomer to the retail scene, operates a network of more than 200 U.S. stores that have created a new paradigm for brick-and-mortar success. Microsoft, a software company, runs about 60 U.S. stores, with plans to open more. Even Google, an information company, is rumored to have retail ambitions.

On the surface, the secret to retail success these days seems to be a tech tie-in or a hip brand. But one other factor increasingly differentiates winning stores from losing ones: trust. "Many of the retailers have gotten out of sync with consumers," says analyst Bob Hetu of research firm Gartner. "They're violating trust with their customers."

Getting the best price, of course, is one of the main things shoppers care about, but if they don't trust the retailer they may still take their business elsewhere, even if the price is right. Best Buy, for example, recently offered to match any price shoppers could find for a product online, to fight back against "showrooming," in which consumers visit a retail outlet to check out the merchandise, then order it from an online site such as Amazon using their smartphones.

But a recent Gartner survey found that many shoppers who practice showrooming would still prefer to buy online, even when the retailer offers to match the price. In fact, shoppers may view price-matching policies and other types of ad-hoc deals as gimmicks, which degrades trust rather than enhances it.

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J.C. Penney is another struggling retailer that suffers from price-policy confusion. Under a turnaround effort meant to move the chain upscale, Penney's swore off the heavy discounting that trashed its profitability and contributed to a down-market image. But when that alienated many traditional customers, Penney's returned to discounting, leaving many shoppers wondering what kind of store it is, anyway.

Data on corporate reputations shows how trust relates to success in the modern marketplace. In the latest survey of corporate reputations by Harris Interactive, Amazon, clearly the most successful online retailer, came in first. Apple--which runs the most profitable stores, in terms of sales per square foot--came in second.

Struggling retailers, meanwhile, have been falling in the Harris ratings. Best Buy fell from 27th in 2011 to 41st this year. J.C. Penney dropped three spots to 37th. Sears, which lacked the visibility to make the list in 2011, did make the rankings in 2013--but came in 46th with a score indicating its reputation is "poor."

Google, meanwhile, ranked fourth in the Harris survey, with a score indicating an "excellent" reputation, while Microsoft came in 15th with a score in the "very good" range. That positions both companies for retail success, if they execute well.

Despite the shift to online shopping, physical stores still account for most purchases. Gartner estimates that 80 percent of retail sales will still take place at brick-and-mortar outlets in 2016. The outlook for dominant big-box retailers such as Wal-Mart and Target is secure, if not bright.

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So Best Buy, Penney's and other struggling retailers can't blame their woes purely on online competitors that don't have to finance expensive real estate. In fact, some retail experts argue that the showrooming trend gives retailers an ideal (yet often missed) opportunity to win over new customers once they've arrived in a store to check out the goods.

The retail landscape will continue to quake, however, with chains that fail to keep up with rapidly changing consumer tastes facing even tougher times. Showrooming, for instance, is spreading beyond consumer electronics to home-improvement goods, baby gear and most things that are expensive enough to bother shopping around for. Amazon and other online retailers, meanwhile, continue to get into new product lines and expand their competitive focus. The list of bygone retailers will probably get longer.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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