How 2010 tech changed retail forever

December 20, 2010: 5:00 AM ET

A long time coming, the combined efforts of major players and successful startups have irrevocably changed the way consumers shop.

In the tech world, 2010 will be remembered for a few newsworthy events. The iPad launched last spring and took tablets mainstream. In August, sales of Android devices trumped iPhone sales for the first time. And just several weeks ago, the industry eagerly witnessed Google's (GOOG) jaw-dropping (and rejected) bid for Groupon.

Behind the scenes, a much more subtle, but no less important, transformation took place. This year, more than ever, American consumers changed the way they shopped thanks in large part to web sites and apps that reshaped the discovery process with more tempting online offers, easier ways to compare prices, and innovative solutions for attracting customers to stores.

So far this holiday season, consumers have spent $27.5 billion online, a 12% increase over last year, compared with overall retail growth, which grew just 3 to 4%. And according to the National Retail Federation, e-commerce sales on Black Friday jumped 15% to make up 34% of all shopping that day. Meanwhile, daily deals sites like Groupon and LivingSocial are reporting banner years, and recently-introduced mobile apps like ShopKick claim rapid adoption, both from consumers and retailers.

Long gone are the days when consumers merely crawled through newspaper ads and trekked out to brick and mortar stores. Through the power of the web, the smartphone and the tablet, they have more options than ever.

The shipping tipping point

E-commerce, of course, is well established, but online retailers are continuing to evolve as competitive pressures mount. In years past, one of the biggest complaints lodged against shopping sites were shipping prices. If you bought something, you usually had to contend with high prices for expedited shipping from FedEx (FDX). And to qualify for free shipping, when available, the barriers were high -- at a store like Toys R Us, users had no choice but to purchase say, over $100 worth of merchandise to qualify. There were so many strings attached to qualify for free shipping that it didn't feel free.

But that's changed. For the first time, in late November, free shipping became the dominant choice for online purchases -- 55% of all transactions during that week were shipped gratis.

Nearly every e-tailer featured some sort of free shipping option, an unprecedented occurrence according to Fiona Dias, Executive Vice President of Strategy and Marketing at GSI Commerce. And where strings were attached in some situations with say minimum purchase requirements, the minimums were set much lower. The tactics have been so successful that retailers like Wal-Mart (WMT) are crowing about them. The big box store in particular hasn't been shy about admitting that free shipping saved its customers $25 million this holiday season.

Amazon (AMZN), with its $79 a year, two-day shipping program, Amazon Prime,  also finally got some competition in the way of ShopRunner, a similarly priced counteroffensive launched by GSI Commerce and several dozen participating online stores including Toys R Us, Barnes & Noble (BKS), and Radio Shack (RSH). Though Fortune found the service to be somewhat lacking on launch day, Dias says the company and participating retailers are happy with ShopRunner's performance, though she declined to disclose specific numbers.

Enter the e-commerce giants

Even more important than free shipping are those oftentimes hard-to-beat prices online. In recent years, Amazon has really led the charge for consumer savings: go online, find a particular item, and users will usually have a ton of options to choose from.

Say you're looking for the four-disc Blu-Ray DVD edition of Pixar's Toy Story 3. Not happy with Amazon's in-house price of $23.99? No problem. Scroll through the site's list of 66 third-party vendors and you'll find the same item selling for less than $19 or used copies going for $17.

Yes, comparing prices has never been easier, a boon for customers and a major headache for retailers. Most recently, Amazon released Price Check, a free iPhone app that lets users price check CDs, DVDs, books, and video games on the fly by scanning products wherever they are, snapping a photo, saying the product name or typing in the name, brand, or model numbers. Find it cheaper via Amazon? Price Check makes it easy for users to order the item via the app instead. According IDC Retail Insights, about 45% of customers with smartphones used them to compare prices.

It's working with Blue Nile (NILE), as well. The online jewelry seller, which launched in 1999 to some skepticism, is still going strong with expected revenues of between $300 and $350 million this year. Its own price check app launched in September, and co-founder and executive chairman Mark Vadon says the app was downloaded 150,000 times in 90 countries and drove a 500% increase in traffic to the site.

Given the popularity of e-commerce and many sites' ability to offer a breadth of products that become the equivalent of hundreds of physical stores, it's no wonder that some brick and mortar chains are struggling. Last August, Barnes and Noble put itself up for sale, and in September, Blockbuster filed for bankruptcy. Moving forward, expect those problems to become more and more common.

Final Destination

Photo: LivingSocial

There is new technology for the remaining two-thirds of consumers who continue to shop in-store, as well. People used to shop around not necessarily knowing what they wanted or where the best places were for specific items, but because of online and mobile apps, people do their research beforehand, and brick and mortar has become just an end point in the shopping journey. And with location-based apps, retailers are always watching you.

Launched four months ago, ShopKick calls itself the first program that rewards users just for walking in the door, with the hope that once they do, they're more inclined to make a purchase.

That is retail's holy grail -- the "conversion rate." Offline, the odds of a walk-in customer actually buying something ranges between 20% and 95%, according to LivingSocial CEO Tim O'Shaughnessy -- in fashion it's 20%, in electronics it's 40% to 60%, and in groceries it's 95%. Once consumers go online, the rate plummets to between 0.5% and 3%. Both psychologically and physically, it's much easier to open a new browser tab and type in a URL than it is to schlep from store to store.

ShopKick encourages users to check into stores by rewarding store visitors with "Kick Bucks." The more Kick Bucks accrued, the more items users are eligible for: cash-back usable at 1,100 participating locations, Facebook credits, iTunes gift cards, travel vouchers, and DVDs. Say you visit three stores in a mall -- that could nab you a $25 gift certificate at a nearby restaurant for lunch when you're done shopping.

Then, of course, you have the growing daily deal sites like Groupon and LivingSocial, which offer massive discounts on products and services from local businesses. Though Groupon launched in 2008 and LivingSocial started up in 2007, both didn't reach critical mass until this year. In fact, they became so effective that Wal-Mart followed suit with its own version, Crowd Saver. In Groupon's case, its current position as market leader and reported annual revenues of $2 billion attracted Google's interest and that a reported $6 billion buyout offer.

"The space that we helped pioneer is new, but it's already fundamentally changing how people think about interacting with their local businesses," says O' Shaughnessy. His company, LivingSocial, now pulls in $1 million in sales a day and recently attracted some cash of its own earlier this month, when Amazon invested $183 million into the company.

For tech companies like LivingSocial, ShopKick, and of course Amazon, the change in consumer spending is clearly a huge boon. For consumers, the inherent value of such tech services is significantly more: better value for their hard-earned dollar.

Also on Fortune.com:

Deal frenzy in aisle 4

Goodbye, Best Buy. Hello, specialty retail?

Wal-Mart's Africa strategy

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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