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Why Amazon Can't Destroy These Three Retailers

The Exchange

Internet retail in general -- and Amazon.com (AMZN) and eBay (EBAY) in particular -- has both dramatically altered the way we shop and struck fear in the hearts of physical stores everywhere. But there just might be a few shops sturdy enough to withstand the ever-more-fierce online onslaught.

According to research firm Morningstar, a handful of real-world names are positioned to compete effectively in the digital age, with three companies in particular standing out. One is an auto parts seller, another is a place for pet owners and the third is a lower-priced clothing merchant. Here's who they are, and what they have going in their favor:

Advance Auto Parts (AAP): In Morningstar's view, Advance stores do something that's hard to duplicate entirely by way of an online experience, and it's not only because of what's in stock. "It will be difficult for e-commerce firms to match auto-part retailers’ convenience, customer service for complex parts needs and services," the firm says.

PetSmart (PETM): The e-commerce side of the pet business has room to grow, standing currently at less than 3% of the industry’s sales, "but it will be difficult for online retailers to meaningfully discount over physical merchants." That's partly because of food. Pet foods don't necessarily cost a lot to buy, though they are heavy in large quantities, and so shipping costs can deter purchases on the Internet. Additionally, PetSmart has succeeded by selling pricier, exclusive items that aren't found at mass merchandisers, and by providing services such as pet lodging.

[See related: Petsmart: The New Dog in Town on the S&P]

Ross Stores (ROST). Off-price apparel -- name-brand and designer goods sold at prices marked down below many retailers -- means this chain is in a desirable place, Morningstar says. Frequent inventory changes, making store visits like a "treasure hunt," and strong relationships with several thousand clothing vendors are some of the pluses that present challenges to online players who want to invade the space. Also, Ross, found in 33 states and Washington, D.C., aims to make the items in its stores meet the preferences of local shoppers, giving it a chance to appeal to consumers regardless of where they live or their demographic.

Digital growth

Now, Morningstar isn't saying a company operating in retail can be entirely immune to e-commerce. Online sales are now more than 6% of sales in the U.S., the report says, and growth in the digital arena is expected to be in the low-double-digit rate for each of the next few years.

"Ease of website development, cheap payment processing options and immediate global reach have removed almost all barriers to entry and flooded the retail space with competition," the report points out. "With more than half of the world's Internet users coming from emerging markets, we expect e-commerce growth will remain strong in the years to come."

As we know, the revolution in retail has meant the end of the road for some of those that couldn't keep up, Morningstar notes. Circuit City, Linens 'n Things and Borders are gone, while names such as Barnes & Noble (BKS), Sears Holdings (SHLD) and Staples (SPLS) have struggled to maintain relevance. Even though several factors have been at play, "we believe e-commerce has been the most disruptive headwinds to traditional retailers over the past decade," the firm says.

It's been astonishing, really. Amazon had sales of $2.8 billion in 2000, and eBay had $431.4 million. Last year their revenue was $61.1 billion and $14.1 billion, respectively.

So clearly, there's considerable merit in Morningstar's position. And it's not been lost on every chain. The savvier ones have gotten more responsive to the e-commerce leaders by, among other things, offering price-matching, allowing online orders to be filled in stores and enhancing mobile platforms.

As an example, department stores "have moved from being laggards in online retail to becoming meaningful beneficiaries of the trend," Morningstar says.  "Some of the oldest department store chains in the country are enjoying the benefits of having physical stores and an integrated online presence."

The report also says that:

  • Home-improvement retailers are largely insulated from e-commerce competition. One reason is they sell certain heavy goods that simply would be procured better in person shipping lumber, for instance, would be cost-prohibitive. Another advantage is the in-person customer service. However, the big players such as Lowe's (LOW) and Home Depot (HD) have improved their Web components and made it easier for customers to send orders to a store for pick-up.
  • For auto-parts sellers, services such as battery charging and parts testing can't be done over the 'Net, and that obviously acts in their favor. But online sites are capable of accessing a larger number of products than a single store, especially in cases where a part is needed for an old or unpopular vehicle. Still, for truly complex matters, shoppers are likely to want a face-to-face interaction.
  • Luxury goods sellers are in an enviable position. By maintaining tight controls of their supply chains, these companies (such as Hermes), don't have to be in a real rush to fend off online alternatives. They don't allow their products to be sold by anyone else, and when you're catering to the wealthy, you're not worried about cutting prices. Luxury brands, therefore, have moved at a variable pace in terms of adapting to the digital realm. Burberry, Morningstar says, has been a leader in reaching customers through multiple routes.