Why Is Omni-Channel Retailing So Important For Bed Bath & Beyond?

In the digital era, where buyers are increasingly shopping through their desktops, laptops and mobile devices, retailers across the industry are looking to ramp up their investments in e-commerce and omni-channel retailing. Major retail chains such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Costco (NASDAQ:COST) have deployed several strategies on these fronts and Bed Bath & Beyond (NASDAQ:BBBY) is no exception. The company has been trying hard to integrate its vast store network with its nascent online channel, in order to leverage buyers’ online shopping interest to bolster store sales.

Over the past few years, almost all U.S. retailers have seen substantial growth in their online revenues, but it has not turned into a big business for any of them. Currently, the direct-to-consumer channel accounts for less than 3% of Wal-Mart’s, Target’s and Bed Bath & Beyond’s revenues. While this figure is likely to increase going forward, growing competition from pure play online retailer Amazon (NASDAQ:AMZN) will act as a repulsive force. To subdue this threat and translate e-commerce into a meaningful business, the U.S. retail industry is gradually shifting towards omni-channel retailing, which refers to providing a seamless shopping experience across stores and the online channel. This has become somewhat of an inevitable move for U.S. retailers, including home goods company Bed Bath & Beyond.

Our price estimate for Bed Bath & Beyond stands at $75, which is just below the current market price.

See our complete analysis for Bed Bath & Beyond

Online Space Remains A Small Portion Of The Overall Retail Industry

Like most retail chains in the U.S., online business accounts for an immaterial portion of Bed Bath & Beyond’s sales (~2%). It will take a long time and a lot of effort  to make this channel a notable revenue contributor. Even if we assume that the retailer’s online sales will double following the completion of its new distribution and IT data center, there will be no significant upside to our price estimate. It is almost evident that online channel alone cannot do much good for retailers, who have traditionally served their customers via brick-and-mortar stores.

In fact, the rate of increase of online revenues across the industry relative to the increase in overall retail sales has been moderate. In 2006, online sales contributed around 2.5% to net retail sales in the U.S.  and this figure increased to around 6% in 2013. During the next five years, this figure is expected to rise to only 9%, which indicates that retailers such as Bed Bath & Beyond will have to significantly outpace the online industry growth to translate their e-commerce channel into a meaningful business.  This seemslike an unrealistic scenario. ^{[1] [2]}

However, a strong online channel can work very well in tandem with a vast store network, giving customers a flexibility in purchasing. This is the reason why the industry is gradually adopting omni-channel retailing.

Omni-Channel Helps Offer The Best Of Online And Physical Space

With the online channel invariably not turning into a big business for retailers, the entire industry is trying to integrate the online channel with the stores channel, to offer the best of both and propel overall revenue growth. According to a survey conducted by Retail Systems Research (RSR) in June 2013, around 84% of the retailers polled worldwide believed that creating a consistent customer experience across channels was very important. ^[3] Moreover, multichannel shoppers have a tendency to spend more than regular shoppers as they have access to a wider product range and additional discounts. Therefore, investing in omni-channel retailing is quite essential for U.S. retailers. An Edgell Knowledge Network survey suggested that a majority of retailers in North America are planning to ramp up their consumer mobile initiatives. ^[4]

However, the current landscape of omni-channel retailing is not well developed in the U.S. According to eMarketer, retailers have been inefficient in coping up with multichannel shoppers’ demands. The RSR survey found that less than one in five respondents reported full synchronization in the 13 most important aspects of omni-channel strategy. Though omni-channel retailing is still at a nascent stage, it is very promising for big retail chains such as Wal-Mart, Target and Bed Bath & Beyond, whose business model is heavily lopsided. ^[3]

What Bed Bath & Beyond Is Doing

Bed Bath & Beyond is taking its online business seriously and is working hard to enhance the customers’ overall shopping experience in stores and online by leveraging mobile devices and social media. The company believes that providing a deeper set of merchandise in an omni channel environment, combined with compelling customer service, will help it gain market share in the future. For this purpose, Bed Bath & Beyond is adding additional functions to its relaunched websites for Bed Bath & Beyond and buybuy Baby. It is also upgrading its mobile websites and apps along with network enhancement in stores.

Alongside, the retailer is developing IT analytics, and marketing and e-commerce groups. The company has completed the construction of its IT data center in North Carolina and is in the phase of staffing and equipping the facility. In addition, Bed Bath & Beyond is planning to open another distribution facility for its direct-to-consumer and store fulfillment. We believe that the retailer will soon consider shipping products directly from its stores, which has become a very popular trend in the U.S. retail industry lately. In fact, the company announced last year that it is planning to increase its investments in technology and advertising to develop a strong omni-channel platform. With pertinent strategies and heavy investments, we believe that Bed Bath & Beyond can become a strong omni-channel retailer in the long run.

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1. U.S. Census Bureau News, U.S. Census, Aug 16 2012 [↩]
2. Total US Retail Sales Top $4.5 Trillion in 2013, Outpace GDP Growth, eMarketer, Apr 10 2014 [↩]
3. Retailers Lag Behind Consumers’ Omnichannel Desires, eMarketer, Dec 18 2013 [↩] [↩]
4. Omnichannel Is The Key For the 2013 Holiday Shopping Season, eMarketer, Sep 10 2013 [↩]