Think of internet commerce as the modern-day wolf, and traditional retailers as the pig who thought he was immune to his adversary's huffing and puffing.

What he's facing today is more like a hurricane, in the form of massive growth in e-commerce and fresh challenges from all sorts of innovative merchandisers. Meanwhile, old-line sellers are struggling to control the costs and complications that come with operating a chain of big-box stores.

Just ask Target Corp. Last year, the big retailer suffered a major setback when it tried to expand operations into Canada. The company launched 124 stores and three distribution centers all at once. The result was a customer-service debacle, with losses estimated at $1bn.

Shelves were empty, selection was poor and warehouses were stuffed with unwanted product. Mark Schindele, newly named president of Target Canada, admitted that the company opened up too many stores and D.C.s in too short a time frame. Vowing a “reset,” he said Target was backpedaling on a portion of its Canada supply-chain strategy.

Lucky for Target that it could afford to fix the mess. When it comes to controlling costs and making key supply-chain decisions, retailers today have precious little margin of error.

Retail margins today are roughly half of what they were six or seven years ago, says Paul Martyn, vice president of supply chain with BravoSolution, the vendor of supply management and procurement software. It’s essential that retailers get key distribution decisions right.

At the same time, the retailing landscape has evolved into something radically different from that of past decades. The e-commerce factor means that stores must be able to fulfill orders via multiple channels. Distribution centers need to process shipments far more quickly, in place of expensive buffer stock.

Big-box stores were pretty much the story of retailing through the latter part of the 20^th Century. Wal-Mart Stores Inc. led the way by offering huge selections of merchandise at the lowest possible price. Size was everything back then.

But Martyn says Target thought too big when setting its sights on Canada. It should have opened up fewer, smaller storefronts and expanded gradually based on demand, to mitigate risks and familiarize itself with the Canadian consumer.

“You need to be more deliberate – get a critical mass of data about consumers and their buying habits before going blind into a market,” he says. The big-box model, he adds, “is very tricky to support these days.”

No one expects the superstores to disappear anytime soon. Still, the growth of e-commerce is forcing big-box retailers to reconsider their strategies. In some cases, size and selection are becoming a liability. The brick-and-mortar store exists today as a “showroom” for shoppers, who can examine the merchandise up close, then go home and buy it over the internet at a cheaper price.

The key to retailing success today is copious and accurate data. Merchandisers must get to know the customer, targeting the best prospects and doing a better job of predicting the results. Accurate demand forecasting has always been an integral part of the retail world; now it’s essential to traditional stores’ survival.

Martyn cites the case of electronics and appliance giant Best Buy Co. Inc., which has struggled to compete with Wal-Mart and other big-box retailers that offer broader product assortments and lower prices. These days, Best Buy is looking to its Geek Squad service unit to provide a value-added experience to consumers. It’s aiming to enter markets “in a more granular way,” he says, retooling its service centers as smaller storefronts selling fast-moving products to committed buyers.

Faced with a explosion of SKUs, store-bound retailers are attempting to sort through the endless possibilities to offer items that yield the highest margins and are less “e-commerce friendly.” (Whatever that means – with Amazon, Google and others jumping into the grocery business, it’s getting tougher to imagine anything that can’t be sold over the internet.)

In addition to the internet threat, merchandisers attempting to be everything to everybody often find themselves undermined by the very brands they stock. The Apple Store and like ventures present the consumer with a specialized buying environment that ends up dis-intermediating the all-purpose retailer.

On the physical distribution side, retailers of all stripes need to adopt an agile model that minimizes buffer stock and stresses more frequent shipments. They’re cutting back on truckload services in favor of smaller loads and a greater reliance on parcel. (In the process, says Martyn, they need to break through the competitive lock that UPS and FedEx hold on much of that market.)

The keyword used to be size; now it’s speed. And e-commerce sellers are continually raising the service bar. Based on what its site visitors browse, Amazon can often predict what they’re going to buy well in advance of the actual purchase. As a result, it can have product ready for shipment at the closest warehouse.

There is, of course, a price to be paid for being wrong. Say the customer doesn’t make the predicted purchase after all. Amazon has paid the cost of shipping that item to the local D.C., only to have it sit idle.

“One of the risks we’re seeing now is that you can have all of the data and make precisely the wrong conclusion,” says Martyn. In these early days of sophisticated demand analytics, many such mistakes will be made.

He advises brick-and-mortar retailers to “stay with your core values, look at where the data can augment them, and exercise on the fundamentals. You need to exercise a bit of caution, as far as running too quickly to big data to look for answers.”

Still, no retailer should assume that future profitability lies in doing business as usual. The physical store of the future will have to be built out of something much stronger than brick.

Next: Solving the e-commerce delivery challenge.

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