Consumers hate in-store tracking (but retailers, startups and investors love it)

Mar 24, 2014

Erin Griffith is a senior writer. She joined Fortune in 2014.

FORTUNE -- Despite excitement from the business world, consumers aren’t keen on the latest innovations in retail advertising. A whole new category of technology has sprung up to serve “omnichannel” retailers, who combine online analytics with brick-and-mortar sales. They do that by connecting to a consumer’s smartphone while they’re in the store. And consumers are wary.

According to a survey of 1,042 consumers conducted by consumer feedback company OpinionLab, 77% of respondents find in-store tracking unacceptable, and 81% said they don’t trust retailers to keep data private and secure. Blame Target for that one. (Respondents said they have more trust in local stores tracking their shopping data than mass-market retailers.)

Prior to now, it wasn’t technologically possible to find out much about consumers in stores until they actually bought something. And even then, they had to buy with a credit card, offer their email address, or use a loyalty account to be identified. But now, thanks to geofencing technology, Wi-Fi, Bluetooth, and ubiquitous smartphones, marketers are able to track and market to customers by identifying the customer's smartphone signals. The goal is to have a customer walk into a department store and get a push notification on his or her phone with a personalized offer.

Startups building out the technology include Nomi, which offers stores analytics on foot traffic and has raised $13 million in venture funding, Euclid which has raised $23.6 million, and RetailNext which has raised $29.4 million. The category was further validated last fall, when Apple (aapl) revealed iBeacon, its own version of an in-store tracking system. iBeacon rolled out in Apple stores first, but is now available for third-party retailers to use. Shopkick, a consumer rewards startup which drives hundreds of millions of sales each year, now offers a location-based product called shopBeacon. Macy's (m) was the first store to deploy it.

MORE: Apple's iBeacon signals turning point for mobile engagement

Marketing pros argue the technology is not invasive because it’s opt-in. Consumers must give permission for any company to market to them based on their location, typically through the retailer’s app. Retailers use in-store messaging to encourage visitors to download their app, although plenty of retailers, like Walgreens (wag), Kohls (kss), and Starbucks (sbux), have fairly popular apps.

Privacy advocates compare in-store tracking to the early days of email marketing, where marketers could buy and sell email addresses without getting permission from the recipients. In 2003, the FTC adopted the CAN-SPAM act, which required marketers to include a way to unsubscribe and a physical address of the publisher. It also banned harvesting email addresses.

Mobile marketing, and in-store tracking, is still very young, but regulators may take notice and implement some ground rules to protect consumers’ privacy. Last month, the FTC held a seminar on the topic, where industry leaders and privacy advocates offered arguments for and against opt-in laws.

Part of the problem with iBeacon and its brethren is the word “tracking.” No one would answer “yes” to the question, “Do you like having your every move tracked whenever you enter a store?” And yet, that’s what happens to us as we browse the web every day. Marketers, publishers, and e-commerce sites use cookies to follow us around the web and serve us ads based on our browsing histories. Cookies have always been a point of contention with privacy wonks, but Internet users are generally okay with it.

The classic argument in favor of tracking, be it virtual or in-store, is that consumers are willing to give up a bit of their privacy in exchange for convenience or savings. That’s the case here, too. In the OpinionLab study, 61% of respondents said they expect to be directly compensated with price discounts for their participation. Another 53% said they expected free products. Still, a whopping 35% said they detested the practice so much that there’s nothing a store could do to motivate them to opt in.

The overall survey shows challenges for these technologies: 63% of those surveyed said they would not opt in to be tracked, even at their favorite stores. So, while retailers buy it, consumers still need to be sold.

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