Why stores are finally turning on to WiFi

December 14, 2012, 5:31 PM UTC

By Verne Kopytoff

, contributor

FORTUNE — For years, retailers frowned on shoppers visiting their stores merely to scope out products before returning home and buying them online for less. The phenomenon became so common that it earned a name — showrooming.

The practice has only expanded with the proliferation of smartphones. Shoppers can use them to quickly compare the price of a Fossil handbag, for example, with the same version on Amazon.com (AMZN). There’s nothing store managers can do to stop them. The shoppers have won the war.

Recognizing their defeat, many retailers have made a u-turn and are now helping shoppers get online. Just before the holiday season, big retailers like Target (TGT), J.C. Penney (JCP) and Saks Fifth Avenue (SKS) installed free Wi-Fi throughout their stores. Macy’s (M) and Sam’s Club (WMT) deployed Wi-Fi last year while Nordstrom (JWN) did so in 2010. 

“It’s where guests are going and where we need to be,” said Eddie Baeb, a spokesman for Target, which finished installing Wi-Fi at its 1,780 stores this fall. “We love showrooming when we’re the ones booking the sales.”

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If anything, retailers are late to the game. Cafes, fast food restaurants and airports have offered free Wi-Fi for years. So have sports stadiums and universities. Competitive pressure clearly played a role in pushing big retailers to adopt Wi-Fi. After a few retail chains added it, others quickly followed for fear that they would lose customers. 

Publically, retailers tout Wi-Fi as more of a convenience for shoppers who may otherwise be reluctant to eat into the limits on their smartphone data plans. It’s also an insurance policy against the sometimes spotty mobile phone reception inside cavernous stores.

How many shoppers actually use in-store Wi-Fi is unclear. Most retailers declined to share information about the number of people accessing their networks, the number of pages they viewed or the potentially embarrassing statistic: How often people visited the sites of rivals. Saks Fifth Avenue, which has equipped its 44 stores with Wi-Fi in partnership with AT&T (T), was a little more forthcoming. In announcing the completion of its network roll out in September, the company said it had enabled over 5 million connections during the previous 10 months.

A recent visit to several San Francisco department stores showed a wide disparity in how retailers market Wi-Fi to shoppers. Whether most customers are even aware it exists is tough to say. 

Saks Fifth Avenue’s men’s store failed to put up any signs about its Wi-Fi. The only way to know it existed was to see the network listed among those available on your smartphone. 

Target earned slightly higher marks by occasionally flashing messages about its free Wi-Fi on a video screen at the entrance to its store.

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However, shoppers didn’t seem to pay attention. 

Macy’s affixed stickers that announced “free Wi-Fi inside” on some of its doors. But there were no signs among the racks of clothes mentioning the network.
To connect to a network, shoppers must first agree to a terms of service that appears on their smartphone screens. The agreement generally spells out that the network is not secure and that the stores will track the Web sites customers visit and the type of devices they use.

Such data could eventually be used to help stores offer personalized coupons and identify merchandise to add to their shelves, said Bryan Wargo, chief executive of Nearbuy Systems, a start-up that helps stores monitor customer behavior on Wi-Fi networks and dissect the data. Customers frequently using the Wi-Fi network to search a rival’s Web site for red cashmere sweaters, for instance, could signal that the store should start stocking them.

“Merchants can understand which products are being showroomed,” Wargo said. “They can ask themselves ‘Should I reduce the price? Should I offer the customer a specific discount?’”

A number of stores are testing Nearbuy’s product, according to Wargo, but he declined to name any of them. No stores interviewed acknowledged using the information they collect to do anything except to keep out hackers.

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Sucharita Mulpuru, an analyst with Forrester (FORR), was skeptical about the value of Wi-Fi data and cautioned that mobile marketing was still in its infancy. She pointed to grocery stores, which have long used loyalty programs to track individuals’ shopping habits — to limited success. “Grocery stores have, for all intents and purposes, had this information for years,” Mulpuru said. “But they still just put a discount on the shelf rather than give you a customized one.”

Wi-Fi is far from universal inside stores. For example, Gap Inc.’s (GPS) stores, which include Gap, Banana Republic and Old Navy, do not offer it. At Best Buy (BBY), availability varies by store. Small businesses, meanwhile, are often a black hole when it comes to Wi-Fi.

To fill in the gap, Facebook (FB) is testing a program to give away wireless routers to merchants so they can set up a network. The program comes with some strings, however. To use the network, customers must first check in their location on Facebook. They are then diverted to the business’ Facebook page. Only then can customers use the network to visit other Web sites.

Kasey Lobaugh, who leads the direct to consumer practice at Deloitte, the auditing and business consulting company, countered that the benefit of Wi-Fi is underappreciated. The opportunity for businesses far exceeds direct sales through mobile devices, he said.

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People who use their smartphones in a store are 14% more likely to make a purchase from that retailer, according to a survey by Deloitte of 1,557 smartphone owners. If they use a store’s specific Web site or app while inside, they are 33% more likely to purchase an item that day.

Shoppers can get a faster connection than their mobile carrier offers, in many cases, to check on items online that may be out of stock or unavailable in the correct size, for example. Given the huge influence of mobile and its ability to lift sales, it makes financial sense for retailers to offer Wi-Fi, he said.

“More informed consumers are more confident in their purchasing decision,” Lobaugh said. “Conventional wisdom about showrooming is wrong.”