Amazon Is Crushing Best Buy and Matching Prices Will Not Help

Amazon Is Crushing Best Buy and Matching Prices Will Not Help
By Szk7788 (Own work) [CC BY-SA 3.0 or GFDL], via Wikimedia Commons

Amazon Is Crushing Best Buy and Matching Prices Will Not Help

Are Best Buy Co., Inc. (NYSE:BBY)’s sales really getting impacted by, Inc. (NASDAQ:AMZN). The theory is that Best Buy is getting hurt by people window shopping. They go into Best Buy and then take their smartphones and compare the prices to Amazon. As a side point, Best Buy Co., Inc. (NYSE:BBY) might also be getting hit by what myself and many others consider horrendous customer service. That might be a future topic, because Amazon’s customer service beats Best Buy’s by a huge margin. Topeka Capital Markets’ analyst, Victor Anthony, is out with a bombshell report, affirming exactly what the common theory is, Best Buy is getting killed by window shopper.

They visited several retail stores, including Best Buy Co., Inc. (NYSE:BBY), Target Corporation (NYSE:TGT) Wal-Mart Stores, Inc. (NYSE:WMT), Staples, Inc. (NASDAQ:SPLS), and Toys R Us, used the Amazon Price Check app, and had conversations with several sales reps about the impact of the Internet, and Amazon (AMZN-$243.94:Buy) in particular, on their respective businesses.

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The main takeaways are:

1) for the majority of the products they price-checked, Amazon’s price was lower; 2) the sales reps, especially at Best Buy, stated that everyone is using their smart-phone and the Price Check app to comparison shop; 3) Best Buy’s sales reps were less enthused about the ability of their firm to survive the impact from Amazon; 4) Target and Wal-mart sales reps did not view, Inc. (NASDAQ:AMZN) as a material threat; 5) Best Buy Co., Inc. (NYSE:BBY) was the only store willing to match Amazon’s price, if asked; and 6) electronics and toys were the two categories, where 100% of the time,, Inc. (NASDAQ:AMZN) had the product and the price was lower.

Key Points

Showrooming is Real and A Big Phenomena

Every sales rep they spoke with at every store, stated that consumers are in fact using their smart-phones to comparison shop. However, the effect seemed most pronounced at Best Buy, where several reps stated that “everyone is doing it”. At Best Buy, they  were told that it appears as if consumers walk into the store with the sole intent to comparison shop.

Electronics and Toys, and Companies Heavily Levered to those Categories, Are At Risk.

Every product they randomly price-checked within the electronics and toys categories, at every store, was available on Amazon, and was cheaper by magnitudes of 5%-40%.

The quick takeaway is that Best Buy and Toys R Us are the most at risk stores from the showrooming effect, whereas Wal-mart and Target were somewhat safe. At the latter two stores, and at Staples, the showrooming effect, per the reps, was contained to the electronics and toys aisles, and barely noticeably in other areas of the stores. In the apparel sections, the effect was non-existent, according to the reps they spoke with.

What Does This Mean for Traditional Retailers?

We are reminded of this Charles Darwin quote, when thinking about the effect on traditional retailers: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

Traditional retailers are responding to Amazon’s threat on their businesses, but they wonder if it is too late. Best Buy is matching Amazon’s price, but only if the consumer asks. Wal-mart is testing same-day shipping from their stores, but history has proven that to be difficult to implement successfully. Staples recently announced stepped-up investments in online/mobile. One thing is certain – responding to, Inc. (NASDAQ:AMZN) will pressure margins at traditional retailers, but that may be a necessary pain point they will have to endure.

What Does This All Mean for Amazon., Inc. (NASDAQ:AMZN) is the biggest beneficiary of the showrooming effect, a fact already reflected in its robust top-line growth, where growth rates are 2x that of the industry. And, contrary to the traditional retailers, Amazon has margin pressure offsets, including a rising third-party mix, advertising, and leverage on shipping costs as distribution centers move closer to the customer. Despite efforts by traditional retailers to stem the effect of showrooming, it continues, and the pure Internet retailers will continue to reap the customers.

Piper Jaffary’s Gene Muster (the ‘Apple guru’) is out with a report, which shows further evidence that, Inc. (NASDAQ:AMZN) is really hurting Best Buy Co., Inc. (NYSE:BBY) . Yesterday, Target announced for the first time, plans to match its in-store pricing with on-line pricing from websites, including, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT) during the holiday season. Similarly, the WSJ reported last week that Best Buy would be matching on line competitors during the holiday season.

However, Gene Muster thinks these moves by Target Corporation (NYSE:TGT) and Best Buy Co., Inc. (NYSE:BBY) are more likely to act as a marketing tactic to help customers feel that they are getting a good deal than to actually save customers a significant amount of money.

The reason is extremely convincing.  The price matching will likely require exact SKU matching and given the trend towards retailer specific SKUs for larger ticket items, exact matching may prove difficult. In the end,  they believe the overall matching process could prove frustrating for customers and is unlikely to cause a slowdown in the shift from off line to on line sales.

 Disclosure: No position

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