Anyone who uses the Internet has been tempted: You see a cool new product in a store, play with it a bit, and decide you’d like to buy. But instead of grabbing a box and heading for a register, you whip out your phone (or leave the store and fire up a Web browser later) to see if you can get a better deal online.
The phenomena can be a real threat to brick-and-mortar stores — and consumer electronics retailer Best Buy is apparently concerned enough that, according to the Wall Street Journal, the company is planning to match Internet pricing of online competitors like Amazon.com in its retail stores. The idea is that folks who come into their locations to check out a product will be more likely to buy the product from Best Buy. To sweeten the deal, the WSJ reports Best Buy will also offer free home delivery on products that are out of stock at its retail locations.
Can the idea work? Or is Best Buy just another brick-and-mortar store destined to be cut off at the knees by Internet commerce?
If Best Buy decided to match online retailers’ pricing during the end-of-year holiday season, it would be another step in the company’s efforts to combat “showrooming,” where brick-and-mortar retailers essentially just serve as showrooms and demonstration sites for products that consumers then buy online from other, less expensive sources.
Is showrooming a serious problem for retailers? The messages are mixed. On one hand, Best Buy’s new CEO Hubert Joly has downplayed the impact. In an interview with the Minneapolis Star Tribune last month, Joly characterized the threat of showrooming as one of the great “falsehoods” about Best Buy. “If there was a lot of showrooming, I don’t think we would have $50 billion in revenue. We must have at least a few people buying in our stores.”
Similarly, the Wall Street Journal quotes Best Buy VP of consumer insights Bill Hoffman characterizing showrooming as “material” to Best Buy’s business, but still “very low,” based on results from Best Buy customer surveys. Of course, consumers who choose to make purchases from online retailers instead of Best Buy may not be in Hoffman’s sample set.
Folks looking at how mobile technology is impacting retail sales seem to be reaching different conclusions. The Pew Research Center’s Project for Excellence in Journalism recently reported that half of U.S. adults own either a smartphone or tablet, meaning half of Best Buy’s customers likely have some sort of mobile access to to mobile price comparison and deal services. Earlier this year, a study from Comscore and partners found that 43 percent of smartphone owners had used their mobile devices for shopping purposes while in a store. Around the same time Nielsen found that 79 percent of U.S. smartphone and tablet owners use their devices for shopping activities. Tablets tended to be used for online shopping, while smartphones tended to be used for in-store and on-the-go functions. But more than half of smartphone and tablet users checked prices with their devices.
But smartphone apps aren’t the only threat to retailers: plain-old Web browsing is still a major factor. In a survey released earlier this year, Alix Partners found that 33 percent of respondents had bought something online in the previous year after checking it out in a store first — and the number jumped to 43 percent of electronics buyers, which would seem to be near the core of Best Buy’s business.
More recently, a survey from Deloitte found that 67 percent of smartphone owners between 14 and 34 years old use their smartphones to shop, and more than half say the devices have influenced their buying decisions. Deloitte only gives mobile devices an overall average “influence” factor of just over 5 percent across major retail categories for 2012 — but expects that to jump to as much as 20 percent by 2016.
Can Best Buy make it work?
The details of Best Buy’s plan haven’t been released — the Wall Street Journal cites only “a person familiar with the matter.” The details could make a tremendous difference. For instance, Best Buy could be bold and declare it will match online prices for any product it sells — a straightforward message that most consumers would immediately understand. Or perhaps Best Buy will split hairs, offering to match online prices only for particular categories or brands, or on selected merchandise. We don’t know yet — we’ve reached out to Best Buy for comment.
If Best Buy wants to re-inject itself into consumers holiday shopping plans, a broad move to match online prices across the board would seem to be the smartest move. But, even with the lucrative holiday season approaching, the company may not be able to make the strategy work. As Joly noted, Best Buy may have in the neighborhood of $50 billion in annual revenue — but it’s just not keeping much of that money. During its most recent fiscal quarter, the company turned in net earnings of just $12 million on $10.5 in revenue — that’s across the entire Best Buy chain. Think of it this way: for every dollar that came into Best Buy’s operation in its most recent quarter, it put a little over one tenth of one cent in its pocket. Best Buy isn’t losing money, but it’s not making much either.
Best Buy’s business model is particularly vulnerable to mobile- and Internet-assisted shopping. After all, the easy availability of technology and electronics products online has already led to the demise of competitors like Circuit City and CompUSA (and Future Shop’s withdrawal from the U.S. market). Most products available from Best Buy are easily available from other outlets, and while some consumers may need hands-on time and assistance making a purchase, many do not — and will take their business elsewhere if they can find a better price.
Best Buy has been working to reduce its retail footprint and increase the amount of revenue it derives from every square foot of store space, and those moves that started to show modest results last quarter. However, the strategy is eerily reminiscent of Circuit City’s “The City” format, which failed to transform its retail operations. Just to make matters more complicated, Best Buy is now looking for a new chief financial officer.
If Best Buy decides to match prices from Internet retailers, it’s essentially playing chicken with companies that have lower operational costs — and, at least in the case of Amazon, radically more-diverse businesses. With earnings of only $12 million last quarter, Best Buy doesn’t have a lot of room to maneuver, and the tactic can’t be sustained over the long term.
However, if Best Bust can convince potential customers that purchasing from them really does represent a “best buy” (or at least as good as anything they’ll find online) they could generate some much-needed goodwill and a solid holiday season — and that might give the company the fuel it needs to transform its business.
If consumers get some good deals along the way, all the better.
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