Friday, November 9, 2012

Best Buy’s Price Matching: Good for Consumers, but What About Profits?

Best Buy sign: Credit Reuters

by Chris Nichols

Wal-Mart's not the only retailer that's had about enough of  Now Best Buy is fighting back against the Jeff Bezos-run merchandising juggernaut.

The Minnesota-based electronics and games seller, apparently tired of hearing how its stores are serving as a physical testing ground for goods that later will be purchased online, is planning to match the prices on items sold by the ever-growing Amazon empire and other Web-based under-cutters in the weeks ahead.

According to a report in The Wall Street Journal, the pricing plan will take place during the holidays. Best Buy is also aiming to provide free home delivery for products that aren't currently stocked in stores. It's doing so, the WSJ points out, even as new CEO Hubert Joly contends the "showrooming" idea isn't as big of a deal as Best Buy's doubters would have you believe.

Consumers and Shareholders

It's a daring move by Best Buy, which has been going through a significant executive makeover and has been pursued this year in a buyout offer by founder Richard Schulze. Additionally, it comes just as the company gets a new online head settled into his office and says goodbye to Chief Financial Officer James Muehlbauer. Very interesting times around the Twin Cities.

Does Best Buy gain an edge here? Not a clear one, but it also doesn't have a lot of strong options for the near term. The good news is consumers will benefit from lower prices, as long as they decide they like the Best Buy experience. The economy is still somewhere between poor and terrible for a lot of regular people, and any break they can get on price they'll take, especially during the busiest shopping part of the year.

Shareholders, however, certainly won't be impressed if profits are damaged by the decision. Selling consumer electronics doesn't reward continued missteps, as Circuit City, bankrupt, and RadioShack, badly wounded, can attest. Best Buy's stock was recently down 7 cents for the day to $17.77. The shares have dropped 25% in 2012 and over the past two years have lost 56%.

An obvious concern of lower prices in terms of the financials would be the effect on margins. Best Buy has a five-year average net margin of 1.8%, though that was hurt by a loss last year that dragged down the tally. In the half decade from 2006 to 2010, the average net margin was 2.9%. Even so, it trails both Amazon and Wal-Mart in that regard, with those two showing margins of 3.0% and 3.5%, respectively. Investors pay for earnings, not third place.

There's no doubt Wal-Mart can battle with Amazon for a long, long time. Only weeks after saying it would stop selling the Amazon Kindle in stores, Wal-Mart, the world's biggest retailer, said it would be testing same-day delivery, something Amazon wants to offer buyers too.

But this isn't about Wal-Mart at the moment. It's about Best Buy, and the question is how long it can hold off Amazon and others doing business in the digital realm. Price matching could give a boost to Best Buy's sales this holiday season if enough volume is moved through - revenue has been basically flat for the last three years at around $50 billion, a number that's expected to be approached again in the current fiscal year. Profits, though, may be another story. (Amazon, meanwhile, is expected to overtake Best Buy in sales this year, with a projected top line of $62.8 billion, according to FactSet.) And then what does Best Buy do for a follow-up?

Yet Another Shift

Right after Joly started, a hire that was greeted with some puzzlement owing to his lack of experience with retailing, he told the Minneapolis Star Tribune that the notion of shoppers coming to Best Buy merely to examine in-person items they had no real intention of purchasing was "one of the greatest falsehoods" about the store chain.

"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," he was quoted as saying in the paper.

Scott Durchslag, the new man in charge of Best Buy's online component and who was last with Expedia, has a lot on his plate. He recently was profiled in All Things D, and he talked about his vision to "innovate to differentiate" with Business Insider. One of the topics he covered -- being competitive on price.

Clearly, the retail business will eliminate without regret any sellers who can't compete, and Internet commerce has changed the entire way we buy. If you can't differentiate on products, you differentiate on prices. If you can't differentiate on prices, you differentiate on customers liking you, and so forth. Apple, for instance, sells products that are unique. Its computers are not like the PCs sold by Lenovo, Toshiba and others, and it sells its inventions at a substantial premium. Those PCs are perfectly fine machines, but not particularly different, one vs. the other. Apple's got its own thing, and that's a big part of the success it's had in the 2000s. Sell yours, and do it for a lot. Or sell the same stuff as everyone else, and do it cheaper or better.

For Best Buy, it's essentially the latter. It might be a dangerous game, but it's one that it probably has to play.

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