Best Buy’s New Scheme Will Poach Customers from Amazon

By Chris Marasco - October 17, 2012 | Tickers: AMZN, BBY, TGT, WMT | 0 Comments

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Slowly but surely, Amazon’s (NASDAQ: AMZN) tremendous pricing advantages are slipping away.  Competitors are taking aim at Amazon’s business model and are launching their own services to compete with Amazon.

Best Buy Takes Aim

In a bid to boost sales during the Christmas shopping season, Best Buy (NYSE: BBY) announced that its stores plan to match the Internet prices of online stores like Amazon.  Also, Best Buy explains that it will give customers home delivery – for free – if the item is out of stock.

Best Buy is taking strong action at a time when consumer sales are moving from brick-and-mortar stores to the online marketplace, and the company is using its strengths to compete with the retail giant.

With equivalent prices for most items, Best Buy now has two major advantages over Amazon.  First, customers can physically see, touch, and use the items that they may want to purchase.  Second, Best Buy has floor staff roaming the aisles, and they are able to share their personal expertise with customers.  Amazon can boast neither.

The aim of Best Buy is to increase its close rate.  Best Buy reports that 40% of shoppers who enter the store leave with a purchase.  However, the company believes that with lower prices and an intelligent floor staff, the company can increase its close rate and improve sales of expensive electronics items.  If consumers understand that Best Buy’s prices are equal to Amazon’s, I expect Best Buy to have a flurry of new customer traffic.

Wal-Mart’s Plan

Like Best Buy, Wal-Mart (NYSE: WMT) is launching an assault on Amazon.  First, Wal-Mart stopped selling the Kindle, a move that is largely symbolic of the growing competition between retailers Wal-Mart and Amazon.  However, Wal-Mart recently launched a same-day delivery service that will likely pluck sales from Amazon.

Wal-Mart is testing its same-day delivery in select locations, and there are major implications if this strategy works.  First, consumers will likely buy a range of simple items like deodorant or peanut butter from Wal-Mart instead of a grocery store.  Moreover, if Wal-Mart offers a price comparable to Amazon, and if Wal-Mart can ship faster than Amazon – even faster than Amazon’s $79 unlimited 2-day shipping from Amazon Prime – then Amazon will likely lose sales to Wal-Mart.

However, I question the profitability of this strategy.  Wal-Mart already sells items at bare-bones prices, and this strategy will impact Wal-Mart’s already thin margins.  I expect this strategy to work best for items that customers need almost immediately, like toothpaste or diapers.  I do not expect it to work well for high-end electronics or food.  Users like to test high-end electronics before buying, and grocery shoppers often like to make a trip to the store and select their own food for cooking.

Target Left in the Cold

One company that has not made headlines for introducing new strategic changes is Target (NYSE: TGT).  With Wal-Mart and Best Buy introducing initiatives to compete head-on with Amazon, Target may be left out in the cold.  Consumers may perceive Target to have higher prices, and the company will not give customers any shipping advantages.  Both of these issues could hamper sales during the Christmas season and hurt Target’s 4.12% profit margin.

Though lagging the competition, Target did introduce one initiative before the Christmas season.  Target will make it easier for its customers to find and to buy top toys.  According to Target.com:

Beginning Oct. 14, Target will showcase the top 20 toys on the main aisle in-store to make finding gifts easier for time-strapped holiday shoppers. For added convenience, each of the top toys will have a QR code that can be scanned to purchase the toy directly using a mobile device and ship it for free to anyone, anywhere in the U.S.

Brick-and-Mortar Stores

In all, the retail scene could likely see a shift from online sales back to brick-and-mortar sales.  Personally, I expect to see Amazon increase its sales this year, but I also expect Best Buy and Wal-Mart to increase their top lines as they find ways to compete head-on with online retailers.

In all, this shopping season is shaping up to be very competitive, and I anticipate more strategic changes as the different retailers find ways to corral customers into their stores – and to keep them from buying from Amazon.

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