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As traditional brick-and-mortar retail locations continue their struggle to thrive, showrooming has become one of the greatest threats to their very survival. The practice refers to the increasing tendency of consumers to actively shop for various items in stores, enjoying the benefits of both the tactile experience and the salesperson’s knowledge, only to purchase them more cheaply online. So rampant has the practice become that it is practically the central theme of Amazon’s (NASDAQ: AMZN) latest Kindle. Retailers are not going quietly into the night, however, introducing strategies ranging from price matching to private labeling in an increased effort to compete. While the relative merits of different approaches will be store-specific, many represent an important paradigm shift that must be understood in order to properly analyze the entire sector.
The Offline Defense Arsenal
While it can be argued that the range of tools employed by retailers with physical locations is limitless, below is a discussion of the top three methods being used to fight back:
Product Line Discrimination – Simply put, retailers and discounters have decided to stop inviting the enemy inside of their stores. Wal-Mart (NYSE: WMT) was just the most recent brick-and-mortar retailer to stop carrying the Kindle line. Having lost Target (NYSE: TGT) as a retail partner already, Amazon’s last vestige is with Best Buy (NYSE: BBY); the big box electronics retailer is expected to stop carrying the devices after the current holiday season.
Private Labeling – In a move that has left many scratching their heads, Best Buy recently announced that it will begin selling an Android-based tablet that carries its private, in-store Insignia branding. While a decision to compete with the likes of Apple and Google may not prove successful for Best Buy, this phenomenon is becoming one of the central ways that retailers are fighting back. Showrooming only works if consumers have a cheaper option through an online retailer like Amazon. Additionally, when product details can be closely controlled by the company selling the product, it has the ability to make true comparison shopping very difficult. The practice, that has long been a favorite for clothing lines, continues to expand. Through innovators like TradeStone Software, a “Merchandise Lifecycle Management” platform, companies are able to bring these brands more quickly to market and more readily compete.
Price Matching – Last week, both Target and Best Buy announced that they would be instituting price-matching practices for the holiday shopping season this year. While the move is expected to put pressure on margins, the decision reflects that lower margins are preferred to lost sales. One-stop options like Target and Wal-Mart should be less adversely impacted; price matching is expected to most heavily impact large-ticket items on which the stores are already fairly competitive. Additionally, by providing consumers with an additional reason to meet all of their shopping needs in a single place, these stores expect to drive business, over and above compressed margins. Best Buy is likely to feel more margin pressure, but the move demonstrates that the company is making a real push to remain competitive against falling sales figures.
Despite having similar weapons at their disposal, the relative preparedness of these various retailers is fairly different. While Wal-Mart has just gotten around to showing Amazon the door and Best Buy continues to look for sales wherever it can, Target has formed an alliance with Geek Squad, arguably the strongest remaining piece of Best Buy. Target and Best Buy are adding price matching after Wal-Mart, but Wal-Mart already has the tightest margins on many large-ticket items, meaning it is exposed to the smallest threat of margin compression. Amazon is practically giving away Kindles in an effort to drive shoppers to higher-margin items it sells, while Target and Wal-Mart possess the seemingly-permanent advantage that consumers are never going to order toilet paper online, inevitably bringing them into these stores. The takeaway is that this is a complex battle that will only get more heated and more important.
Given each of the above factors, the analysis of retail investments should now have a greater framework through which to be viewed. As each of the above companies jockeys for superiority, particularly during the critical holiday season, the reaction of each to these forces may inform your view of their respective stocks.
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com, Best Buy, Best Buy, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.