Phoenix From the Ashes or Burn Victim?

Danny is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: A precious version of this article made an inaccurate reference to Best Buy's founder. The mistake has been corrected.

It seems that Best Buy (NYSE: BBY) investors finally have something to celebrate.  When Best Buy reported earnings on Friday, the stock price jumped over 16%.  So they must have had a really GREAT quarter, right?  Actually, it just stunk less.

Dig a little deeper into the numbers and what you see is no reason to celebrate.  Revenue fell by 0.4% from a year earlier during the all-important holiday shopping season.  The crucial same store sales metric, which factors out stores open less than a year, actually dropped 1.4% in the recent quarter.  US same store sales were flat and international same store sales tanked 6.4%.  However, the drop was less than analysts and investors were anticipating.  They also saw online sales increase by 10%.  So let’s break out the bubbly, right?

Unfortunately, Best Buy is sandwiched firmly between a rock and a hard place and the future presents challenges.  However, in order to understand the threat to Best Buy and other big-box retailers, we must first look at a broader societal retail trend and its implications. 

The Rock

According to a Harris Interactive poll of 2249 adults about their holiday shopping habits, taken just before Black Friday, 43% admitted to checking out a product in a brick and mortar store, than buying that same product online.  The process, known as showrooming, has become an increasingly painful thorn in the side of retailers, but none more so than in the electronics category.

Of those that bought online after in-store research, the most oft cited victim was Best Buy at 24%.  Others in the electronics retail field were close behind.  Wal-Mart (NYSE: WMT) was cited next with 22% of those polled, followed by Target (NYSE: TGT) at 9%.

The news gets worse for our purveyors of electronics.  The most cited company benefiting from this trend, which should come as no surprise to investors, is Amazon (NASDAQ: AMZN).  Over 57% of those showrooming made their final purchase with Amazon.  Of those showrooming Best Buy, 71% purchased from Amazon, along with 72% from Target and 64% from Wal-mart.

This trend is confirmed in a survey by Aprimo and Forrester.  Their results of 2,000 consumers polled indicate that 20 percent said they had compared prices online while at a store.   Over 30% of these indicated that their research led to a purchase elsewhere. 

Forrester research analyst Sucharita Mulpuru had this to say:  “Eventually, I think the end game to this will be a major contraction of big box stores”.  As the only national pure play electronics retailer, this trend will likely affect Best Buy more than their brick and mortar competitors, who sell more than just electronics.

Are these retailers planning to roll over and play dead?  Not by a long shot.  

Stop, Drop and Roll

Time reports that Target’s plans to combat showrooming include the Shopkick app, in which you accumulate points, or “kicks,” by scanning merchandise in the store. Kicks can be traded in for gift cards, iTunes downloads, and the like - with Target betting that shoppers who scan goods are much more likely to buy those goods.

Meanwhile, Best Buy is combating showrooming by allowing customers to shop online in stores if they don’t have mobile devices handy. Salespeople and Geek Squad workers are being equipped with tablets and other devices so that they can help shoppers find more detail on products and look up reviews.

Last year, Best Buy interim CEO G. “Mike” Mikan said of showrooming, “Ending that trend is a top priority for our team.

In an interview with Slate, Wal-Mart CEO Mike Duke reveals Wal-Mart is planning initiatives to combat showrooming.  These include allowing customers to order online and either pick up your order in the store the same day (which is an option for shoppers now) or have it delivered to you the same day from the local store.  Also, as I previously reported, several major retailers including Wal-Mart have announced an initiative to develop their own mobile payment network, including mobile apps and digital wallet.  This would allow Wal-Mart customers to pay for their in-store purchases with a smartphone, thereby bypassing the checkout line.  “We are uniquely positioned to give customers anytime, anywhere access to Wal-Mart by combining the smartphone, online, and the physical stores," Duke stated. "Ultimately, that will give us an edge over any competitor."

Will these initiatives be enough to stem the tide?  Only time will tell. 

The Hard Place (or battling for the spoils)

As if battling Amazon and showrooming were not enough, Target and Wal-Mart seek to take advantage of Best Buy’s weakness in the battle for electronics retail supremacy.  These competitors put additional pressure on Best Buy despite their efforts to turn things around. 

Last summer, while Best Buy was closing stores in an attempt to cut costs, Wal-Mart was going for the jugular.  The Star Tribune reports that Wal-Mart took out the following ads in markets were Best Buy was closing stores:  "Did your local Best Buy just close?  We have the top brands and low prices."

Target, not to be outdone, recently announced that they will institute a year round price matching policy targeting their most important competitors including Best Buy, Wal-Mart, Amazon and Toys “R” Us.  As if Best Buy didn’t have enough to worry about. 

A Final Word

This consumer trend of showrooming may be the final nail in the coffin of big box electronics retail.  I’ve had a red thumbs-down CAPS call on Best Buy since May of last year and that call is beating the market by 29%, even after their recent jump.  With pressure from brick and mortar competitors and showrooming driving sales to Amazon, I would not invest in Best Buy.  Amazon may be better positioned for future growth. 

Best Buy may still rise like a Phoenix from the ashes, on the wings of a potential buyout by founder Richard Schulze.  However, if their turn-around doesn’t materialize soon, they may just be a victim burned by a trend that is sweeping like a wildfire through retail.

Danny owns shares of and has personally been a party to showrooming. The Motley Fool recommends The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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