My Experience Shows Why Physical Retailers Should Worry

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

Anyone who knows me, knows that I have a bit of a problem. I like technology and some would even say I'm a bit obsessed. I've owned PCs, an Apple Macbook, two different Macbook Air models, iPads, an iPhone, a PS3, an Xbox 360, and more. While some of my friends have suggested I start a support group for electronics anonymous, I don't see it as a problem, as much as I know what I like, and I change my mind when I see something better. One thing that has been a constant theme, has been my love for Apple products. Since the company introduced the original iPod, I've been watching each successive product release, and many times made a purchase. However, when the company released the iPhone 5 something happened...I didn't jump at the chance to upgrade. 

What was my problem? To be honest, I wanted more from the iPhone 5. Don't get me wrong, I think Apple did a lot of great things by going from the iPhone 4S to the 5. Apple gave customers a bigger screen, reportedly great battery life, a faster processor, and a thinner and lighter device. So what was the problem? Quite honestly, the problem was I already had an iPad 3. In fact, since I don't do a lot of traveling where I can't get wifi, I actually sold my old iPhone 3G and went to a “feature phone” so I could justify getting my iPad. As I said before, my friends think I have a problem.

I don't like having to carry my cell phone and iPad everywhere, so I wanted a smartphone that would fit into the “phablet” category. Just like when Apple introduced the iPhone to allow customers to combine their iPod and cell phone, I wanted something with a bigger screen to allow me to combine my cell phone and tablet.

The fact that I decided to get a Samsung Galaxy Note 2 is just a fact, but not the reason physical retailers should be concerned. The reason they should worry is, I became the poster boy for “showrooming” during this experience. Where did I go before I bought this device? I went to one of my favorite stores, Best Buy (NYSE: BBY). The reason I went to Best Buy is the same reason anyone does, they want to see and try out the latest gadgets.

This is something that Target (NYSE: TGT) in particular needs to take note of. With the recent news that RadioShack is severing ties with Target's cell phone kiosks, the company might be thinking about what to do next. I've been in probably hundreds of Target stores in my life, but I don't know anyone who has bought a cell phone at the store. Part of the issue is customers can't try anything out. They have the devices on display, but they are mock-ups or they don't have batteries so they can't be powered on. This allows customers to see the size, but doesn't allow them to see how the device works. There is a lesson here, the easier physical retailers make it to try out devices, the more subject they are to showrooming. There is a reason that Target stopped carrying the (NASDAQ: AMZN) Kindle Fire. Target selling the Kindle Fire was akin to Coca-Cola stocking their machine with Pepsi.

Back to Best Buy for a minute, I walked into the store, and the Galaxy Note 2 is front and center. The device is powered on, connected to wifi, and you can play with it until your heart is content. I could see how fast the unit was, try out the different functions, get a sense of the size, the screen quality, and more. I decided this was the phone for me. Then what did I do? I went home to buy the device from Amazon.

In that moment, I was Best Buy's worst nightmare come true. I walked into their store, tried a device, and was just several feet away from the people who could have sold it to me, and yet I walked out and ordered it online. Why did I do this? To be honest, I almost never go into a store to make a big purchase without already going online to check prices. I knew that Amazon sold the device for $279.99 versus $299.99 at Best Buy. I also knew that I wouldn't be required to pay sales tax at the point of sale like I would at Best Buy. The combination of these two factors, meant a difference of about $40 in the overall price. Since the only difference between buying from Amazon was a 2 business day wait, I figured the $40 was worth the two days.

The fact that I ended up returning the phone is another story, but the bottom line is Amazon is winning business because they offer cheaper prices, and in most cases customers can avoid paying sales tax at the point of sale. The sales tax issue will likely change over time. Once Amazon is required to collect sales tax nationwide, the gap between physical retailers and online will narrow. The question is, which physical retailers will be around to see that day?

The bottom line is, if you are Target, you stick to what you know. Target is well known for fashion, home furnishings, and increasingly groceries. With RadioShack pulling support for the company's cell phone sales business, I would make the radical suggestion that Target exit this business completely. Another option would be for Target to team with Best Buy and let Best Buy run these kiosks. If you are Best Buy, you have to understand that you need smaller stores, with faster reaction time from your staff. You also need to decide if you are willing to match Amazon's prices. If not, Best Buy is in serious trouble.

When it comes to Amazon, the company's rock bottom prices and fast shipping are great draws to the site, and the company will continue driving competitors out of business. While nationwide collection of sales taxes for online transactions is all but certain in the future, for now physical retailers have plenty to worry about from this online king.

MHenage has no position in any stocks mentioned. 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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