Best Buy Will Plummet Due to Amazon's Online Dominance
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Is it harder for virtual stores to become brick and mortar businesses or for big-box retailers to become an online presence?
To be honest, it’s a crapshoot. Some businesses are doing remarkably well jumping into the competitions’ sandbox, while others make investors and consumers alike wonder what’s going on and is there a solid future in it? Amazon.com (NASDAQ: AMZN) and Ebay are both titans of the online shopping and payment industries that have stepped rather successfully into the physical world, offering consumers the ability to use their online billing accounts in real stores. On the other hand Best Buy (NYSE: BBY) and Wal-Mart (NYSE: WMT) are not faring so well. My prediction is that online companies will have better success than retailers trying to go virtual.
Stepping Offline
Amazon was not the first to step out of the computer and onto the streets. One must credit Apple (NASDAQ: AAPL) with setting the standard of being on- and off-line. Opening its own stores was a costly move, but seemed to be effective. Consumers appreciated the ability to try out new products, put hands on products before purchasing – a feature that companies like Amazon didn’t provide.
By not relying on big-box retailers as its only method to sell iPods, iPhones, and iPads, Apple is able to capitalize on its record high sales for e-readers and tablets. In essence, it captures both on- and off-line markets.
But now, Seattle is prepping to become home to Amazon’s first official store, which will offer its line of Kindle products, as well as other key brand merchandise. In their own store, Amazon will have more control over the training, selling, and of course, more of the profits, as well as put them on the same level of Barnes & Noble which offers the same for its Nook.
The Reverse
The strategy of moving into competitors markets is universal. Retail giants such as Wal-mart and Best Buy have plowed ahead to bring their online shopping presence as convenient and enjoyable as in-store. Unfortunately, these have not seen such stellar results.
For Best Buy, it would seem that Chief Executive Officer Brian Dunn was otherwise occupied or, at the very least, giving his attention to other pursuits than making this strategy successful. With current announcements, its stock was down 16 cents, or 0.7%, to $21.80.
Not that Dunn was improving things. The company had already begun a massive closing down of stores and laying off of employees over the past year. The loss of market share to Amazon and the migration to everything to a digital delivery system seem like an irreversible trend.
Likewise, though Wal-Mart has not had any scandalous replacements of its leaders, it has not done much to promote the “Save Money - Live Better” slogan on its website. Even over Christmas time, the company saw a reduction in online sales and web activity compared to the previous year.
Where This is Going
The Amazon Goliath has more or less dominated the online purchasing world, both with its own products and others. Millions of convenience-seekers just find a few clicks of the mouse a better alternative to gallons of gas, crowded aisles and indifferent cashiers.
For Amazon, however, the drawback will be that pesky problem of overhead. It will be difficult for Amazon to remain as competitive once it must pay ‘to keep the lights on’ in a brick and mortar store. The key to success will be moderation and plenty of steady planning, research, and implementation. It cannot rush into gobbling up real estate and suffer the same fate as companies that grew too fast and were left holding the bag when business slowed (Starbucks anyone?). The costs it will incur – and generously pass on to John and Jane Consumer – must be certain to not outgrow the sales made in store before too much is invested and possibly lost.
My prediction is that after the novelty wears off, people will retreat back to their online shopping sanctuary where power lies in a few simple clicks and home delivery. But time will tell whether Amazons roll out strategy was too aggressive to support itself. While Amazon shares holds steady at around $192, my prediction is that they will see little movement, as new costs offset new sales in their stores and compress margins. Stores will require significant working capital, even if the company pursues sale-leasebacks for its physical buildings. I anticipate operating margins at its brick-and-mortar stores will be half the 1.8% average operating margin for the company overall.
Even so, I still see this as more attractive than the future of retailers like Wal-Mart and Best Buy. In particular, the days of specialized big boxes like Best Buy are coming to an end. As numbers prove, consumers opt for all they need under one roof, rather than one stop for groceries, one stop for clothes, one for electronics, etc. Hence the aggressive grocery strategy Target is taking (a few years behind Wal-Mart one might add!).
Summary
Investors will be wise to jump into Amazon stock. I think great returns are on the horizon based on its strength of leadership and strategic plan for growth. I see Amazon being wise and taking its time in its roll out strategy.
On the contrary, investors should not expect Best Buy to post big returns. No, this isn’t just a knee-jerk judgment on Dunn’s extracurricular activities. The company has been steadily swindling for the past few years. As fuel costs increase, real world shoppers will soon grow less interested in driving to the local electronics store.
The competitive advantage that made Amazon will be just one of the nails in Best Buy’s coffin.
The Motley Fool has no positions in the stocks mentioned above. StockCroc1 has no positions in the stocks mentioned above. 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.
