The Evils of Showrooming
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While living in Shanghai in 2010, I witnessed a B-School case study for the record books. It happened right before my eyes, and I knew that many a bleary eyed future banker/consultant/supermarket bagger would be studying it for years to come. It was the collapse of Best Buy China. It happened overnight, literally. One day everything was fine and the next there was a chain fence over the front door with armed guards standing out front. What had BBY done to fail so spectacularly and so quickly? Though there are many reasons for the collapse, the one this article focuses on is the scourge of "showrooming."
Essentially showrooming is going to one store to test out a product, touch it, smell it, taste it (if that's your thing) and then go find it online for cheap. You could argue that this has been done since the dawn of the marketplace; you go to the fancy store in the nice location but then say "eh, I can probably find this at Wal-Mart (NYSE: WMT) for half the price." Sure, these are two competing brick and mortar stores, one just chose to attract the higher end clientèle that will pay for the better experience: even playing field. But in this age of "fairness," people argue that a brick and mortar store is competing with an internet retailer is unfair; most always the internet retailer will win when it comes to price.
One of the reasons Best Buy China failed was that Best Buy failed to accurately read the desires of their incredibly price-sensitive consumers. Though this was a novelty to the US at the time, American consumers during this recession are increasingly starting to look downright cheap. Companies like Borders and Circuit City have been felled in part by showroomers and others are close to it. The trend, though difficult to quantify, is growing rapidly. Bloomberg Businessweek points out that, "Research firm Gartner (IT) calculated that worldwide mobile payment transactions will surpass $171.5 billion this year, up from $106 billion last year" and "[in 2011, a company running ecommerce for brands like Mattel, Nikon, and Microsoft] saw about a 15 percent penetration of mobile devices [in online purchasing], and [their] expectation is that will go up to 25 percent this holiday season." Mobile devices facilitate showrooming to a great extent and allow customers to make their purchase while still in "buy-mode."
So, amongst all the losers in showrooming, who is winning? Amazon (NASDAQ: AMZN). Their customers don't have to pay sales tax (though that could be ending soon), their operating margins run at about half that of their competitors (BBY at 3.69% vs. AMZN at 1.42%, for instance) hence prices are lower, and, with the introduction of Prime, customers get free 2 day shipping, which drastically cuts down on the whole instant-gratification thing the internet lacks. Retailers will eventually fire back en masse at AMZN with more schemes like price-match guarantees, smarter inventory stocking, and even technology that disrupts cell phones while customers are in the store, but until then AMZN is bound to continue its growth; and after that, you can use all the money AMZN saved you to invest in the next "scourge of retail!" Isn't competition grand?
TheLaowai 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. 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.