Brick-and-mortar retailers that compete directly with online retailers face a couple of key challenges. First they have to find a way to lure customers away from their computers and into stores. Once they get them there, they have to deal with the problem of free riders. Consider Best Buy’s issues when it competes with Amazon.com.
Best Buy hosted a great Black Friday this year, with super promotions, attractive enough to increase its sales by 7 percent over the previous year’s sale event. Despite this increase in sales, profits were much lower. Best Buy made even less profit than a discount retailer, the 99 Cent Only Stores. As if the extreme post-Thanksgiving sales were not enough, Best Buy continued to offer free shipping throughout the holiday season on all online purchases. With this expensive tactic, the retailer hopes customers will come back to the store, after the holiday busyness, to buy installation and warranty services.
But sometimes customers in the stores create a bigger problem for Best Buy, especially when they use the stores like showrooms where they can try out products and compare them in person. A quick check on smartphone, even while still talking with the salesperson, can let them know if another retailer has lower prices online. With its low price guarantee, Best Buy has to keep offering more compelling offers.
Amazon makes the game even more cutthroat by giving customers a Price Check application they can use to compare prices while in stores. Not only is the app convenient, but if consumers use it and then buy from Amazon, they earn an additional 5 percent off the price.
Noting all these trends, many analysts suggest Best Buy should decrease the size of its stores, especially as more and more of its space-hogging products shift into digital download markets. The company plans to decrease stores by 10 percent in the next five years. But will it be enough to improve its profitability, and fast?
1. Do you use mobile apps to price check in stores?
2. What other options might Best Buy try to overcome these competitive challenges?
Source: Jeffrey A. Trachtenberg, “E-Book Readers Face Sticker Shock,” The Wall Street Journal, December 15, 2011.