Can Best Buy take on Amazon?
The electronics retailer wants to combat 'showrooming' by lowering online prices, but competing with the e-commerce giant won't be easy.
For one thing, as Bloomberg News notes, Best Buy only generates about 6% of its sales online. Though the Richfield, Minn., company recently hired former Expedia (EXPE) president Scott Durchslag as its new head of e-commerce, building the business is not going to be easy.
Many consumers have gotten into the habit of using Best Buy's large, cavernous stores as a showroom to check out merchandise they plan to buy online at a lower price. The costs associated with these stores is one reason why Best Buy is not competitive with Amazon. A study released by Barclay's earlier this year found that goods sold on Best Buy's site were 4.2% higher -- before tax and shipping -- than Amazon. That's a huge advantage.
Best Buy's new CEO, turnaround specialist Hubert Joly, has the unenviable task of figuring out how to lower prices without crushing profit margins. Anybody can give merchandise away for free. Changing consumer behavior is never easy, though, and if Best Buy wants to beat Amazon at its own game, its prices will have to be lower then the e-commerce giant's. The problem with this approach, though, is that it may take business away from its stores. Moreover, what's to stop Amazon and other rivals from discounting to start a price war?
Shares of Best Buy have slumped more than 23% this year as the chain struggled to attract consumers to its more than 1,000 stores. Comparable store sales, a key retail metric, have fallen for eight of the past 10 quarters. The chain has suspended share buybacks and reduced its earnings outlook. Many analysts argue that the competition in the consumer electronics industry will only intensify. At the same time, founder Richard Schulze is moving forward with his proposed $11 billion takeover of the company.
Best Buy's future remains uncertain. Competing with Amazon on price is the right move for the chain, though it may be too little too late.
--Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
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