Last year, as the holiday shopping season was in full swing, I wrote about the practice of show-rooming in a piece titled:“We Killed It.”
“We killed it” is attributed to Best Buy’s CEO and refers to the company’s plans to end the negative consequences on brick-and-mortar sales when would-be customers browse and touch the products on Best Buy’s shelves only to go home and order the same product from an online retailer (often at a cheaper price).
The idea was that Best Buy seemed to be enthusiastically embracing the show-rooming concept, rather than listening to the naysayers who continually suggested the practice would put the brick-and-mortar electronics store out of business.
Here’s a chart that shows the epic rise of e-commerce since 2000. And as you’ll see, the slice of the retail pie that goes to electronics and appliance stores has actually declined over the same time.
The growing trend of e-commerce has clearly put brick-and-mortar retailers in a bind. Whether a result of show-rooming… costlier overhead… or the sheer laziness of U.S. consumers (who prefer to make purchases from the comfort of their couches)… the likes of RadioShack, Circuit City, and Best Buy have been fighting an uphill battle for more than a decade now.
Circuit City is already out of business.
RadioShack is now close behind.
Is Best Buy next?
This AMZN:BBY ratio declined sharply throughout 2013. On the year, Amazon gained an impressive 60%, although Best Buy trounced that gain with an epic rise of 236%.
But since December, that trend has reversed.
On January 16, Best Buy released revenue figures from the preceding nine-week shopping season and investors were sorely disappointed. The stock dropped 28% in a day!
For Best Buy, embracing show-rooming came at a cost. As I mentioned in December:
While pledging to match online competitors’ lower price may prevent some of Best Buy’s shoppers from walking out of the store empty-handed, a race to the bottom will be difficult to maintain in the long run, as brick-and-mortar retailers still fight with the disadvantage they have in higher overhead expenses.
Basically, for Best Buy to compete with online retailers, it had to drop prices and cut profit margins to the bone.
In the company’s January 16 announcement, CEO Hubert Joly cites “an intensely promotional holiday season” as the cause for poor performance. The company chose to “invest” (HA!) in its customers… offering lower prices to maintain a grip on its market share. But that means the company won’t be making much money.
This investment in pricing did come with a higher-than-expected cost… and we now estimate our fourth quarter income rate will be lower than last year.
That’s the uphill battle Best Buy faces.
Year-to-date, both retailers are in negative territory. Although Best Buy is faring worse, with a loss of 35%, Amazon’s stock is down just 7.5%.
Time will tell if Best Buy is destined for the same fate as RadioShack. But if I were a betting man, I’d bet on Amazon, NOT Best Buy.
For now, I’m looking for investment opportunities outside of the retail space. You should too.