May 31, 2012 at 7:55 AM ET
In the annals of unfortunate nicknames, Best Buy has been saddled with one that's particularly challenging: the Amazon Showroom.
Internet retailers, especially Amazon.com, benefit when consumers visit a Best Buy store, check out an item like a TV or home theater system, maybe ask the salesperson some questions about features or performance, then go home and buy it online for a few bucks less.
This practice of "showrooming," as it's been dubbed by analysts, doesn't just affect Best Buy; Sears also said its first-quarter earnings were hurt by weaker electronics sales. But as the nation's biggest electronics retailer and one that's been virtually without an equivalent brick-and-mortar competitor since Circuit City's 2008 bankruptcy, Best Buy has the most to lose from this practice.
When the company released its first-quarter results last week, it said same-store sales dropped 5 percent while online purchases rose 20 percent, indicating that even Best Buy customers might look, but don't buy at the stores anymore. In response, the company is closing 50 stores — 41 of them have been shuttered already — to focus on expanding its smaller-format Best Buy Mobile cell phone stores and its e-commerce channel.
"They just can’t afford the huge stores that made sense years ago. They need to have a leaner assortment in stores," Sucharita Mulpuru, an analyst at Forrester Research, said via e-mail.
“My goal is to continue to shrink the company's physical footprint and substantially reduce our cost structure. Total square footage will go down as we make decisions about the best use of space and resources,” interim CEO Mike Mikan said during the investor conference call, Internet Retailer magazine reported. Best Buy declined an interview request for this article.
This won't end showrooming, though. First of all, analysts point out that Best Buy's current footprint is so big that it will still have plenty of floor space to display the things people want to look at, then buy somewhere else. "What there will be less of are categories like DVDs and video games which are essentially dying or challenged categories," Mulpuru said.
"I think they got a little bit too big for themselves," said Anne Zybowski, director of retail insights for Kantar Retail. "The move to smaller stores, I think it's not just because of the showrooming phenomenon."
If Best Buy does scale back to where finding a store to browse in becomes a challenge, consumers will react in one of two ways. About half of electronics buyers already buy so sight unseen, said Lori Wachs, president and co-founder, Cross Ledge Investments. "You already have a lot of people that have fully bought into... buying it without having seen it and touched it," she said.
Tech-savvy consumers can find what they need to know about device functions and features without the help of a salesperson. If there's no Best Buy to browse, some will just rely more heavily on professional and user reviews and message boards.
As more online retailers offer free returns as well as free shipping, more customers are likely to see a purchase as a no-risk situation. For the retailer, though, this means added costs: paying for return postage, repackaging and returning them to their inventory. "Returns are becoming a larger expense and these online retailers need to figure out how to handle them most efficiently," said Alison Jatlow Levy, retail strategist at consulting firm Kurt Salmon. "We think as more customers switch to shopping and purchasing online, you'll see an inrease in return rates."
One reason showrooming has grown is that people are more comfortable comparing prices and buying things online or with a smartphone. The other reason is that there really isn't anything innovative enough on the market to make buyers decide they have to see it in person.
"Early on in a cycle, people need things explained to them a bit more," Wachs said. "We just haven't been in a cycle like that in the past few years… The last big thing was supposed to be those 3D TVs and that was a big flop." Instead, improvements to TVs have been incremental or consist of back-end functions such as Internet connection. None of the major video game console makers have launched a new version in years, and the innovations in the tablet market that capture wide consumer interest are all coming from Apple.
"That's a big reason why smartphone and Best Buy Mobile format have been so successful," said Zybowski. That's where the innovation is taking place, and those are the products people want to play with and try out. Staffing these smaller stores with knowledgeable sales people also is an opportunity for Best Buy to burnish its customer-service credentials.
Other customers of bigger items like TVs, game consoles and desktop computers will still want the hand-holding they can get at a physical store — even if they plan to go home and take advantage of lower prices online. These shoppers are likely to seek out regional electronics chains or even independent outlets. This might sound like a losing proposition for these smaller retailers, but Zybowski pointed out it could also benefit them significantly when the "next big thing" in electronics technology comes along.
But when that next big thing — whatever it is — does eventually hit the market, people will want to see it, ask questions and learn how it works, which could benefit smaller electronics stores. It could also benefit Best Buy, since analysts say the brand still will almost certainly have some form of a showroom presence. "Showrooming will not go away," said Oliver Wintermantel, an analyst at ISI Group.
"People will use stores like hhgregg and Best Buy to look at products, especially new products like Windows 8" when it debuts this fall, he said. "For new products, people want to see what it is, how it feels, what it does."