Capital Ideas Blog

How Best Buy could beat Amazon

By Vanessa Sumo
December 12, 2012

From: Blog


Many shoppers who set foot in a brick-and-mortar store may just be there to scrutinize a product they’re interested in before searching online to find the same item for the lowest price—a practice known as “showrooming.” This affects stores like Best Buy, which sells electronics that are widely available from online sellers, most obviously Amazon. So how should traditional retailers respond? Not by being drawn into price wars with online sellers that they are unlikely to win, says Chicago Booth Professor Jean-Pierre Dubé in a recent Newsweek article.

Online retailers such as Amazon can afford to offer lower prices because they don’t have the fixed costs of physical stores, have lower costs for every transaction and enjoy massive economies of scale. Moreover, smartphone apps such as Amazon’s Price Check have made showrooming easier by letting customers scan a product’s bar code and directly compare its price with Amazon’s.

One way to prevent showrooming customers heading out the door would be to match online prices. Dubé thinks this is a bad idea. Instead of focusing on offering the lowest prices, retailers such as Best Buy should move upmarket by offering a higher level of service and adding some high-end items to the product mix. Offering expert personal advice and a multi-sensory browsing experience that online stores can’t offer could be what mass retailers need to survive fierce competition from online shopping, he says.

Best Buy can look to stores such as Home Depot and Lowe’s, which Dubé predicts will survive the threat of internet shopping because people who go to these stores greatly benefit from the help they get in finding and using a product.

Apple stores are another great example of a profitable store format where service plays a key role. Moreover, Apple products never go on sale, a characteristic shared with other high-end products. Dubé points out that luxury retail has performed well in recent years despite the recent recession. Because prices of high-end products are never steeply discounted, retailers can afford to offer higher-end services.

A higher level of service requires hiring people with technical expertise, which would make the premium that customers pay to come into the store worthwhile. “With 100 percent probability, you are going to need to upskill your labor force,” writes Dubé. “If they want my business, they can’t put a high-school kid in front of me who doesn’t know what they’re talking about.”

Bricks-and-mortar stores have been employing other strategies to combat the threat from internet retailers. Many are giving customers the option of buying online and picking up their purchases at stores. Retailers such as Target have been offering an exclusive line of products in store to entice customers.

"It's very critical for the retailer to have the customer actually walk into the store,” Booth Professor Pradeep Chintagunta said in a recent interview on American Public Media’s Marketplace Morning Report. “They can then come across other products in the store that they end up buying."

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