Electronics Retailing - The Perspective Of A Buyer

Includes: AMZN, BBY, TGT, WMT
by: Paulo Santos

In the last few weeks, I've been in the market for a few electronics, including a further LCD computer monitor for me and a Sony NEX-5R camera for my wife. This has led me to do a little shopping, in this shopping I've come into contact with several realities pertaining to electronics retailing. Although my experience is from visiting European retailers, such as Pixmania and Amazon.com (online) plus Fnac and Mediamarkt (offline), some of it directly translates to the U.S. markets.


Since I'm going to buy specific products, the main consideration is price. Here, Amazon.com (NASDAQ:AMZN) and Pixmania have better pricing than what the physical stores present.

The fact that these stores present lower pricing does not mean, though, that they have lower costs. A cursory look into the latest Dixons' earnings presentation (Dixons is Pixmania's parent) shows Pixmania to presently be unprofitable. As for Amazon.com, we already knew that in its latest earnings report it fell into the red as well.

So things aren't as simple as they seem - although online retailers can present lower prices, they do so at the cost of margins. However, it doesn't stop there …


It turns out that products sold by Amazon.com, especially those sold in the Marketplace, don't necessarily have a warranty. This was a surprise for me. Amazon.com specifically asks the customer to look up and contact the manufacturer to check if a given product has a warranty. This was a huge surprise for me.

This has severe implications when competing with bricks & mortar retailers. A warranty has value. Even the certainty of having a warranty has value. This means that at the same price, online retailers following Amazon.com's policy are likely to lose the sale on trust alone, versus a bricks & mortar retailer. For me this excluded Amazon.com (the UK division) from consideration for the products I was seeking. You don't buy a 500-600 Euro camera without the certainty of a warranty.


Showrooming, or the practice of checking out a product in a physical store only to order it later online at a cheaper price, is a reality. I did this myself, that's how I got to know that prices were somewhat lower online.

With this being a reality, there is no alternative for the physical stores than to fight it back. Some are doing precisely that, which brings us to …

Price matching

In the U.S., Best Buy (NYSE:BBY) already had some price matching to online competitors in this holiday season, while Target (NYSE:TGT) has decided to implement it year-round. This is very significant in light of the showrooming phenomenon. If a customer is in the store and knows the price he's looking at will be changed to match whatever he can get online, then there's zero incentive for him not to buy at that point and instead go online to make the purchase. Add to this that the store has more service, is easier to return products to and there is no doubt the products carry a warranty, and at the same price the store basically always gets the sale.

The first data we've received seems to confirm the notion that retailers using price matching can stop the bleeding of lost sales to Amazon. Overall in the U.S. in Q4, Best Buy managed to finally present unchanged same store sales, and in the States where Amazon.com was forced to collect sales taxes (something which could still drive customers towards Amazon.com even in the face of price matching), Best Buy actually saw improved sales (when compared to other States where Best Buy is present).

In short, price matching by physical stores, as long as these can handle the resulting margins, is a potential game-changer versus the strong growth of online retailers. As far as I can tell from looking at Wal-Mart's (NYSE:WMT) and Costco's (NASDAQ:COST) P&L statements, these retailers can easily handle price-matching Amazon. Simply put, their SG&A costs/revenues are significantly lower than Amazon.com's. They're the lowest cost providers, not Amazon.com.

A word for Apple (NASDAQ:AAPL)

Something I found curious. Apple is very mindful of its own market presence. Whereas everyone else's tablets, smartphones and laptops were in the same space, with brands all mixed-up, Apple got areas of its own in both physical stores I visited (Mediamarkt and Fnac). Not only that, but given the lack of aggressiveness in tablet pricing by most other Android-powered brands, Apple's products while seeming premium, weren't much more expensive - except for unknown budget brands. This might change as Amazon.com, Google, Asus, etc, enter the low-end tablet market space, but for now Apple still has a true merchandising and image advantage.

On the other hand, the usability of Android tablets with the present hardware seems a decent match for Apple's iPad, and the same thing happens with the smartphones powered by either Android or Microsoft's (NASDAQ:MSFT) WP8. I played around with an HTC 8X and it was a joy to use - it was also a very obvious copy of Nokia's (NYSE:NOK) Lumia 800/900/820/920 products, I wonder how long until Nokia pushes a lawsuit here.


When buying electronics, the likelihood is that online pricing will still seem cheaper. However, one has to be entirely certain that one is buying the exact same thing - including warranties. Also, if the physical retailer price-matches the online prices, then all the advantage of buying online is gone while all the disadvantages are still present.

Given this, I'd conclude that price-matching is a potential game changer in the war between bricks & mortar retailers and online retailers. If the physical retailers can match the costs of their online competitors, then this war is far from having a certain outcome. We shouldn't forget that mail-order retailing once lost a war just like the one online retailing is fighting now. Mail-order retailing wasn't much different from online retailing today, all that changed was the catalog.

Obviously, the online retailer that would be most affected by these observations would be Amazon.com, since it's already profitless even before the impact of the effects of price matching and sales tax collection. Not only that, but Amazon.com trades at a huge premium to the entire market in spite of its falling earnings, falling estimates and slowing growth. The implication of these observations is that Amazon.com's remaining buoy, its revenue growth, will see a further significant slowdown. Indeed, the same thing already happened in Europe to Pixmania, which up until recently was growing strongly on the back of low prices.

Post scriptum: Once again this year, Amazon.com's Kindle Fire tablet is showing itself to be incredibly seasonal in demand. Like during 2012, as the holidays went sales fell off a cliff. This is evident in that the Kindle Fire HD has already lost its top spot in Amazon.com's best sellers' list to the Kindle Paperwhite.

Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.