Best Buy (NYSE:BBY) has announced that it will make its price-matching policy permanent from March 3, 2013. The policy was introduced on an experimental basis in the holiday season. It guarantees that the company will match the lowest price on offer for a product by an online or a brick-and-mortar retailer if a customer can show proof of the same.
Under the new permanent policy, Best Buy will price match all local retail competitors and 19 major online competitors in all product categories and on nearly all in-stock products, whenever asked by a customer. This guarantee is available on Best Buy’s website at more than 1,000 Best Buy big box stores, more than 400 Best Buy Mobile standalone stores in the United States, as well as on the telephone. Some of the online retailers in Best Buy’s list are Apple.com (NASDAQ:AAPL), Amazon.com, (NASDAQ:AMZN) Crutchfield.com, and Walmart.com (NYSE:WMT). 
Online only music, movies, mobile phones, digital downloads, pre-orders, and refurbished products and products from Marketplace vendors on Best Buy’s website do not qualify for the Low Price Guarantee (the name given to the price-matching policy). More details can be found here.
While this move may curtail or end the phenomenon of showrooming, it is certain to hit Best Buy’s margins adversely. It seems that the company is trying to grab market share at the expense of margins.
Best Buy seems to be following in the footsteps of Target which adopted a permanent price-matching policy some time back.
Why This Policy?
Retailers like Wal-Mart and Amazon are taking business away from pure-play consumer electronics stores by offering huge discounts. Customers are still using physical stores to check out products and gain hands-on experience with gadgets. However, a large number of them then proceed to buy these from online stores like Amazon at cheaper prices. This phenomenon of showrooming has hit business hard for companies like Best Buy and RadioShack. The trend has accelerated by changing consumer spending habits, which are shifting from high discretionary spending to higher savings.
What The Policy Says
The price-matching policy is not absolute. Prices will be matched for a customer only if the customer places a request for the same, and the final decision will eventually be taken by the staff. Customers might be asked to produce proof of still-in-effect lower prices at a competitor’s store or website. Best Buy will also not match prices during the return and exchange period.
There is a small trade-off though. On the same day that the policy comes into effect, Best Buy will halve its time window for returns and exchanges to 15 days — down from the longstanding 30-day period currently in place. This may keep some consumers away since competitors like Amazon offer a 30-day return and exchange period for most products.
How It Might Play Out
We think that there are different categories of customers. Some prefer to buy a product at the cheapest possible price while others value the whole experience of shopping in order to be educated on their purchases. There are also those who give maximum importance to convenience. Amazon offers low prices as well as facilities like “2-day shipping” to its Prime members on many in-stock items. This might sound convenient enough to some customers who want to avoid the hassle of going to a store and the inevitable gas charges. However, there are customers who value instant gratification. We think that Best Buy’s price matching policy might provide a marginal incentive to lure more people in this category to its stores.
Earlier, e-commerce players were largely exempt from paying sales tax in most states. This loophole is being plugged by many states and fewer states now permit themselves to be used as sales-tax havens. The increased costs are being passed on to the customers, reducing the price differentials between online and physical retail stores. Thus, Best Buy might find it easier to match these prices. Customers who value the whole experience of shopping and interacting with knowledgeable sales staff may now opt to buy from a Best Buy store if they are getting products at the same price.
The overall consumer behavior will determine whether or not the showrooming phenomenon persists in the future.
This strategy is sure to hit Best Buy’s profit margins. The company could be attempting to shore up its absolute profit numbers with higher sales. This acquires salience in view of persistent rumors that Best Buy’s founder Richard Schulze may place a buyout bid at the end of February when the deadline given to him for the same expires. While the company didn’t comment on the implication of this policy for profitability, it might be possible that it is betting on cost-cutting measures to make up for margin contractions.
We have a price estimate for Best Buy of $16 which will be revised after the fourth quarter earnings results.
Disclosure: No positions