Over the past few years, online retailer Amazon (NASDAQ:AMZN) has grown at a tremendous pace, which has proved threatening for a number of physical retailers in the U.S. Many retailers have found it difficult to compete with Amazon due to its low prices, increasing showrooming and the convenience of online shopping. While Best Buy (NYSE:BBY) and Target (NYSE:TGT) were believed to be the biggest victims of Amazon's showrooming, Bed Bath & Beyond (NASDAQ:BBBY) turns out to be the most-at-risk retailer according to a Placed study. In this analysis, we take a look at how Amazon threatens the home goods retailer and how it is fending off the competition from the online giant.
Since Bed Bath & Beyond is a specialty retailer, it offers a greater variety of products compared to Amazon. It leverages its decentralized management culture to effectively respond to different regional needs, resulting in better customer service. Even without its 20% discount coupon, Bed Bath & Beyond's products are often cheaper than similar products on Amazon. Apart from offering attractive products at competitive prices, Bed Bath & Beyond is also investing in its online channel, which is currently at a nascent stage. As the retailer maintains its strength on the aforementioned fronts and continues to grow its online business, it will be well equipped to dilute the growing threat from Amazon.
Our price estimate for Bed Bath & Beyond stands at $78, which is slightly ahead of the market price.
The Amazon Threat
Online retail giant Amazon has emerged as a threat to a number of retailers in the U.S. with its rapid growth and showrooming. Showrooming refers to the phenomenon where shoppers visit physical stores to find products, compare their prices on different websites and buy them online. Amazon offers and promotes free mobile apps to encourage its customers to compare prices of various products while walking in different stores.
According to a survey conducted by Placed, a Seattle based startup, Bed Bath & Beyond faces the greatest risks due to showrooming, even more than Best Buy and Target. The research was based on the responses of close to 15,000 Amazon customers who have checked products from nearly one billion U.S. location data points. This study ranked Bed Bath & Beyond at the first position in the list of most-at-risk retailers as Amazon's showroomers are 27% more likely to visit a Bed Bath & Beyond store. David Shim (CEO of Placed) stated that unless the brick-and-mortar retailers go proactive, Amazon will remain the winner in the e-commerce channel. According to Simon-Kucher & Partners, a global consultancy firm, product categories that have lower purchase frequency and higher need of touch such as furniture, home furnishing, decorative items, health and beauty are the next in line for the online vs. physical store battle. Therefore, we believe that Amazon poses a serious threat for Bed Bath & Beyond.
Bed Bath & Beyond Is Well Positioned To Fend Off Competition
Although Amazon's showrooming is threatening for Bed Bath & Beyond, we believe that the home goods retailer is well equipped to remain competitive against the online retailer. Being a specialty retailer, Bed Bath & Beyond offers a greater variety of products that might not be easy to find in any other store or over the Internet. Since customers shop for home furnishing products occasionally, the quality, variety and shopping experience become important. Bed Bath & Beyond's decentralized management culture enables it to better serve its customers by offering products in accordance to regional tastes. This culture leverages the knowledge, independence and customer focus of the store associates to respond efficiently to market demand.
Bed Bath & Beyond also enjoys pricing advantage over the online giant, which makes this threat less imminent. An analysis by BB&T Capital Markets (investment firm) found that a basket of 30 comparable items was about 6.5% cheaper at Bed Bath & Beyond as compared to Amazon. What's interesting to note is that the home goods retailer's prices are lower even without its 20% discount coupon. According to BB&T analyst Anthony Chukumba, Bed Bath & Beyond's prices are lower than Amazon's on a daily basis, and it is not an exclusive strategy to beat the online giant. Moreover, many customers prefer to physically see the home furnishing products before buying them, which makes Bed Bath & Beyond a viable shopping destination.
The Company Is Also Developing Its Online Channel
Bed Bath & Beyond's online business is very small, contributing just 1%-2% to its overall revenues. However, this channel is quite important for the retailer given the optimistic outlook of the online retail industry. According to eMarketer, online sales for furniture and home furnishing products will almost double by 2016. The company appears to be making some valuable efforts including the launch of new websites and omni-channel retailing to take advantage of this growth.
Bed Bath & Beyond launched new websites for its namesake business and buybuy Baby during the second quarter of fiscal 2013. It also replaced their back end and customer facing systems to make them more efficient. Moreover, it is planning to enhance network communication in its stores and upgrade mobile websites and apps. The retailer is also working towards improving its point-of-sale system as well as the growth and development of IT analytics, marketing and e-commerce. Bed Bath & Beyond is in the process of building, equipping and staffing its IT data center in North Carolina, which will support its overall IT systems. We believe that the effective execution of these strategies will allow the company to tap the tremendous growth potential in online retailing and better compete with Amazon on the latter's turf.
Disclosure: No positions