In follow up to our recent blog on show rooming, we see this as an overall trend in bricks retail today.
Best Buy CEO Hubert Joly’s turnaround strategy to combat the likes of Amazon was to remove price from the purchase decision and consumers would stick with Best Buy because they can find a wide assortment of products, get advice from knowledgeable staff and test gadgets.
On the surface, this seems all fine, but as evidenced, did not work with revenue from outlets open at least 14 months fell 0.9 percent in the nine weeks ended Jan. 4.
There are several problems related to this strategy.
Lowering the retail price of things gives you less margin to work with. Less margin means you need to lower your costs, but as a bricks retailer, you need to pay high rent, staff and all those costs associated with it. You don’t have the efficiencies of a scalable warehouse and strategically placed shipping locations that get your goods to the consumer in a day at ground costs.
If you look at cost of goods on commodity type products like electronics, it’s more or less equal across the board, so everyone works with the same margins. Bricks sales don’t have to ship, so they save some money there, but have to put more money towards overhead support, overall a disadvantage to bricks.
In order for bricks to survive, they need to sell accessories, or in our business warranties. In fact, Best Buy would not exist today if they didn’t sell warranties. Warranty sales help bring the price erosion seen back to a level that works. But to sell warranties, you need quality staff and you need to be able to talk to the customer.
Bricks have had to reduce staff to combat the reduction of sales and margin price erosion, so service starts on a downward spiral.
To combat price reductions, bricks retailers place products in bulk on the floor for consumers to grab. Consumers that make the effort to go into stores often know via their web research what they want before they even go in.
This further complicates things because you can’t sell high margin accessories to a customer who just grabbed and went. Meanwhile they try to combat online sales with their own online properties, however, online conversion of accessories including warranty is much lower than in store, so the transition to online isn’t seamless. It’s a downward spiral that is hard to fight.
Perhaps show rooming is the answer and the future of retail will be run by OEMs showcasing their goods and selling direct. After all, if the retailers aren’t there to show off goods, how will people touch them? Will this bring a shift back to bricks in the new life? OEMs would control margins in these cases and could make that shift work. The transition is already happening with companies like Apple, Samsung and Microsoft, why not others? Clothing lines often sell direct and keep their margins, why not in electronics too?
The future of retail is changing, those that find they key will get ahead of the game. So far the key belongs to the web.