It’s not easy being a big box retailer. While Best Buy, Wal-Mart, and Target once ruled the industry, Amazon has quickly stolen the spotlight as the leading place to shop for just about everything.
Brian Sozzi, an equity research analyst at Wall Street Strategies, summed this up with a simple question: “Is BBY simply just a showroom for Amazon?”
The electronics giant could be turning into that. There are many consumers who use Best Buy and other major retailers to browse, and then turn to Amazon to make the actual purchase.
In spite of this, Best Buy managed to impress a few investors this week with a $5 billion share repurchase program, as well as a 7% dividend increase. After this news was announced on Tuesday, investors responded positively during the early pre-market hours. Even Anthony Scaramucci, a managing partner at SkyBridge Capital, was impressed. On CNBC, he referred to Best Buy as the hedge fund trade of the week.
Does all this mean that Best Buy is finally a good buy?
“I can see where they are coming from,” Sozzi told Benzinga this morning. “Here is a significant share owner in the sector trading at single digit multiples, and just announced a dividend increase plus share repo program.”
Sozzi added that he is willing to miss a few points on the upside “pending a fundamental turn in the business.”
“I don’t think last week’s earnings demonstrated that a fundamental turn is underway, and we could be on a path to much better than expected earnings growth rates in coming quarters,” he said.
Finding the Best Buy
If there was ever a time when consumers were apprehensive about shopping online, you wouldn’t know it today. Whether they are too busy or too lazy to go to a physical retail outlet, or simply can’t find what they want in store, Amazon is quickly becoming the dominating player in the industry.
Personally, I love Best Buy. I like to touch and test new electronics before I buy them. I also like having a decent backup retailer for video games whenever GameStop is sold out of a particular item. While Amazon is great for many items, especially those that are not easily found in stores, there is something really wonderful about being able to take home a new device, video game, movie or CD and use it right now.
There are many consumers, however, who just don’t feel that way. For them, it’s the price and convenience factor that matters most. What does this mean for Amazon’s leading brick-and-mortar competitors?
Wal-Mart’s business plan – to provide the cheapest items possible – has been very effective over the years. But increased competition has prevented the corporation from maintaining customer loyalty.
As much as Amazon may threaten Wal-Mart, the company has faced stiffer competition from Best Buy (which trounces WMT’s electronics department), Toys ‘R’ Us (WMT was number-one in toys until Toys ‘R’ Us made a comeback), and Target (a retailer that consumers perceive as offering goods of a slightly higher quality).
Right now, consumers don’t perceive Wal-Mart as being a “high-quality” retailer. And when the company tries to do something a little more upscale (such as offering organic fruits and vegetables), it often fails. This is partially because consumers who shop at Wal-Mart expect the goods to be cheaper, and are therefore less likely to be searching for an upscale item. And those who do search for those items are disappointed when they discover that they are not on the same level as similar items offered at other retailers.
To compete more effectively (and to ensure that Amazon doesn’t become a bigger threat), Wal-Mart needs to beef up its website, expand its electronics department – but NOT its video game department; GameStop owns that territory – and finally decide whether it wants to be known as the store with the cheapest goods (as it is currently perceived), or the store that sells great items at the best price. If Wal-Mart decides on the latter, it will need to rebrand itself in the eyes of consumers or continue to suffer the consequences.
Target, AKA the “upper class Wal-Mart,” has built up a solid retail chain. But by opening too many stores too soon, and by trying to sell too many products in too small of a space, Target has dug itself into a hole. Unless you are buying the latest and greatest piece of electronic equipment, Target is not the place to shop. Its electronics section is very limited, not only in TVs but in video games, cameras, tablets, netbooks, etc. In this regard, Target and Wal-Mart have taken the same path: they like to dabble in a lot of areas without taking any of them too seriously.
This is where Amazon comes out the victor. In addition to the superior pricing (on some items – not all), the convenience factor, the well-promoted free shipping, and the trusted brand name, Amazon also perseveres above Target in the area of product selection. As a shopper, I like Target. But I can’t tell you how many times I’ve visited a location, couldn’t find what I was looking for, and ultimately had to purchase the item elsewhere. More and more, I find myself thinking about Amazon first.
Target.com has the same problems as the stores: not enough merchandise.
As long as Amazon can maintain a superior inventory of items, the online enterprise will continue to be a deadly threat to Target.
GameStop doesn’t have much to worry about this year. Diehard gamers love this retailer because it’s quick, reliable, and there are locations everywhere. Casual gamers love it because GameStop offers an enormous selection of used games (and will buy back virtually any console or handheld game, a feature no other retailer offers).
GameStop has also designed a terrific website. Sozzi believes that the company’s online game initiatives “are pretty interesting and will be instrumental to their future growth.”
“The future of video games, much to the chagrin of diehards who love discs, will be digital game downloads which will be the prerequisite to downloading additional levels, characters, etc.,” Sozzi said. “If you take a look at Call of Duty, just imagine the profit margin boost to Activision Blizzard if they didn’t have to produce physical discs, just distribute the game online and then release their typical map packs.”
The Future at Retail
Retailers are in for a rough ride. Target and Wal-Mart may soon find that they have no room to grow. Wholesale chains like Costco and BJ’s will be challenged as well: why should consumers pay an annual fee to be a part of their “clubs” when they could shop on Amazon for free?
— Louis Bedigian
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