E-commerce is dead. Long live omnichannel commerce!

I’ve never really liked the term ‘e-commerce’. But now more than ever it does not make much sense to think of e-commerce as a separate category. Everything is just commerce. If you want a new term I would suggest something like ‘ubiquitous commerce’, ‘omnichannel commerce’, or ‘pervasive commerce’. The frontiers between the different channels are getting fuzzier and the buying process is more complex: A customer checks reviews, compares prices, and verifies availability online before making the short trip to a brick-and-mortar store to make the purchase. One goes to a store to check out a product and then orders online on her mobile from a cheaper competitor. Another one orders five pairs of shoes online and returns the ones that don’t fit. One wants a pair of headphones and after asking his friends online decides on which model to buy based on their recommendations. A customer scans a QR code inside a store to get information about a product and some alternatives. The gap between traditional and online retail is thus disappearing. Threatened by the growth of low cost online merchants, traditional retailers have had to adapt. The percentage of U.S. retail revenues from online purchases has been steadily growing and stood at about 5.7% in 2012 (U.S. Census Bureau). Yet, this is still only a small portion of all the retail market.

New trends in retail are also emerging. Stores are used as small distribution centers to ship directly to customers. Online retailers experiment with same day delivery. Indoor location technology allows physical retailers to individually track customers’ movements inside their stores (by triangulating their phones Wi-Fi signals). They can determine returning customers since they are uniquely identified via their phone’s MAC addresses. Rachel Metz, of MIT Technology Review, has written that ‘’one reason online commerce hasn’t yet wiped out American malls is that shopping is a form of entertainment. It’s something to do’’. This is very true.  But traditional retailers need to adjust and leverage their physical stores rather than see them as costly liabilities. The case of Best Buy is a great example.

The Fight of Traditional Retailers: The Case of Best Buy

Although it is still the largest consumer electronics retailer with $50.7 billion in revenues (2012), Best Buy’s growth had slowed to a meager 0.9%. It had lost $1.2 billion in 2012 and faced extremely strong competition in the low cost segment from Wal-Mart and from online retailer Amazon, who was growing sales in Best Buy’s categories at a strong 50% annually and rapidly approaching Best Buy (with total revenues of $48 billion in 2012). The online market for consumer electronics is in the neighbourhood of 20% in the U.S. (about 9% for general retail) and growing at about 15% annually.

The impression is that Amazon’s cost structure is leaner than Best Buy: no need to support a thousand big box stores, a lot less employees, and to add insult to injury, Amazon did not levy sales taxes on purchases in many states, an unfair advantage, although its days are now counted due to the proposed Marketplace Fairness Act of 2013. However, Best Buy’s cost structure is equivalent to Amazon: Best Buy has a slightly better gross profit margin than Amazon, and operating expenses and operating margins are similar. SG&A (selling, general and administrative expenses) for Best Buy in 2011 was 20.2% of sales, while the comparable figure for Amazon was 20.6% of sales. This shows that Best Buy can at least compete on costs with Amazon.

Today, consumers are empowered with real-time information about products and prices. Amazon has introduced same-day, one-click delivery in some cities across the U.S. This helps to counteract one of the main strengths of brick and mortar stores: instant gratification. Brick and mortar stores are increasingly being used as showrooms for lower cost retailers. But, the most important reason for show rooming remains price. In 2011, Amazon released a ‘’price-check’’ mobile phone app that allowed users to compare offers in stores to the prices on Amazon’s website. Since Best Buy was often not competitive, it loss ground to Amazon. A decrease in sales of digital TVs at the profit of smartphones and tablets, often sold by telephone service providers, increased retail competition. Best Buy was clearly lagging in the cellphone segment: while it enjoyed a 20% market share in consumer electronics, Best Buy only had approximately a 5% share of the cellphones market. Best Buy also faced key management departures, especially Dick Schulze, company founder and chairman of the board. Its stores closure and downsizing were eating profits. Its international expansion was struggling as Best Buy did not understand well and take into account the specificities and cultural differences in the markets it was trying to conquer. The company was in crisis: it lost more than 55% of its market capitalization in the previous 5 years.

For Best Buy, there was however some faint light and positive aspects on which to build the strategy for the next 5 years: e-commerce and smartphones sales were growing relatively well, its cost structure was competitive with Amazon, and it looked like Amazon’s unfair tax advantage would soon be a thing of the past. After carefully analysing the strengths and weaknesses of online versus physical purchases, I believe that Best Buy can reignite its growth and deliver positive results by using a strategy mix of strong  online and physical stores by combining the strengths of both channels. Best Buy needs to refocus its international expansion and, secondly, counteract the showrooming phenomenon and better compete against rivals Amazon and Wal-Mart.

Strengths Weaknesses
Online purchase + Potential   for lower prices+  Wider selection

+ High convenience,   time saving, and

crowd   avoidance (shop 24/7 in the

comfort of   your home)

+  Easy comparison shopping and

access to   user reviews online

(although   purchase can be

physical as   in reverse show

rooming)

No   physical contact with product priorto purchase   (cannot touch, see, hear,

etc.)

Need to   wait for delivery (although

Amazon do   offer same-day delivery for

some   products)

 Potential additional delivery costs.

You may   need to be present to receive

your   packages or go collect it

somewhere

 Returning products might be

challenging

Physical purchase +  Can buy on the spot (instantgratification)

+  Physical contact with product

+  More personalized service

Prices might be higher Less convenient (have to   go to the store

during certain hours, etc.)

Narrower selection   (limited physical

space to store inventory)

Starting back from scratch: focused international expansion strategy

Best Buy’s international expansion has not been a great success, to say the least. To its defense, it has had some bad timing during the Great Recession. Best Buy “recently exited completely its European business, leaving it with precious little to show for the last ten years of international expansion efforts”. It has also exited Turkey in 2011. During the same year, Best Buy closed all of its nine Best Buy branded stores in China to focus on expanding the more profitable domestic chain it acquired five years earlier, Five Star.

One of the issues with Best Buy’s international expansion strategy is that it disclosed its plans to enter the foreign markets too early and openly and gave its competitors a chance to react back. They also failed to understand their customers and take into account important cultural differences. In China for example, they were selling too expensive products compared to what their Chinese customers were willing or able to pay. In the UK, they pushed the suburban big box retail outlet concept despite the fact that Britons preferred smaller and centrally-located stores. Best Buy’s brand was also not very well-known internationally. Not many people in China know what Best Buy is, and this might explain why Best Buy decided to close its Best Buy branded stores in China and focus on the local Five Star chain.

The new international expansion strategy should be viewed as an opportunity for not repeating the same mistakes and to adapt rapidly to a changing reality. Moreover, the lack of brick and mortar stores in these foreign countries should be viewed as a clean slate to rethink the new strategy. Best Buy should focus on an e-commerce strategy for its international expansion with a limited number of physical flagship stores, complemented with small stores (much smaller than their U.S. counterparts) located in busy shopping areas and downtown business centers, allowing for easy pick-up of items.

This mainly e-commerce strategy complemented with a smaller store footprint would be less costly and capital intensive than building an extensive network of big box brick and mortar stores. It could also gradually help to build the brand awareness, and later Best Buy could add more stores progressively as it sees fit. The previous lessons have shown that it should adapt its offering to each specific country’s tastes and culture. For example, in an immature market like China with a massive portion of low-end consumers, the price advantage seriously outshines any advantages in service and management.

Best Buy should spend the resources and efforts to market the Best Buy brand in its international markets. The suggested strategy should help to alleviate these costs. It can also acquire domestic well-known brands when feasible, based on country specific cultural differences, like it did successfully in China. It should also focus on growing products segments: mainly smartphones and tablets. It needs to augment its 5% share of the cellphones market in the U.S. and abroad.

The end of show rooming: buying on the spot! 

   How can traditional retailers counteract showrooming? I believe these may help:

  1. Offer competitive prices, ideally backed up by a price matching policy.
  2. Provide in-store added value with great service and passionate, knowledgeable staff, and product demonstrations. The Apple Store should be a model to follow.
  3. Offer a simple and intuitive online ordering system with an extended selection of online products that can be delivered directly to customers or to the stores for physical pick-up.
  4. Offer up-to-date, real-time inventory information online.
  5. Offer an option to pay online purchases in-store at pick-up.

The two most important advantages of buying online are potential lower price and convenience. But, people also want to see and touch what they intend to buy. They want to feel the mouse pad, see the crystal clear screen resolution, or hear the sound quality of an eight speakers home theater system. Despite the shift to online shopping, physical stores still account for most purchases. Gartner estimates that 80 percent of retail sales will still take place at brick-and-mortar outlets in 2016. Best Buy can use its existing physical stores as an asset rather than as a liability. Similar to what Apple does with its Apple Stores, a good and knowledgeable sales force can improve the shopping experience by providing advices and help with product comparisons to find the right product for the customer. Having physical stores can also be an advantage for product returns and, simply put, better service. If the price is right (e.g. similar to Amazon or Wal-Mart), then customers, instead of show rooming, will just buy the products on the spot. Why would they wait?! Once that the online sales tax law is modified and that the playing field is leveled, Best Buy shall be much better suited to compete on price with Amazon.

Moreover, Best Buy still has better purchasing power than Amazon since their share of the consumer electronics market is larger, and since Amazon uses third party independent sellers for low-demand or ‘long-tail’ products. These third parties have lower purchasing power. Amazon has about 2 million third-party sellers globally which constitutes about 2/5 of total transactions. As Amazon increases fees for third-party sellers, deals in the electronics section are likely to become a thing of the past. If Best Buy can achieve competitive prices, they can offer a price matching policy, reinforcing in the minds of consumers the fact that their prices are as good as any competitor. Best Buy needs to perfectly integrate its online and in-store services and to focus on the advantages of both. Best Buy could also offer same-day delivery of online purchases (for an additional fee), like the service introduced by Wal-Mart in 2012 in its fight against Amazon.

Best Buy has somewhat managed to turn itself around. It now makes money again and its stock has tripled in value. It has repaired its online presence and tightly integrated it with its physical stores. When the ‘Pick Up in Store’ button was added to its website, Best Buy reported that 40% of shoppers were choosing that option. By leveraging the online and brick and mortar channels into a unified, coherent, simple, and highly efficient business model, Best Buy should be able to weather the storm and solidify its market leader position in consumer electronics against the online competition.

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