Retailers Pursue Market Share Over Margins

Discussion
Dec 15, 2011
George Anderson

Best Buy saw its share price slip more than 15 percent this week despite posting its first quarterly same-store sales gain in two years. The reason the stock took a Wall Street hit was that Best Buy’s quarterly profits were way down as the chain used heavily discounted items as well as the offer of free shipping on online orders to help it try and recapture lost market share.

Best Buy CEO Brian Dunn, according to reports, told analysts on a conference call, "Value is critically important to consumers right now and there’s nothing more important to us than our customer franchise. So maintaining and growing that share in the places where there is growth is critically important to us because it sets up, and has historically set up, for us our strategies around connections and services and all the value-added things that we do better than anybody else."

While Mr. Dunn made the case for focusing on share (others including Amazon and Walmart have done so in the past), analysts questioned whether Best Buy and other retailers were on a slippery slope.

"I think Best Buy is the canary in the coal mine. I think we’re going to hear retailers across all categories, with the exception of luxury, reporting depressed margin for the holiday time period," Joel Bines, managing director of AlixPartners, told Reuters.

Discussion Questions: Do you think that retailers, as a general rule, will post higher sales and lower profits this holiday season? Are chains such as Best Buy and others making a mistake by focusing on maintaining or growing market share even if it means sacrificing profit margins?

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26 Comments on "Retailers Pursue Market Share Over Margins"


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Adrian Weidmann
Guest
9 years 4 months ago

Market share seems to always trump margins. It’s easier to ‘spin doctor’ the results for Wall Street and higher sales make for better headlines and short term ‘feel good’ results. Unfortunately it doesn’t address the long term trend of the marginalization of retailers. The competitive landscape along with digitally empowered shoppers will continually drive the reduction of margins. Retailers need to pause, design and create a true value based relationship with their customers.

George Whalin
Guest
George Whalin
9 years 4 months ago

The holiday season in the electronics business has become a battleground with low prices the key to getting customers to buy. It is shortsighted to think Brian Dunn doesn’t know what he’s doing. Mr. Dunn and Best Buy are simply doing what’s necessary to stay in the fight with amazon.com, Walmart and other retailers selling electronics at razor-thin margins.

Dick Seesel
Guest
9 years 4 months ago

Chains like Best Buy appear headed for softer margins as they try to sell electronics categories subject to increasing competition (Amazon) and commoditization (TVs and laptops). And Costco seems to be headed in the same direction (lower margins) even though its share price is not being punished like Best Buy’s.

Stores that are driving higher demand around exclusive brands (Macy’s, for example) are likely to be rewarded in the current quarter, even though they have had to deal with higher apparel commodity prices all year. And, finally, a lot of the margin outcome depends more than anything on leftover seasonal inventory after Christmas; stores heavily invested in cold weather goods cannot be happy with the current trend.

Warren Thayer
Guest
9 years 4 months ago

Given the environment, I think we’ll see somewhat higher sales and lower profits this season. Best Buy may have a unique problem they haven’t faced up to, what with their non-consumer-friendly return policies, restocking fees, etc. Word of mouth about that has spread pretty far and wide. It keeps me from going there anymore if I’m seeking a big-ticket item.

Bob Phibbs
Guest
9 years 4 months ago

Is retail becoming a ponzi scheme?

If Amazon can come up with a product that they lose money on to gain market share, if Groupon can rake in millions without profits due to high acquisition costs, if LivingSocial can subsidize the Whole Foods gift certificate and now Best Buy cannot recoup what it costs to deliver a product to a customer, are we in a retail bubble?

This coupled with the realities of the Amazon price check app I wrote about yesterday, and it seems big companies are getting caught in something small businesses could never afford to do.

No amount of omni channel is going to make those realities subside.

Dr. Emmanuel Probst
Guest
Dr. Emmanuel Probst
9 years 4 months ago

My overall concern is that customers focus only on price, and discounting items to drive traffic may not translate into client acquisition/retention. This reasoning is particularly relevant in consumer electronics, where one can easily compare prices for an exact same SKU between a dozen+ vendors. To Brian Dunn’s point, the opportunity for Best Buy is to focus on its value added services (I’m thinking Geek Squad), as well as differentiating on the experience.

Paula Rosenblum
Guest
9 years 4 months ago

Best Buy has its own troubles. The company lost its service mojo and now is in a race to the bottom. I can’t believe the industry Black Friday promos weren’t planned well in advance and part of the planned gross margin. To me the big question is, what happens this weekend and next week? Those are the unplanned markdowns.

Ed Rosenbaum
Guest
9 years 4 months ago

I spent time yesterday walking through some large footprint stores, one of which was Best Buy. My reason for this was purely inquisitive; I wanted to see how traffic was and to see if people were actually carrying store bags (purchases). Of course they were at this time of year. If not, we are in more trouble than I first thought.

I was pleased to see many shoppers all with multiple “bags” and still there for more. It appears retailers are focused on driving sales numbers as high as possible at any cost this season. Once the season can be declared a success the attention will revert to the market share.

David Slavick
Guest
David Slavick
9 years 4 months ago
Best Buy is not surprised by this performance report and there is more bad news on the horizon. They knew that competing on price was going to be tough this season. If you recall they launched a campaign focused on trade-in assurance, coupled with long-standing policy of price protection for 30 days. We are entering a new era of price sensitivity as savvy shoppers are accessing the web to know in real-time whether or not the deal is truly a good deal. Likewise, they set alerts post purchase in case the price on that 40″ flat screen dropped. Just today, reports are out that almost 25% of shoppers have made a return due to “buyers remorse.” This is going to be a huge impact on margin, especially in home electronics and appliances as shoppers will now get to pick the bare bones of open box/heavy markdown items. Best Buy’s advantage was MAP. They typically had 2 to 4 weeks of price advantage vs. the competition. Amazingly with Circuit City their primary competitor no longer in… Read more »
Bill Emerson
Guest
Bill Emerson
9 years 4 months ago

My sense is that profits will indeed be lower. Whether sales will be higher is questionable. One of the insidious aspects of competing on discounts is that with average tickets lower due to the discount, transaction counts have to rise much higher. Given the environment, this seems unlikely.

Going strictly after market share and using price cuts to get there is a footrace to the bottom. The department stores took this route years ago and now there is basically one left. As an alternative, look at Apple. They have 15% market share in their industry and have, depending on the day you look, the highest market cap in the world. It’s all about the product/experience. Anybody can sell $10 bills for $7.

Tony Orlando
Guest
9 years 4 months ago
All the rocket scientists in the world cannot prevent the fallout from the price wars going on in retail, and unfortunately the long-term profitability of many stores is in peril. The low price mantra, the super coupon queens that tell people how to get things for free, the Black Friday mentality, the “I’ll match any price in the universe” jargon the mega stores push, and the overall horrible economy are making it almost impossible to gain an edge today, without selling a “pound of flesh” to gain market share. I really try to not play this game of below cost selling and I don’t see a future for some regional and independent stores that try to match all the crazy schemes out in the marketplace. We must re-invent how we do business to survive, and the answer is right under your noses, folks. Make and create something the folks really want to buy, and still make a good profit at the same time. I can not survive in my business without selling customers food they… Read more »
Gene Detroyer
Guest
9 years 4 months ago
If you have ever worked for a major company that does annual plans, you know rare when they do not project growth in excess of market growth. Those who want to say the reverse, even if they believe it, rarely have the fortitude to present such. The point is that every company is planning market growth beyond the growth of the market. Another word for that is “market share.” There is a true failure to realize that for every company that increases share, there will be a company that rolls over and lets them. A market share strategy is a losing proposition. It isn’t even a reasonable business strategy. It is business destruction. And retailers are among businesses that are most guilty of it. The only market share strategy that should ever be pursued is when a company has developed a sustainable competitive advantage. And be assured, price and promotion are not sustainable competitive advantages. Bravo to the retailers who allow their same store sales to decline a couple of points, increase their profits by… Read more »
Mark Burr
Guest
9 years 4 months ago

Make no mistake, there are two words that are very important this season — top line.

Nothing will change consumer mentality like positive top-line reporting before, during and after the season. I think it is a move to change psyche. In doing so, it could change a lot of things in the months following.

Consumers don’t look at the inside numbers. What they do look at is their own feelings about whether or not it is okay to spend.

Positive reporting has impact on that psyche. Change that first, then worry about the inside numbers in the successive months.

Phil Masiello
Guest
Phil Masiello
9 years 4 months ago
Back in 2000, we continually heard from the internet pundits how online stores were going to kill brick and mortar retail. They may have been partially correct and a bit early in the statement. What is the relevance today of a company like Best Buy to the consumer? Break down the categories; where can a company like Best Buy stake a claim? Personally, I use Best Buy as a showroom to check the features of an appliance and then purchase online where the product is shipped to me for less money. Most retailers today are trying to buy consumer sales with deals that are too good to pass up with low to no gross margin. I believe that most retailers will post higher sales and lower margins. Too many brick and mortar retailers lost far too much time not developing their internet and brick and mortar complementary strategy. Borders GAVE Amazon their online book business, which eventually killed that company. Over the next few years we will see the demise of many brick and mortar… Read more »
Alejandro Padron
Guest
Alejandro Padron
9 years 4 months ago

For a market leader the size of Best Buy, they have to focus on adding value to shore up profits. For that they must focus on accelerating restructuring of their online channel.

Tom Smith
Guest
Tom Smith
9 years 4 months ago

Chains that focus on delivering an outstanding customer experience will post higher sales and greater profits. Those that don’t, won’t.

Best Buy has outsourced its appliance delivery, losing a very important connection to the customer. The outsourced delivery companies are not fulfilling Best Buy’s promises and this will ultimately undermine Best Buy’s trust and profit.

Roger Saunders
Guest
9 years 4 months ago

Retailers have a more compelling need to guard profit margins as they attempt to grow market share. Unlike manufacturers who can manage “buying” market share in the short term, or in new market launches, retailers have a box that they will live with for 5, 10, 20, or more years.

This is a slippery slope. Best Buy better have some strong spikes in those shoes.

As to retail sales over the holiday period, totals should be up a modest +2.4% to +2.8%, based on consumer sentiments coming out of the monthly Consumer Intentions & Actions (CIA) survey. We have been seeing that pattern from the September to December surveys.

The consumer has been saying that online sales will have increased favor for the season. Best Buy and others who are blending the two strategies of in-store and online will have to closely coordinate them in order to deliver on the profit margin needed.

Ed Dennis
Guest
Ed Dennis
9 years 4 months ago
Sure they will. Times are tough and consumers must watch every dime. Most retailers are astute enough to realize this and are battling to get consumers into their stores with great deals. If you can sell someone a 32″ LCD TV for $219 and lose $10 but make it up by also selling them $40 worth of cables on which you make $30 then you are ahead of the game. If the customer doesn’t walk in the door, you haven’t made any money. The problem Best Buy has is that they have over estimated the demand for the $219 LCD TV. They will have to fire sale these for $179 to get their money out of inventory before the first of the year. If retailers like Best Buy and Sears would take a “Trader Joe’s” approach to their PL brand and make them better than the national brands, then they could defend their position. Sears did this with Craftsman and DieHard and Kenmore. As electronics has become the focus of much holiday shopping, these guys… Read more »
Jonathan Marek
Guest
9 years 4 months ago

Stock prices take a hit when a company proves they can’t maintain sales and maintain margins. That’s what we’re seeing here. Buying share with margin can be a very expensive proposition. Best Buy also does not benefit from being in the same general space as Apple, which has proven it can grow quickly without sacrificing margin a bit. If this trend does hold for retail more broadly this season (and I don’t necessarily think it will), expect a drag on more retail stocks.

Fabien Tiburce
Guest
Fabien Tiburce
9 years 4 months ago

What is driving this trend? Fear and survival instincts. The economy is in a post-recession slooooowwwww recovery. Customers are very price sensitive. On the other hand, bricks and mortar stores are competing for their very existence against the like the Amazon, Netflix and iTunes. Retailers know that, not being competitive on pricing at this point in time is probably a path to irrelevance and extinction. Sure is tough to be a commodity retailer right now. Focus on unique products, great service and give your customers reasons to visit your stores.

Phil Rubin
Guest
9 years 4 months ago

Higher sales and lower margins are a function of us all living in “discount city.” Customers have been trained for 30 years now to buy on discounts. Further, too many retailers are pursuing the same strategies and collectively struggling (like Best Buy) to compete with Amazon and leading brick-and-mortar merchants like Costco.

Looking at it through our loyalty marketing lens, there’s no question that Best Buy’s strategy has been to become a generic frequent flyer program. Same playbook in terms of structure,offers and partners. This becomes discounting on top of discounting and Best Buy doesn’t have the currency that the airlines do (i.e., they can’t sell $1 billion worth of points).

In order to grow profits, retailers need to follow strategies that create and amplify differentiation (aka a branded approach) and deliver real value by focusing on customers.

Al McClain
Guest
Al McClain
9 years 4 months ago

As Warren said, part of the problem for Best Buy is an unfriendly returns policy. Here’s a tiny part of it, from their website, “14 days for desktop and notebook computers, tablets, monitors, projectors, camcorders, digital cameras, radar detectors, DJ equipment and lighting, pro audio and home recording equipment
30 days for all other products
45 days for all products for Reward Zone Program Premier Silver members
Best Buy reserves the right to deny any return or exchange.”

There are all sorts of other rules and regulations and disclaimers to read through. I realize not everyone is a Costco member, but they offer indefinite returns on most items except electronics. Electronics are under a 90 day return policy, they offer a concierge service to assist with any problems by phone, and double the manufacturers warranty.

Sometimes, the best price isn’t the best deal. Best Buy could do themselves a favor and spend a little more time being customer friendly and they wouldn’t have to discount as much.

Doug Stephens
Guest
Doug Stephens
9 years 4 months ago

There’s a simple adage in retail that still holds true (despite our scary preoccupation with Wall Street) That is, “You don’t put sales in the bank.” So, if you’re able to chase a larger market, great — so long as you’re putting more total profit dollars in the bank at the end of the day. If however, you’re paying more hours, in more stores and shipping more product for less profit — you’re going to go out of business. It’s just a matter of time.

Mark Price
Guest
Mark Price
9 years 4 months ago

In answer to your first question, with the proliferation of free shipping offers out in the market this year, online merchants will clearly have lower margins. For traditional retail, I think the question is still out for the holidays. Black Friday and Cyber Monday were heavily discounted like always, but the final results depend on whether or not retailer panic in the final days of the season, and throw the floodgates open.

Market share is only a benefit if it is the right market share. If the consumers brought in during this time period are high-value customers, then the margin will be made up and then some throughout the rest of the year. If those customers are simply bargain shoppers, then the roof may fall in.

Ted Hurlbut
Guest
Ted Hurlbut
9 years 4 months ago

Just about every major national retailer is working with a business model based on volume, driven by low prices. This makes market share a critical metric, especially in a low growth environment.

BB has the added complication that it’s products are highly identifiable and thus particularly price sensitive, making them essentially commodities. That creates further pressure on prices. Add to that that the nature of their products lends themselves to e-commerce shopping, and absorbing shipping costs, and BB is probably more susceptible than most to margin pressures.

Still, margins have been under pressure at retail since just about the dawn of retail, and most certainly since the recession began. I think this years’ financial results across the industry will show a continuation of that trend.

Steve Montgomery
Guest
9 years 4 months ago

I believe as many have stated before me that without sales you have no margins to worry about. In the fuel business, the mantra for the major oil companies was always “protect the gallons because margins come and go.” Unfortunately for many brick and mortar retailers the margins may never come back, but if you don’t have traffic, there is no need to worry about margins

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