The Next Victims of Showrooming

Showrooming has brought Best Buy (NYSE: BBY  ) to its knees, leading to a painful slump in sales. But a recent study shows that three retailers are even more at risk of showrooming than the electronics superstore. First let's take a closer look at showrooming. Then we'll unveil the newest victims.

Showrooming 101
Showrooming is when you walk into a big-box retailer, peruse the aisles in search of your desired product, research it in person, and then go online later and buy it for a cheaper price than what you found it selling for in-store. By launching a smartphone app that lets customers scan bar codes, Amazon.com (NASDAQ: AMZN  ) has simplified the showrooming process and benefited handsomely as a result.

By epitomizing the impact of showrooming on brick-and-mortar store sales, Best Buy has served as Amazon's punching bag for years. But according to the recently published Placed: Aisle to Amazon Study, nine other retailers face strong threats of their lunch money being stolen by Amazon. 

Company

Amazon Showrooming --
Retailer Risk Index

Bed Bath and Beyond

127

PetSmart (NASDAQ: PETM  )

125

Toys R Us

121

Best Buy

120

Sears Holdings 

119

Barnes and Noble 

118

Kohl's

117

Target (NYSE: TGT  )

115

Costco Wholesale

114

J.C. Penney (NYSE: JCP  )

114

Source: Placed.

The Placed study posed the question, "Have you purchased an item on Amazon.com after looking at the same item in a physical retail store?" With an index of 100 equaling an "average representation," Best Buy's score of 120 means that showroomers were 20% more likely to visit Best Buy than an average consumer.

On the chopping block
But three specialty retailers appear to be the newest victims of showrooming, even worse off than Best Buy. Showroomers were 27%, 25%, and 21%, respectively, more likely to visit Bed Bath and Beyond, PetSmart, and Toys R Us than an average consumer.

So what's a brick-and-mortar retailer to do in order to combat showrooming? Sure, a retailer can price-match. Both Best Buy and Target initiated permanent price-matching strategies, but it comes at a cost by putting their margins at risk. And, yes, a retailer can expand the products it offers on its website and throw in free shipping. But at some point, all of that becomes unsustainable.

Traditional retailers find it difficult to compete on price because they have high fixed costs, like rent for their stores. Instead, they have to compete on differentiation by providing something e-tailers like Amazon can't, be it a better shopping experience, unparalleled service, or fantastic support.

Unique retailing animal
Of the three most at-risk retailers, I think PetSmart is the alpha male. Currently a $50-billion-plus industry, pet ownership is growing by leaps and bounds. Besides boasting strong industry growth, PetSmart focuses on differentiation through its services. As the largest provider of pet services in North America, PetSmart has seen its services sales double in the past six years. And the pet-centric retailer hasn't even scratched the surface internationally.

Anyone can order pet food on Amazon's Wag.com, but you can't board your dog there, you can't get it groomed there, and you can't let other "pet parents" dote on it there, either. We have huge emotional connections to our pets and, more and more, we treat them as members of our families.

You can't say the same about the new toaster you just scored at Bed Bath and Beyond or the My Little Pony you bought at Toys R Us.

In the clear... sort of
For the time being, J.C. Penney appears the most insulated from showrooming. And it couldn't come at a more opportune time for the department-store chain. Under CEO Ron Johnson's leadership, the retailer has suffered horrendously. Fellow Fool Sean Williams sums up JCP's recent earnings results as possibly "the worst quarter in retail history."  Ouch. Shares have fallen roughly 40% since Johnson took the helm in November 2011.

So, why is JCP immune from showrooming? Perhaps because sales traffic has suffered so badly that people are barely entering the distressed retailer as it is. Among the tumbleweeds rolling by and the crickets chirping, same-store sales were down practically 32% from the same period last year. Internet sales dropped nearly 35%. Penney's is losing market share left and right. And it's going to nearly every other American retailer.

Foolish bottom line
Showrooming is more than a passing fad. It's not merely media hype or a fleeting trend. It represents a legitimate problem that traditional retailers must face. Clearly, e-tailers have changed the competitive landscape. But is Amazon destined to be the only beneficiary? Or will physical retailers step up their game, identify new opportunities, and differentiate themselves?

Investors wondering whether J.C. Penney is a buy today are invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.


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  • Report this Comment On March 01, 2013, at 8:26 PM, Chuck2010 wrote:

    Showrooming clearly is going to knock off additional retailers. I just don't see Costco belonging on a list sharing the same risk level as JCP.

    Just one example, Costco wine vs Amazon / Amazon sellers. Costco wines are in the store because buyers tasted the wine first. Costco is the world's largest wine buyer. Unless another wine retailer of similar scale set up shop at Amazon, it seems unlikely Amazon could replicate this. And even were it to happen, wine as a product is so diverse, showrooming would be meaningless.

    Costco manages the seasonal holiday toys in ways that Amazon will find it difficult showroom. Costco buyers work with manufacturers to come up with 150 unique toys designed just for Costco. This can include popular products where the toy is packaged with accessories in a combination you cannot get elsewhere.

    TV's have unique models as well. Getting the comparable model and price available anywhere else takes more than just a barcode to figure out.

    Costco shaves margins on its offerings making its profits on the membership fee. One might expect that their prices are very competitive with any Amazon pricing for the same item.

    There are risks to Costco, it seems like Costco is on sounder ground than anyone else on the list in this article.

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