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Major Retailers Fight Back Against Amazon

By Tamara Walsh - Oct 15, 2012 at 6:00PM

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Wal-Mart and Best Buy attack Amazon on its own turf.

With the holiday shopping season just around the corner, bricks-and-mortar stores are finding new ways to compete with Amazon.com (AMZN 2.21%). Wal-Mart (WMT -0.86%) was quick to challenge the world's largest Web retailer on its home turf earlier this month when the retailer launched a same-day delivery service called "Wal-Mart To Go" -- but more on that in a minute. First let's get to the heart of this retail transformation and zero in on what's really at stake for the big-box superstore and others like it.

Revolutionizing retail
Founded by Jeff Bezos in 1994, Amazon forever changed the way we shop. And it's no secret that big-box stores have since suffered at the hands of the online powerhouse. However, major retailers are finally making a meaningful attempt to fight back. In fact, even consumer electronics giant Best Buy (BBY 6.74%) is stepping out of the box with a new pricing strategy meant to beat Amazon at its own game.

Many industry experts argue that Best Buy has fallen out of favor largely due to so-called "showrooming" -- a notion I support. Up until this point, Best Buy has shown little concern over the growing number of customers who use its stores to comparison-shop. According to The Wall Street Journal, only about 40% of Best Buy shoppers actually leave its stores having made a purchase. Meanwhile, there's a good chance that a large portion of the other 60% of shoppers later made their purchases elsewhere online.

To protect itself ahead of the critical holiday shopping season, Best Buy plans to match merchandise pricing offered online at Amazon and other retailers' sites. To prove just how serious it is, the electronics chain is also throwing in free delivery on products that it doesn't have on-hand in stores. The new strategy is certainly an upgrade from previous attempts to combat showrooming.

In the past, Best Buy would only go as far as to match a competitor's store price on identical products, while refusing to match its rivals' online prices. While the new price-matching program is a play against online retailers like Amazon and Wal-Mart, it doesn't cover other formidable opponents, such as online marketplace  eBay (EBAY 1.09%).

A pricey trade-off
Nevertheless, Best Buy's new strategy is a giant step in the right direction. However, it remains to be seen whether the struggling retailer can really afford such a costly pricing plan. The reality is that matching the lower prices offered by online rivals could pinch Best Buy's already depressed margins.

Not to mention that one of the reasons Best Buy needs to mark up products more than online retailers such as Amazon is to help offset high overhead costs. Unlike Amazon, which doesn't have a physical storefront, Best Buy is burdened with huge rent payments and wages for hundreds of thousands of employees.

Of course, there's also a risk that Best Buy will run into delivery issues again. Who can forget last year, when Best Buy cancelled countless orders just days before Christmas? With Amazon, eBay, and Wal-Mart stepping up their game this holiday shopping season, it's more important than ever that Best Buy make good on its promises.

Delivering profits
Amazon has made it easier for people to shop online by providing cheaper and faster delivery services -- an initiative Wal-Mart isn't taking lightly. As the largest discount retailer in the U.S., Wal-Mart has the resources necessary to win back online shoppers. That's where "Wal-Mart To Go" comes into the picture.

The online trial, which will last through the holidays, promises same-day delivery on orders placed by noon. While there's no minimum required, a flat fee of $10 is tacked on, regardless of order size. As of now, UPS (UPS -0.07%) will be delivering all packages purchased through Wal-Mart's new same-day shipping program. The service is currently being tested in select areas including Northern Virginia, Philadelphia, and San Francisco.

Wal-Mart's new delivery service is the company's answer to Amazon's popular Prime membership. As an Amazon Prime member myself, I can attest to the convenience of unlimited next-day and two-day shipping for just $79 a year. However, if Wal-Mart can expand its new service to reach more cities, it could win back Web-savvy customers from Amazon -- although that is a big if.  

Fight to the finish
This isn't the first time Wal-Mart has fought back against Amazon. Earlier this year, the discounter stopped selling Amazon Kindle tablets in its stores. Now Wal-Mart customers can choose from devices including Apple's (AAPL -0.80%) iPad, Google's (GOOGL -0.79%) Nexus e-reader, and Barnes & Noble's (BKS) Nook.

That's a bold move heading into the holiday season. However, I suspect Barnes & Noble will see an uptick in Nook sales as a result of Wal-Mart dropping similarly priced Kindle items from its product lineup. With the holiday season accounting for about 40% of retailers' annual revenue, implementing winning retail strategies is more important than ever for these companies.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$123.06 (-0.86%) $-1.07
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,128.08 (2.21%) $46.08
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$78.42 (6.74%) $4.95
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,102.62 (-0.79%) $-16.78
Apple Inc. Stock Quote
Apple Inc.
AAPL
$139.23 (-0.80%) $-1.13
eBay Inc. Stock Quote
eBay Inc.
EBAY
$44.66 (1.09%) $0.48
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$173.98 (-0.07%) $0.13
Barnes & Noble, Inc. Stock Quote
Barnes & Noble, Inc.
BKS

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