It's not just Best Buy (NYSE:BBY) that's moving aggressively to match lower online prices.
Target (NYSE:TGT) will now allow in-store shoppers to get in on lower prices offered by some online rivals on the same merchandise between Nov. 1 and Dec. 16.
It's a great strategy on paper. Combating the problematic showrooming trend -- where shoppers go window-shopping at physical stores before buying what they want online for less -- with the benefit of immediate gratification makes sense. We may even begin to see what I'll just coin as reverse showrooming, as Web-savvy shoppers spend time researching online retailers to smoke out the lowest price before heading out to Target or Best Buy to make the lower-priced purchase.
However, it remains to be seen what will happen to margins. For now, the retailers are in denial. Target's sticking to its guidance of earning $4.65 to $4.85 a share this year. Best Buy hasn't hosed down its outlook since throwing its hat into this competitive pricing ring.
Target will probably hold up better than Best Buy. The cheap-chic retailer is in a good place. It often teams up with designers and celebrities to roll out exclusive products. It also sells so many nondurable consumer staples that nobody's going to make a long line in customer service to adjust the price of a Ban roll-on or a box of Hostess blueberry muffins down a few cents.
Best Buy will take a bigger hit. It relies too heavily on the big-ticket items, where there could be substantial savings for those mastering the art of reverse showrooming. See, I coined the phrase just a few paragraphs ago, and it's already catching on!
Beyond reverse showrooming
It won't just be the margin pressure to keep an eye on, though. What happens to the shopping experience at these places? The next two months will already be busy times for retailers. What will happen to the already long checkout lines and even longer customer service queues if cashiers need to call in managers whenever someone brandishes a smartphone with a lower price from an online retailer?
The verification process will be hairier than simply whipping out a circular from a local competitor.
Oh, and it gets even stickier.
That's fair. You don't want some online closeout liquidator or desperate eBay reseller obliterating margins. Since Toys R Us and Wal-Mart don't want to cheat in-store shoppers, it's safe to say that online pricing will be similar for both companies. However, what about Amazon?
The fate of the bottom lines at Best Buy and Target rest on how badly Amazon CEO Jeff Bezos wants to win this game of limbo.
We're not done yet.
Target and Best Buy do know that Amazon is perpetually updating its pricing. By mulling shopper patterns and monitoring rival pricing, the leading online retailer can change prices throughout the day. How will Target and Best Buy deal with those fluctuations? What if a price that someone pulls up on a smartphone is different than the one that Target pulls up on its browser?
Smartphones just got cheaper
Target and Best Buy know that technology won't be their allies. They both devote plenty of space to books, DVDs, CDs, and video games. They know that selling a tablet or smartphone results in weaning that customer off its physical media ecosystem and introducing them to a digital marketplace where purchases and future store visits are sacrificed.
It would be a stretch to say that they reluctantly sell mobile tech gadgetry, but I've never seen a seafood restaurant sell fishing poles.
The push to match online pricing will speed up the smartphone migration. Customers who aren't Web-savvy will see the shopper in front of them shave $150 off a high-def TV and realize that they're being had if they don't scour for similar bargains.
The lines will get longer. The retailers will wind up selling a lot of products at a loss. Shoppers will be anxious about missing out on better deals.
The in-store shopping experience is about to get cheaper, but it will be less pleasant.
Reverse showrooming will last for all of a single holiday season, and bricks-and mortar chains will never be the same come January.
Tell me again why this is a good idea?
Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. The call is beating the market so far -- because Best Buy is not. It's a gutsy call now, but I'll stick with it on paper. I wouldn't short Best Buy with real money.