Online Wars: Best Buy v. Amazon

Hubert Joly, the new CEO at Best Buy, recently said that the retailer’s new strategy is to focus on online buying and loyalty incentives.  In other words, the company intends to take on Amazon and other online retailers head-on.

Let’’s see, with my Amazon Prime membership I get free shipping (on a boatload of items), instant streaming of TV shows and movies, and library book “rentals” on my Kindle.  The latter two benefits were added recently with no increase in the annual membership fee of $79.  Oh, and with my Chase/Amazon credit card, I earn 3% on my Amazon purchases.  The seamless integration of purchases (books and media) to my tablet is, …well, seamless.  No matter if I purchase items on my phone or my laptop, I turn on my Kindle and there they are:  my latest digital purchases.

Both companies are about $50 billion in annual revenue, but less than 5% of Best Buy’s revenue comes from online sales.  So, yes, they have room to grow the online sector.  They also have much ground to cover to compete with Amazon online.

The company must zig where Amazon (and other online retailers) zag.  Five things the management should consider:

  • Consumers still like to make big ticket electronic and appliance purchases in-person.
  • Price matching will further deteriorate margins.
  • Differentiation makes head-to-head “showrooming”” more difficult.
  • Employees who are trained can compare merchandise to competitor’s online merchandise and “defend” differentiated products.
  • Selling the heck out of warranty and on-site replacement services adds value

Maybe the new strategy ought not be to focus on loyalty.  Not because it’s not important but because it’s a given.  Best Buy has a head start on Amazon on physical locations.  Taking advantage of that and focusing on services (repairs and such) might be a better way to zig when Amazon zags.