This is a serious problem for both companies, according to the Wall Street Journal:
Another risk is that retailers run the risk of encouraging even more shoppers to check the Internet to compare prices, a comparison that doesn’t favor the big box stores. A recent survey by brokerage house William Blair & Co. found that on average Target’s prices were about 14% higher than Amazon’s, Best Buy Co., Inc. (NYSE:BBY)’s were 16% higher and Wal-Mart’s prices were 9% higher. The comparison included shipping costs for Amazon, but not sales taxes.
So matching prices and other moves (such as Best Buy’s flash deals announced on Twitter) should help Amazon’s competitors fight back in some ways. But there are some things that they just simply cannot affect. For example, customers who would simply prefer to order a product online and have it delivered quickly (thanks to Amazon’s two day shipping service) rather than driving out to a big store. There’s not much that the retailers can do to match this. Nor can they do anything about the fact that e-commerce is largely exempt from sales taxes at the moment. So regardless, Amazon still has a comparative advantage over it’s various competitors.
How does Amazon achieve this? Founder and CEO Jeff Bezos himself explained a bit of this success (and his thoughts on the company’s share price) during a Harvard Business Review interview:
ADI IGNATIUS: So how much do you care about your share price?
JEFF BEZOS: I care very much about our share owners, and so I care very much about our long term share price. I do not follow the stock on a daily basis, and I don’t think there’s any the information in it. Benjamin Graham said, “In the short term, the stock market is a voting machine. In the long term, it’s a weighing machine.” And we try to build a company that wants to be weighed and not voted upon.
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ADI IGNATIUS: At what point will the goal change from lowering margins, building market share, to making a bigger profit?
JEFF BEZOS: Percentage margins are not one of the things we are seeking to optimize. It’s the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.
Free cash flow is cash from operations minus capital expenditures (the cost of warehouses, machines, distribution, cloud computing, etc). Bezos, as you can see above, is more interested in driving free cash flow than actually generating a profit for investors. Why? Because he believes that there is still plenty of room to grow and expand, thanks to the power of the Internet. He’s ready to do anything to sell as much as possible for the lowest price possible, then reinvest almost everything that he makes into more low, low prices and expanding even further across the globe.
As any Amazon customer could probably tell you, this is all just fantastical. They get to buy practically whatever they want at prices that beat almost every other retailer.
