Retailers’ nightmare – 2: Price competition increased
Now, retailers are trying to replicate the success of Wal-Mart Stores, Inc. (NYSE:WMT), the world’s largest retailer that was founded 50 years ago on “everyday low” prices. Experts say Wal-Mart’s strategy has worked because it built its reputation on being able to offer customers the lowest prices every day.
In fact, the company’s revenue at stores open at least a year in the U.S. fell for two years, when it veered away from the strategy in favor of temporary price cuts. The company has since been able to turnaround its business, in part by renewing its commitment to “everyday low” prices.
Penney executives say they considered Wal-Mart Stores, Inc. (NYSE:WMT)’s model when they decided to change the retailer’s pricing strategy. It was part of an attempt to turnaround the company, which has had annual sales declines in four of the past five years. But Penney, which has 1,000 stores, has learned that it’s not so easy to duplicate Wal-Mart’s magic. Customers have not embraced the new pricing.
Like Wal-Mart Stores, Inc. (NYSE:WMT), Lowe’s Companies, Inc. (NYSE:LOW), the nation’s second largest home improvement chain, built its business around “everyday low” pricing. But then, the company strayed away from that and started offering more sales when the housing market tanked in 2006. Shortly after, the company’s performance began to lag behind its bigger rival The Home Depot, Inc. (NYSE:HD), which never veered away from its everyday pricing strategy.
Even Target Corporation (NYSE:TGT) recently made a huge move to counter the practice of “showrooming,” the term that refers to how consumers are using retail brick-and-mortar stores to go hands-on with items, which they then order online for less — often from competitors like Wal-Mart and Amazon.com, Inc. (NASDAQ:AMZN). The company announced that it is now extending its holiday price matching policy year-round.
It’s hard to say whether or not the move will have the desired impact. Target was price-matching online retailers over the holidays (Nov. 1 – Dec. 16), but December sales were still flat year-over-year.
Price-matching can be a dangerous game, as Best Buy Co., Inc. (NYSE:BBY) found out, recently issuing complaints to the attorneys general in over half a dozen states, saying that Wal-Mart Stores, Inc. (NYSE:WMT)’s ads were misleading. Best Buy specifically cited an iPhone 5 price match, saying it lost $65,000 on the day of a Wal-Mart Facebook promotion, because it had to match the chain’s $150 price, despite the fact that iPhones were out of stock in many places.
The bottom line
Best Buy’s stock has doubled since the beginning of this year. Although Best Buy Co., Inc. (NYSE:BBY)’s turnaround initiative has boosted investor sentiment immensely, I doubt if a sustainable turnaround is really on the cards. Given the extremely difficult environment prevailing in the retail sector as stated above, I believe only a sustainable turnaround can lift the stock even from here.
The article Why Best Buy Is Not My “Best Buy” Any More? originally appeared on Fool.com and is written by Anindya Batabyal.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
