Interesting piece in the Minnesota’s Star Tribune about different pricing approaches taken by Target and Best Buy; Target decided to protect its margins and profits over the holidays, while Best Buy slashed prices to compete with the likes of Amazon.com.
The story notes that “retailers have always struggled with the classic tension between sales and profit margins: you want to capture market share and drive same-store sales, but at what price?
“In Best Buy's case, the retailer used to imply higher margin services like Geek Squad and Internet growth could somehow offset its eroding in-store sales.” But the company has concluded that it needs to drive up store traffic in order to be successful, and that discounts are the best path to generating that traffic.
The story continues: “Target, on the other hand, doesn't face the same kind of existential pressure as Best Buy so ... the retailer can afford to be more high minded about the ‘race to the bottom’.” And the company seems to be satisfied that it has made the right decision...at least for the moment.
The story notes that “retailers have always struggled with the classic tension between sales and profit margins: you want to capture market share and drive same-store sales, but at what price?
“In Best Buy's case, the retailer used to imply higher margin services like Geek Squad and Internet growth could somehow offset its eroding in-store sales.” But the company has concluded that it needs to drive up store traffic in order to be successful, and that discounts are the best path to generating that traffic.
The story continues: “Target, on the other hand, doesn't face the same kind of existential pressure as Best Buy so ... the retailer can afford to be more high minded about the ‘race to the bottom’.” And the company seems to be satisfied that it has made the right decision...at least for the moment.
- KC's View:
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I’m not sure why the writer in this case thinks that Amazon and Walmart are not existential threats to Target. But that is sort of a flaw in the reasoning.
I actually agree with the notion that the “race to the bottom” can kill a business in the long-term, because it erodes all value other than price, and you can always be undercut on price. So in that sense, I agree with Target. (JC Penney would seem to feel the same way, if its new ad campaign is to be believed.)
But I’ll tell you a little story.
Over Saturday afternoon, our flat screen TV went kablooey. As my daughter said, the picture started to “have seizures.” So we called the local one-store independent electronics retailer where we bought it to find out if we had an extended warranty and when it expired. This was about 5 pm, but in two minutes they told us that the good news was we’d gotten the extended five-year warranty, but the bad news was that the TV was six years old. (Of course.) We tried to describe the problem to the service guy, and then decided to set up a service call for Monday.
“Want me to come out now?” he said.
We were shocked. “Sure,” we said.
And in about 45 minutes he was there.
Now, there was more bad news. The TV was fried - it was an early model plasma flat screen, and beyond repair. But the guy spent about an hour with us, explaining different options (plasma? LCD? LED?), and helping us think through what was going to be a decent sized investment.
Here’s the thing. We have a Costco, PC Richard and Best Buy closer to our house, but we never really thought hard about going to any of them. This local guy promises to match advertised prices, and he showed up at our house on a Saturday night to help us out. (There was a modest service fee because there was no warranty, but we got enormous value from his being there.) So on Sunday, when we needed to replace our TV, there was only one option - because my local electronics retailer has established his value in our minds.
And the value was established on the front lines.
One other note. Would he have done this for anyone? I have no idea. It is possible that the folks at County TV & Appliances looked at our customer record and saw that over the past 28 years, we’ve bought several TVs from them, as well as two dishwashers, a couple of refrigerators, a stove and a Weber grill (that they built and delivered for free). Maybe we earned that kind of treatment.
But isn’t that the way it should be?
