How Showrooming Impacts Earnings

Showrooming is no longer a sideshow. For C-Level executives it has become the main event. The extensive press coverage of the demise of Best Buy was a wake-up call for both brands and retailers. Showrooming is not just simply a nuisance, it can actually bring down a major retailer. The fact that both Target and Walmart, two extremely savvy retailers, now match internet prices is some indication that the Showrooming phenomena now has the attention of management at the most senior levels.
The internet press made no secret of the fact that a number of items purchased at Best Buy could be purchased on-line at significant savings. Overnight Best Buy became the poster child for showrooming. What happened next went largely unnoticed in the popular press. Some rather bright earnings analysts created a financial model to try to determine the impact the decision to match internet prices would have on Best Buy’s earnings. The news was not flattering. Investors, upon reading and understanding the earnings analysts report, headed for the exits. They gave a serious “thumbs down” on Best Buy management’s decision to match internet prices. The rest, as they say, is history. Well documented history. Clearly Best Buy management made a series of miss-steps over the last few years, but it cannot be denied that the showrooming phenomena played a significant role in the ultimate downfall of this once iconic retailer, and darling of Wall Street.
Showrooming impacts earnings. How earnings will be impacted is a function of both the scope and complexity of the showrooming challege, as well as how management chooses to address those challeges.
Can the showrooming impact on earnings be predicted? To some degree: Yes. The earnings analysts have already proven this. However they had the significant advantage of a ton of information innocently provided by others in the retail research world. Can your organization predict the impact that showrooming will have on your earning? Maybe.
We recently tested this theory. We created a mock brand organization that sold to retailers. We then designed three possible scenarios based on three different Showrooming Risk Profiles™. Due to space and time considerations, we’ll presume that the Showrooming Risk Profiles (SRP) were graded as high, medium and low.
In the first scenario the organization was rated at having a medium SRP. The impact was losing placement of the 5 best selling SKU’s at their top 5 retailers. Sales dropped 5.3%, and earnings dropped 20.0%.
In the second scenario the organization was rated as having a low SRP. The impact was that they picked up 5 new SKUs at their top 5 retailers because they demonstrated to the retailers that they had a much better SRP than their peer group. Sales increased a modest 1.1% and earnings increased a healthy 4.0%
In the third scenario the organization was rated as having a very high SRP. The impact was losing their 3rd largest retail account. Sales dropped 7.3% and earnings plummeted by 27.8%
A similar exercise was run for retailers with various SRP scores. The results were very similar.
The message was clear. Even a little bit of showrooming can have a significant impact on earnings. That’s why showrooming is no longer a side show, but is now the main event.

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