BRANDOOGLE

Category: Showrooming Risk Metrics

  • Internet Price Risk…Buyer Beware

    As the summer winds down, the all-important fall buying season for retailers is heating up. While the role of the retail buyer has never been easy, the advances in technology, savvy online retailers, as well as increased use of mobile devices, the job is now infinitely more challenging.

    Historically, retail buyers have managed a series of macro risks when determining how to deploy their open-to-buy dollars to maximize their Gross Margin Return On Inventory (GMROI):

    • Trend Risk – Will the product resonate with consumers?
    • Inventory Risk – What is the optimal inventory needed to meet demand?
    • Delivery Risk – Can the supplier deliver product to ensure the smooth flow of goods throughout the selling season?

    Now, the retail buyer faces an added internet price risk – commonly referred to as Showrooming.
    Simply defined, Showrooming is the likelihood a consumer will find product significantly discounted online and purchase the product on a discounted site rather than through the retailer. If this risk is not understood and mitigated it could make all other traditional macro risks seem inconsequential.

    Both advances in mobile technology and comparison shopping apps in the last year have amplified the Showrooming risk. These advances have led to increased convenience, speed and ease of comparison shopping, and have been adopted by consumers at unprecedented levels. Retailers can find themselves in trouble when the product can be found online at a significant discount despite their best efforts to choose proper trends, brands and products.

    Best Buy is perhaps the most well documented example of mismanaging the Showrooming phenomena. Best Buy’s strategy of price-matching, coupled with multiple delivery options, to compete with pure e-tailers resulted in similar year over year sales numbers. That said, when the impact of price matching on GMROI was revealed after the holiday season, a near panic ensued among shareholders. So despite significant investments by traditional retailers to deliver a robust omni-channel marketing strategy, large retailers still face an uphill battle when a pure “e-tailer’s” pricing creates a dramatic gap in pricing.

    Not all brands suffer the same fate. Several brands exercise incredible price discipline in both retail and online channels: Apple, Stihl, and KitchenAid to name a few.

    So what should a retail buyer do to manage Internet Price Risk?
    The first step in curbing Showrooming is to monitor the online pricing behavior of brands being considered for the fall assortment. By monitoring the products and the brand within the category assortment, the retail buyer can quickly determine which brands take online pricing discipline seriously and which ones do not. Once the buyer knows the risk posed by the brand they can shift open-to-buy dollars to brands that offer the lowest Internet Price Risk and protect the GMROI.

    With the National Retail Federation projecting that traditional retailers are in for another tough year, while Amazon is projecting another year of double digit growth, it’s more vital than before for retailers to win the war for consumer dollars. For retail buyers, the success of this coming holiday season will depend largely on how well they manage Showrooming and Internet Price Risk this current buying season.

  • Is Best Buy’s Showrooming Strategy Flawed?

    About a year ago I blogged that “Showrooming is no longer a sideshow, but now the main event”. (Showrooming is the practice of evaluating an item at a retail outlet, and subsequently purchasing the item online for a much lower price.) In this blog I went to great pains to show that showrooming risk impacts earnings, and that investors would shun business models that had a high degree of showrooming risk. I even went as far as to use Best Buy (BBY) as an example of where Wall Street analysts predicted that showrooming would hurt earnings, and subsequently beat down the stock price.

    I was wrong. Well, at least partially wrong.

    Since the writing of that blog Wall Street bid up the price of the stock from the mid-teens to the high forties. Management proclaimed that Best Buy would “be the Ultimate Holiday Showroom.” The theory was that this would improve foot traffic to the stores, and subsequently dramatically increase sales. The theory was proven out, and throughout the year management demonstrated that same store traffic was improving and Best Buy became one of the great turnaround stories of 2013. They were taking on Amazon.com head on, and winning. The 2013 holiday season would be Best Buy’s victory lap.

    And then the bombshell. In mid-January Best Buy released their earnings for the previous quarter and the results could not have been more of a shock to Wall Street. While same store sales were essentially the same as the previous holiday season, the practice of “price matching” Amazon had decimated margins. Management claimed that this was an “unexpected speed bump on the road to recovery” and was the result of operating in an “extremely promotional environment.” In the days following the earnings announcement the stock was bid down to 50% of its 52 week high.

    I would argue that we are not in “an extremely promotional” environment. In fact, quite the opposite. The advances in technology, along with merchants offering price matching guarantees, has created unprecedented pressure on retail margins. There is nothing “extreme” in this environment. This is the new “normal.”

    So should investors completely abandon the entire retail sector, in favor of industries that promise higher returns? Not at all.
    Before making a bet on a retail stock, investors should understand the showrooming risk profile of the company, and what management is doing to address this risk. If management can’t tell investors how much exposure they face from online price competition from deep discounters, investors shouldn’t walk away, they should run. On the other hand, if management can tell investors precisely what their risk exposure is, investors should listen to how management intends to manage that risk. If management simply suggests that price matching is how they will combat this risk, ask for their resumes to see if any of them used to work at Best Buy.

    This new “normal” presents great opportunities for both retailers and investors. Those retailers that “get it” will well outperform their peer group. Those retailers that don’t, present a great opportunity for those investors who like to operate in the “shorts” market.

    David Coleman is the CEO and Founder of Brandoogle (brandoogle.com). Brandoogle works with retailers and brands to combat showrooming with a proprietary suite of software and services. He can be reached via e-mail at dcoleman@brandoogle.com.

  • 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.

  • The Showrooming Scorecard

    “If Showrooming is so pervasive, why aren’t companies doing more to combat it?” This is a question we are hearing more and more. Companies, be it brands or retailers, realize that this problem is reaching epidemic proportions, yet seem to be doing little to change the dynamic. Why?
    We can’t manage what we don’t measure. And we don’t know how to measure showrooming. Until now.
    It is possible to define an objective measure that is applicable to both retailers and brands. Essentially we need to measure the “risk” of being showroomed. How likely is it that a customer will see our product at retail and then choose to purchase the item on-line at a discount?
    The risk is a function of several factors
    • How many of the SKU’s being investigated are available at both retail and the web simultaneously?
    • How many web sites are discounting the product?
    • How many products does each web-site carry?
    • How deeply is each SKU being discounted on-line?
    There are probably other factors that could refine the metric, but the above factors are clearly the ones driving the risk. Only once the showrooming risk is measured, can the management of that risk be addressed.
    Two companies with an identical showrooming risk profile™ score may have very different underlying causes of their risk. Understanding the numbers behind the numbers is the key to managing the risk. Imagine two golfers return to the clubhouse after playing 18 holes of golf. Each shows a 103 on their scorecard which, among serious golfers, would not be considered a very good score. Before the golfers work on improving their game, they need to understand what is wrong with their game. One may have trouble getting off the tee, and one may have trouble putting. Two very different problems, but yield the same total score.
    It’s the same with the showrooming risk profile™ score. Knowing the score is only the start, understanding what is driving the score is where the real improvement begins. Is it a single web site that is deeply discounting, or is multiple web-sites with moderate discounting? Or is it something else entirely?
    Now that we have a metric, who should we hold accountable for managing that metric? The organization. The underlying causes, and solutions to showrooming risk can be found across the organization from purchasing to IT to sales. When showrooming risk is a corporate metric the corporation will work together to manage that risk. We are all responsible in some way, large or small, for helping improve the profit of our organization and the same can be said of our role in managing showrooming risk.

    David Coleman is the founder of Brandoogle, a company that is focused on helping retailers and brands understand, measure and manage their showrooming risk. He can be contacted by e-mail at dcoleman@brandoogle.com.