Monday, September 10, 2012

Amazon and the Showroom Effect

The Little App That Caused So Much Trouble

I have this little app on my smartphone called Amazon Price Check. I can take it into Target, scan the bar code of any item I’m thinking of buying, and Amazon will check its catalog to let me know if it offers the same thing at a better price. If so, I make an instant decision whether to walk out of Target with purchase in hand or wait for Amazon to deliver it to my doorstep, exercising some patience in exchange for saving a little cash. 



This is a ruthless test of how well stores are maintaining the protection of the convenience barrier; how well “have it now” is holding up against the customer decision to delay gratification and wait for delivery. 

The real melee from this little app came last Christmas when Amazon went right for the stores’ jugular. Not only could you conduct the price check, but Amazon would subtract an additional five percent of the purchase price if you bought it from them on the spot. Vicious! 

The promotion created a maelstrom, turning Amazon into a political punching bag as even U.S. Senators weighed in on how this little app might usher in an online retail dystopia. They conjured images of abandoned shopping centers blighting the landscape with legions of unemployed cashiers rattling tin cups for donations as everyone turns to online retailers to buy their stuff. 

The grandstanding brought, of course, loads of media attention which – to Amazon’s resounding pleasure – provided what was sure to be millions of dollars in free publicity for the app, leading to more downloads and wider usage during the holiday season. 

I used it. It made me feel a little sheepish. I would glance furtively around as I scanned some potential gift for my daughter, fearing the judging glare of some Target associate watching me erode some tiny sliver from her means of earning a living. It seemed almost immoral. But the more I did it, the easier it became. The less guilt I felt. Amazon knows this. Amazon understands how habits are formed.

Showrooming 

The practice has been dubbed “showrooming.” Shoppers use the shelf space at Best Buy, Target, or any another traditional store to look at a product, touch it, turn it over in their hands, try it on for size, and then order it for less at Amazon. The store becomes a testing ground for all sorts of merchandise, but never wins the sale. 

It’s been happening for a while, but it’s only with the introduction of simple little apps like Price Check that the practice has become nearly frictionless. Where shoppers used to plan their showroom tours in advance - collecting product and price information online in preparation for their store visits – now they do it without the effort of premeditation. 

All traditional stores have been forced to consider their tactical responses. Target has been most aggressive in its response, treating Amazon’s Christmas promotion as an act of war (which it was). It responded first by pulling the Amazon Kindle line of products from its shelves. And sensing that it’s fighting for its life (which it is) it then upped the ante. Target pulled a page from the Lowe’s vs. Home Depot battle plan and adapted it for the showrooming battle.

Target Learns from Lowes 

Amazon wants to set the agenda for how much selection is presented by retailers and the price at which it’s offered. They want complete, universal selection, and they want the lowest prices. This will bring the shoppers. It’s the low-cost, low-price strategy for winning the patronage of the broad middle of the market. 

But the retail wars do not take place on a fixed field of battle. The players move constantly; the tactics evolve; the momentum swings. The industry is such a brutal place to compete because everyone can see what everyone else is doing. Once a new tactic works, your opponent either adopts it for himself or counteracts it with his own maneuver, negating whatever benefit it provided. 

For example, have you ever felt perplexed by the never-ending tug-o-war between Lowe’s and Home Depot? Both make some form of a low-price guarantee, making assurances you won’t find their competitors offering the same product for less money. If you do, they’ll match the price and perhaps throw in an additional discount to boot. These programs have all the hallmarks of a war of pricing attrition. (Think back to our pricing game theory discussion here.) The consumer certainly benefits, but at what cost to the businesses? 

But these retailers are a cunning bunch. Their price match guarantees are legitimate, but they have taken great pains to offer very little overlapping merchandise. They are masters of stocking items that count as functional equivalents but not exact matches. They get big manufacturers to build special models, or entire product lines, just for them. Lowe’s version is very similar to Home Depot’s, but it’s rarely the same thing. 

Because of their size, the volume of sales they drive for manufacturers, and the sophistication of their merchant operations, the home improvement giants can make demands for tailored products. The practice creates a sort of d├ętente in their ongoing battles. They fight over plenty of other things, but they’ve figured out how to avoid doing grievous harm to each other on the pricing front. 

Target executives are no dummies either, and they have plenty of muscle to throw around with manufacturers. They’ve demanded that suppliers provide them with exclusive items unavailable at any other retailer, most notably Amazon.  I’ve noticed this for some time when looking at, for example, Sesame Street toys for my daughters. An increasing number of the Elmo products come in packaging with the distinct Target bulls eye stamped prominently on the front with the words “Only at Target.” 


These items brings with them unique barcodes. Using the Price Check app or not, you won’t find this Elmo in the Amazon catalog. Much like the price guarantees with the home improvement stores, there won’t be an exact match to spark a pricing war.

Fighting Showrooming By Playing a Different Game 

Expect more and more of this from Target and other traditional retailers. Because they move such high volumes of product for all the national brands, they can exert some pressure to get help in the showrooming war with Amazon. 

Target is a grizzled veteran in fighting companies with wider selection and better means of offering lower prices. They’ve managed to co-exist with Walmart (not as happy neighbors mind you, but they co-exist nonetheless) despite the latter’s firm commitment to what I’ll call the Glass Doctrine…that statement of intent from former Walmart CEO David Glass: 

We want everybody to be selling the same stuff, and we want to compete on a price basis, and they will go broke five percent before we will.

If Walmart wants to commoditize everything and sell it for less, Target (in addition to pushing its “upscale discount” corporate brand approach that we featured in an article here) will source alternatives to the nationally branded products. It will (and has) invest heavily in its own store brands, price them for less, and give shoppers a choice. It won’t be able to beat Walmart on the price of Tide detergent on a day-in, day-out basis, but it will provide its Up & Up alternative at a nice discount. 

As an aside, this can be a tremendously effective approach to differentiate your selection from the competition, escaping the deep wounds suffered in toe-to-toe pricing battles. Think Trader Joe’s. Its entire business is built on the idea that a store can be stocked almost exclusively with its own brands. Trader Joe’s IS the brand. It doesn’t carry Tide, Oreo’s or Wheat Thins, so customers can’t make direct comparisons on price against national brands. This has proved an effective way to avoid the Glass Doctrine altogether. Just refuse to play the game by another retailer’s rules. 

Perhaps this becomes the model for fighting the showrooming effect…Don’t play their game; make up your own rules. 

Back to Amazon 

Amazon will continue its push toward universal selection and cheaper prices. It will find brilliant tactics to help consumers compare its offers against the same items being offered at stores. But don’t expect the stores to cede their advantages without a major fight. 

They will work hard to impede Amazon’s attempts to commoditize everything, to offer everything at a lower price, to adopt the Glass Doctrine as its own. There’s a long history of fighting the selection wars this way, and Target is leading the defense now. 

Expect retailers to look for similar ways to frustrate Amazon’s attempt to offer universal selection and win on price.