Best Buy (NYSE:BBY) has announced that it will match the lower prices offered by Amazon and other online retailers in its brick-and-mortar stores. It will also offer free shipping for items which customers find out-of-stock in its stores. While the company already had a price matching policy in place, it was previously restricted to local retail competitors. 
We think that Best Buy is digging in its heels for a long-term battle with online retailers. It should be obvious that matching online prices will impact the company’s profits. Best Buy seems to be making a bet on its ability to withstand the onslaught from online retailers even at the cost of a short-term hit to its profitability. Its confidence seems to be arising from its expertise at other elements which define a customer’s buying experience – human interaction, after-sales services, and a wide variety of merchandise available at its stores. Also, online retailers’ competitive edge is no longer as advantagous now that several states are implementing new sales tax rules.
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Why This Policy?
Retailers like Wal-Mart and Amazon are taking business away from pure-play consumer electronics stores by offering huge discounts. Customers are still using physical stores to check out products and gain hands-on experience with gadgets. However, a large number of them then proceed to buy these from online stores like Amazon at cheaper prices. This phenomenon of showrooming has hit business hard for companies like Best Buy and RadioShack. The trend has been accelerated by changing consumer spending habits, which are shifting from high discretionary spending to higher savings. 
While Best Buy is investing in building its own internal IT team to bolster its online presence, it needs to keep its brick-and-mortar stores viable as well. The idea should be to seamlessly integrate its online and physical stores to deliver a superior customer experience and differentiate itself from the competition.
What The Policy Says
The price-matching policy is not absolute. Prices will be matched for a customer only if the customer places a request for the same, and the final decision will eventually be taken by the staff. Customers might be asked to produce proof of still-in-effect lower prices at a competitor’s store or website. Also, the company will not match prices for special one-off sales by competitors. For example, if Amazon slashes prices by 50% as part of a sale, Best Buy will not seek to match that price. 
The new policy will be effective November 17, 2012, and then again during the holiday shopping rush from November 27, 2012 to December 24, 2012. The decision to persist with the policy beyond this date will be taken at a later stage.
How It Might Play Out
We think that there are different categories of customers. Some prefer to buy a product at the cheapest possible price while others value the whole experience of shopping in order to be educated on their purchases. There are also those who give maximum importance to convenience. Amazon offers low prices, as well as facilities like “2-day shipping” to its Prime members on many in-stock items. This might sound convenient enough to some customers who want to avoid the hassle of going to a store and the inevitable gas charges. However, there are customers who value instant gratification. We think that Best Buy’s price matching policy might provide a marginal incentive to lure more people in this category to its stores.
Earlier, e-commerce players were largely exempt from paying sales-tax in most states. This loophole is being plugged by many states and fewer states now permit themselves to be used as sales-tax havens. The increased costs are being passed on to the customers, reducing the price differentials between online and physical retail stores. Thus, Best Buy might find it easier to match these prices. Customers who value the whole experience of shopping and interacting with knowledgeable sales staff may now opt to buy from a Best Buy store if they are getting products at the same price.
This strategy is sure to hit Best Buy’s profit margins. The company could be attempting to shore up its absolute profit numbers with higher sales. Even if the matching prices policy results in short-term losses, it will buy it some time to put in place the integrated business model we referred to earlier. We think this would be preferable to losing customers and sales, which are crucial for the company to maintain market share and retain its customer base. On the other hand, if Best Buy discontinues this policy after December, it might result in profit reduction but no sustainable long-term benefits.
We have a price estimate of around $25 for Best Buy which is at a premium to the market price.Notes: