Nathan Field: Tough times for store owners in the internet age

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Well-stocked locations and knowledgeable staff are no longer the competitive advantages they once were. Photo / Thinkstock
Well-stocked locations and knowledgeable staff are no longer the competitive advantages they once were. Photo / Thinkstock

Retailers need to accept the landscape has changed, writes Nathan Field.

On a recent US holiday, my wife and I found ourselves hunting for an Apple power cable in a Best Buy store (think of an aircraft hangar-sized Dick Smith).

When a sales assistant led us to the right section, we balked at the US$85 ($108) price tag, since we only needed the cable for a few weeks.

The assistant then whispered a solution - as long as we kept the box and the receipt, we could use the cable for the duration of our road trip, then take it back to any Best Buy store for a full refund.

Perfect, we said, and hurried to join the long checkout queue.

But after a few minutes of slow progress, we realised we'd joined the returns line, chock-full of people doing exactly what we were planning to do in three weeks' time.

The checkouts were on the other side of the store and they were virtually empty.

The experience drove home just how tough it is for traditional retailers to compete in the internet age.

It's often said that stores like Best Buy are turning into show rooms for Amazon but it's even worse than that.

Customers can not only sample a product in-store, they can take it home, make sure it works to their satisfaction, then claim the refund and buy it cheaper online.

No wonder Best Buy's share price has fallen 33 per cent over the past year.

And it's not just Best Buy finding things tough - electronics retailers around the world have been suffering from the rise of online competition.

The previous number two in the US, Circuit City, went bust in 2009, Dixons in the UK has been furiously rationalising its network, and earlier this year, Woolworths announced plans to close up to 100 Dick Smith stores in Australia and New Zealand.

There's not much sympathy out there for retailers like Best Buy.

Consensus opinion seems to be that they're out of touch with changing consumer needs, much like other big-box casualties such as Borders and Virgin Megastores.

Having well-stocked locations and knowledgeable staff are no longer the competitive advantages they once were.

The new generation of customers expects to milk those services for free and the retailer who invariably rings up the sale will be the one with the best price.

Best Buy argues, with some validity, that Amazon has an unfair price advantage because it doesn't collect sales tax in many US states.

Amazon has been running around striking deals with these states, using jobs as a bargaining chip in order to preserve its tax exemptions.

But once the sales tax arbitrage is over, it's inevitable that some of Amazon's price advantage will disappear, especially with shipping costs on the rise.

So will a level playing ground revive Best Buy's flagging fortunes? Not necessarily.

Amazon's competitive advantage isn't totally based on avoiding tax.

It also has convenience and economies of scale in its favour, not to mention a remarkably patient shareholder base that allows management to pursue top-line growth at the expense of profits.

To compete with a thin margin beast like Amazon, Best Buy needs to think outside the box.

It's certainly trying - closing down large stores, boosting its online offering, rewarding its best customers - but judging by the ugly share price action the market doesn't think it's moving fast enough.

New Zealand retailers are facing similar challenges, and like Best Buy, they're pointing the finger at the politicians.

They argue that because consumers don't pay GST on imported online goods under $400, the system isn't fair and equitable.

However, lowering the threshold to include every online purchase is likely to be both fiddly and costly.

And even if a new collection system could be implemented effectively, it wouldn't stop the march of online retail.

Arguments about the unfairness of online competition are taking place the world over. It seems like a losing battle.

Ultimately, store-centric retailers are going to have to deal with the fact that consumers, not governments, are pushing sales online.

It's a bitter pill to swallow for those who've invested in a physical footprint, but crying foul isn't likely to win any customers back. Accepting that the retail landscape has changed is the only way forward.

Nathan Field is a senior equity analyst at Gareth Morgan Investments. Any opinions expressed in this column are Nathan Field's personal views. These opinions are general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. Readers should seek independent financial advice before making an investment decision.

- NZ Herald

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