Best Buy May Go EDLP Route
Best Buy is looking to shift from "three decades of
tactical discounting" to
an every day low pricing model, as reported by Bloomberg News.
The reason,
according to Mike Vitelli, enterprise executive vice president and president,
Americas for Best Buy, is that consumers using smartphones and other technology
are able to comparison shop and are unwilling to wait for a sale to come around.
Having low every day prices means (hopefully) fewer consumers will take their
business to the competition, which ranges from Amazon to hhgregg to Walmart.
Best
Buy has made recent changes, such as dropping fees on returns to retain a higher
percentage of its shoppers. It also launched its new product buyback program
to help make it easier for consumers to upgrade to new technologies.
Michael
Pachter, an analyst with Wedbush Securities, questioned Best Buy’s move to
EDLP.
"Wal-Mart makes up for everyday low pricing in volume," Mr. Pachter
told Bloomberg. "Best Buy doesn’t have the traffic, so it
doesn’t
make sense for them. They’re losing better-informed customers who are
more savvy about alternative places to buy the same product."
Best Buy
management believes it has trained consumers to wait for sales before deciding
to purchase. Moving to EDLP, the company believes, will change that mindset.
Discussion Questions
Discussion Questions: Where do you come down on the EDLP versus Hi-Lo pricing strategy debate? What do you think about Best Buy moving to some form of EDLP?
To the extent that Best Buy carries the same products as its competitors (in-store), then EDLP may be a necessity for them. The “I want a TV, I want it today, and Brandsmart is a lot cheaper than Best Buy” reality has to hurt them. Add online, where there are more less expensive options, even when BB has the product on sale only makes the problem worse. It’s not like Best Buy delivers much added value–hard to find sales people, mostly similar products to competition, no better warranties or return policies.
I believe this is a good idea for Best Buy. They have trained sales people who can help with purchases and drive more sales IF they can get consumers into the store. They also have the Geek Squad tie in that they can leverage when a sale is made. I have shopped for electronics and always find a better price than Best Buy but not usually the same level of expertise and the follow-up service. Best Buy has a total value package that an EDLP program combined with their latest return policy and buy back plan can be marketed to consumers as a total package.
Unless Best Buy’s EDLP pricing will be consistently the lowest prices in the marketplace (always a tough thing to accomplish), I don’t see this strategy overcoming the “smartphone” dilemma. Consumers will be just as capable of price comparisons vs. Walmart and other competitors, whether Best Buy is following a high/low or EDLP strategy. The bigger question–regardless of pricing strategy–is whether Best Buy can maintain its edge by focusing more sharply on growth businesses like tablets and smartphones with the breadth of assortment and quality of service that they are known for.
EDLP makes sense for big ticket, commodity-type SKUs like such and such television or computer package. But, here in Canada, there has been a notorious high-profile retailer failure caused by EDLP in the last decade: Eaton’s. Eaton’s, once Canada’s largest chain of department stores, switched to EDLP in the 90s and went out of business a few years later. Without the allure of promotions, customers stopped coming. I think there is something to be learned from this. Customers want EDLP and retailers need to be competitive but promos do drive traffic too.
I’m not sure Best Buy has a lot of choice in the matter. Having been there, they are absolutely right that they have effectively trained their customer to wait for promotions before they shop there. This is the end result of competing on price (ask anyone who worked in department stores). The question, though, becomes “how do I get them in the store? I think Peter’s right on this. Best Buy must now determine how to fund and execute a strategy that demonstrates the value added of shopping Best Buy for something other than price. Geek Squad and Magnolia are a good base to build on. The typical BB sales associate is not. Technology pricing will always be susceptible to Moore’s Law. Great support and service are not.
Consumer electronics are a commodity business. With consumers having many choices for where to buy and online merchants offering free shipping and sometimes no sales tax, it’s easy to visit Best Buy to look at the physical product and then complete the purchase online.
The business problem for Best Buy is how much profit they will potentially sacrifice in order to always offer a low price and will they be able to sustain this model.
I’m not sure why Best Buy can’t do a hybrid model based on category. They’ve got all the tools to do it. The retail world is not so black and white and there are a number of very successful hybrid models out there. The shopper is so fluid, why can’t the retailer move with the flow?
hhgregg is hitting Best Buy hard, wherever the two compete, with their daily promotional activity on all media.
Unless they have a lowest price policy, their EDLP policy might be a big bust.
Safeway announced an EDLP model not long ago and promptly dropped it after much fanfare. The folks at BBY will want to think through their strategy carefully, and consider monetizing their real estate as they compete with online competitors. Would training classes or speeded up repair services bring in added revenue?
Perhaps EDLP will help them reshape their return policies which could be affected by their current promoting practices of bundling promotional items.
The sliding scale of restocking fees which are based in part to certain levels of Reward Card membership offends the walk-in customer and needs to be addressed.
There’s a thin line between stopping abusive returns with affecting customer service. If EDLP is viewed by an opportunity to address this than perhaps they will regain those who have walked way angry and vowed never to return.
Anytime a retailer embarks on the game of who can give it away the cheapest, it is the beginning of the end. Retailing is Romance. Enticement, wooing, continuous reinforcement, and doing those things that perpetuates the relationship. Giving it away only got you a date for the Prom.
It is tough to be a merchant but merchants are the only ones that will be left standing.
EDLP sounds great but then you are almost guaranteed that someone somewhere will have a lower promotional price than yours. If I am you competitor and you executing and EDLP strategy then I can draw customers by knowing what your prices are (and are going to be) and then selectively promoting items with a far more attractive price.
As we all know, price is the easiest attribute to compete with. The question for BB is can then create those value adds that will outweigh the price element? I know I value the knowledge of the sales person when I shop there…admittedly after having researched the items online before entering the store.
EDLP will not drive short run traffic as Safeway and Kmart found out. It is going after a different customer and with Best Buy’s inventory and variety, it will always be vulnerable to someone’s lower prices, especially in in this age of cross channel merchandising. They will lose some battles but not the war when the customers try to take that 50″ TV back to the now defunct International House of Cupcakes and Gum Drops.
Best Buy did not train customers to wait for a sale, that was a result of the entire retail environment, aided recently by the information explosion provided by the internet. The only large ticket retailer I have seen make EDLP work is Original Mattress Factory–and that I attribute that to the fact that there is little price transparency in that industry that makes comparison shopping very difficult. When I bought my LCD TV I didn’t wait for a BB sale, I took in an ad from hhgregg and BB matched their low sale price. Even on low ticket items, smart shoppers know that usually someone else’s sale price beats Walmart–and Walmart also matches prices.
So will BB have both EDLP and price matching? Consumers, especially the more affluent ones spending the money these days, like to feel they are getting a bargain and EDLP does not translate to a “bargain.” That is why they eagerly await the Sunday newspaper ad circulars every week.
I wish BB good luck getting off the slippery slope of promotional pricing. The fact is that all of their products are highly identifiable branded near-commodities. EDLP presumes that a stable ELDP can be determined. And that presumes that all of their competitors will adopt ELDP and not try to promotional undercut BB. Yeah, right.
Unless BB can differentiate themselves with assortment, product knowledge or customer service in a way they’ve not recently demonstrated, I don’t think they have any choice but to continue to engage in the promotional pricing wars.
To a great extent the choices for retailers will become as follows:
1. Price match on like items
2. EDLP with constant (internal) price checking
3. Offer a uniquely branded product that can’t be compared
4. Create an experience so mindbogglingly incredible consumers lose site of price almost entirely.
Option 1: Irritates customers.
Option 2: Cuts into margins.
Option 3: Isn’t always feasible across all product categories.
Option 4: Is is undoubtedly the most difficult but it’s by far the most profitable and sustainable.
As mobile shopping tools put perfect pricing and availability in the hands of all shoppers, promotional pricing is going to lose its efficacy. The question for retailers like Best Buy is, does it make sense to get ahead of the trend, or be a fast second mover?
For what it’s worth, TWICE magazine is now reporting that Best Buy is disputing the Bloomberg article that triggered this thread.