Why Target’s Amazon price match matters less to Target than to other retailers
Tell me the last time you did price comparison research across multiple retailers for a bottle of laundry detergent? How about for a package of socks? Halloween Candy? Greeting cards? Motor oil? The answer across the board is likely never. And that’s exactly why Target’s new policy of price-matching the online prices of Amazon, Walmart.com, BestBuy.com, Toysrus.com, and even itself year round doesn’t matter.
At least for the retailer itself, that is. It might matter a whole lot to its competitors.
The bulk of Target’s revenue is generated from sales of commodity items. The retailer's 2011 Annual Report offers a breakdown of its sales by product category, which reveals: 25 percent Household Essentials, 19 percent Apparel & Accessories, 19 percent Food & Pet Supplies, 19 percent Hardlines (including electronics), and 18 percent Furnishings and Decor.
Many of these items are even store-branded or exclusive. These relatively low ticket categories don’t vary in price significantly from one retailer to another – regardless of whether they’re physical or online. As a result, consumers tend to purchase them in places of convenience, which often means where they can get everything they need in a single trip. As a result, Target’s new year round price match policy is largely symbolic.
Target CEO Gregg Steinhafel admitted as much, downplaying the likely impact prior to a December 1 through 16 pilot of the program. "We don't see a lot of price match activity in our stores," he said in a November analyst call. "Our value proposition is so good day in and day out, and our circular price offering is so good that we don't expect this to be meaningful."
By meaningful, Steinhafel is referring to dollars and cents. The CEO doesn’t believe the policy change will cost his company real money. Wells Fargo analyst Matt Nemer agreed, saying, "It's not likely to have a huge impact on financials or customer behavior."
Where the move could have real impact is in consumer state of mind. Target is hoping consumers will walk away with the message that they’ll always get the best price in its stores, no matter what. Long the hipper, high end choice on the discount retailer scale, Target is essentially inviting customers to think of them as-- shudder!-- Wal-Mart. (With cooler commercials.)
The other reason the broader price match policy is unlikely to have a significant impact is that it’s far too onerous for consumers to widely take advantage of. First and foremost, discounts and price adjustments are not taken at the register, but rather at the customer service counter. That means a second line to wait in and likely a precipitous drop in utilization.
This is not to mention the fact that consumers must first be aware of the policy, and then do the legwork to find the discounted price elsewhere. Secondly, price match may only be applied to a single unit of each item.
Many commentators painted the policy change as response to “showrooming,” the trend that sees consumers browse items in brick-and-mortar stores and then buy the same item online (presumably at a lower price). We’ve discussed the phenomenon at length here in the past, specifically with regard to the detrimental effect it’s having on consumer electronics retailer Best Buy.
Target is not immune from Showrooming, with nine percent of all showrooming activity happening in the retailers’ stores – making it the third-most effected chain, well behind category “leader” Wal-Mart at 24 percent. But, the most popular categories for showroomers – which we're surprised isn't already a new Bravo reality show – are big-ticket items, like electronics. And in this category, the price differences can be meaningful.
Best Buy’s prices, for example, are reportedly 17 percent higher than Amazon’s on average. Always the victim, Best Buy was done in over the holidays by Wal-Mart’s decision to briefly discount the iPhone 5 by 25 percent. Price matching its competitor in this case reportedly cost Best Buy $65,000.
But, while Target certainly carries electronics, these items are just not the store’s bread and butter. At one time, DVDs, Video Games, and even CDs may have made up an appreciable portion of Target’s revenue. But that era has long since ended, and not as a result of showrooming. The items that fill most Target shoppers’ carts today don’t instinctually lend themselves to price-matching. And the retailer is hoping that with its new policy, consumers will just assume that they’re getting the best deal because “that’s what Target’s all about.”
The most interesting thing that might come out of this is other retailers following suit. Since the dawn of ecommerce, nearly all brick-and-mortar price match policies have been limited to the print-circulars of other physical retailers. Only recently have the largest chains started price-matching online competitors. But if consumers start to see this as the status quo, imagine what retailers they might demand it from next. Mega-bookstores like Barnes & Noble? Grocery Stores? Fashion department stores like Nordstrom? The trickle down effect could be devastating.
Infrastructure-burdened brick-and-mortar retailers at large are in no way ready for a world where they must match the prices of Amazon and other etailers, regardless of how crazy low they may be. Amazon, for one, has shown a willingness operate at razor thin margins or even lose money in some cases to put pressure on its competitors. With more than $5 billion in cash equivalents in the bank and a number of rapidly growing profit centers, Amazon is more than capable of playing hardball should such a widespread policy become a reality.
So in the short term, Target’s updated price match policy will have little effect on the retailer or on its customers. But it may mark the beginning – or a hastening of the end – of a seismic shift in power from brick-and-mortar retailers to their online foes when it comes to commodity goods that can be purchased anywhere.
It would be easy to argue that consumers win either way. But if the endgame is less competition and nowhere to showroom when you want to, I’m not sure that’s the case.