The competition in the computer electronics space has heated up to the boiling point. Friday we saw Best Buy pull out the big guns. They will attempt a last-ditch effort to safe customers from walking out the door and buying products elsewhere. Many are wondering if this is enough to save the faltering retail business. A more appropriate question is, does Amazon have a finishing move that will end this retail match?
It has been quite a long and drawn out war between the two retailers. The other morning our notions about Amazons willingness to do anything to win was confirmed. Jeff Bezos attested to Wall Streets long-held notion that the Kindle E-reader was being sold at cost. This does not merely justify that Amazon knows where the profit engine in the consumer electronics sits (in selling content, think iTunes), it suggests that Amazon will play cut throat hardball to solidify its place against any competition.
Some time ago I suggested that the key to Best Buy saving itself was via RadioShack (you can read it all here). Best Buy has currently taken the route that price competition will save them. In fact they should have focused on some of the strategies I focused on in the article., Most importantly Best Buy should have changed their approach to retail. Instead of taking the brick and mortar approach that has served companies well for decades, that is dead, they should have focused on reinventing themselves. Apple has given them all the tools they need to see how it can be done. If Best Buy could just focus on selling an experience rather than a product, the game could be swung in their favor. Due to their actual locations, their real estate, they can offer features and experience that no online retailer can offer. A simple example would be taking the Apple one on one and education courses, changing them to fit the model of Best Buy. Best Buy has failed to do this and merely set up Amazon to do amaz(on)ing things.
At the end of the day Amazon has a one-of-a-kind business model. They have become synonymous with online shopping. Most of the major online merchants sell through their own sites and via Amazon. Does this mean they are worth a P/E of nearly 300? That’s a question that will be answered in the coming months. Though compare them to the likes of social media and that valuation doesn’t seem so ridiculous, being that Amazon has a reals, solid, and established business. Instead of attempting to make money through ads, Amazon has their own ad program making them money. As I mentioned above, Amazon’s willingness to sell products at cost shows their commitment to wining. A devotion to success remains a key component in separating winning companies from losing ones. So does the fact that Amazon has a diversified and strong business without the headaches of brick and mortar merit that P/E ratio? That I will leave up to you, but the divergence between best buy and Amazon is obvious.
Be it the divergence of their stock returns shown in the above image or the breakdown of the two companies I have mentioned throughout the article, the companies are two completely different investments. Best Buy sits on the edge of becoming extent and has failed to differentiate itself. The other company, Amazon, sits on the edge of the future, competing with the likes of Apple in the consumer electronics department. In simpler terms, Best Buy remains trapped inside a Ford Model T amidst the 20th century, while Amazon has pushed into the 21st. This in turn has successfully destroyed the once held lead that Best Buy had
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