Why Best Buy Should Follow Target’s Kindle Kibosh

by Kyle Woodley | May 4, 2012 9:47 am

Congratulations, Target (NYSE:TGT[1]). You finally stopped shilling the rope Amazon (NASDAQ:AMZN[2]) has been hanging you with.

On Wednesday, Target said it would stop selling Amazon’s Kindle tablets and e-readers. The move marks a long-awaited counterattack from the brick-and-mortar crowd that has for years been hemorrhaging customers to the ubiquitious e-tailer. It’s also a slap at the practice of “showrooming,” in which people visit physical stores to view the goods, then head online later (sometimes using their Kindle Fires) to purchase products for lower prices.

To clarify the message that Amazon in particular — and not just the general ease of online purchases via tablets — is the enemy, Target not only will continue selling Barnes & Noble’s (NYSE:BKS[3]) Nook and other tablets, but it’s currently erecting special store-in-stores for Apple (NASDAQ:AAPL[4]) products, including the iPad.

At Target, Amazon’s name is mud.

And if I’m in charge at Best Buy (NYSE:BBY[5]) and Staples (NASDAQ:SPLS[6]), among others, I’m winding up for the next haymaker as we speak.

Don’t get me wrong. I’m a realist, so I know that no matter what Target & Friends do …

  1. E-tailing isn’t going anywhere. People love the convenience of buying online, plus the cheaper prices offered by Amazon and others. Plus, as a whole, we’re just a more technologically connected society. AMZN and other e-tailers will continue to take money out of stores’ registers. Period.
  2. Kindles and Kindle Fires are attractive products. Amazon’s family of tablets and e-readers are backed by decent tech and are priced to sell.

That said, it doesn’t mean the brick-and-mortar retailers have to take Point 1 sitting down, and they can at least muffle the effectiveness of Point 2 by making it awfully damn hard for people to ever get a good look at a Kindle in person.

You see, there’s a reason “showrooming” exists at all: People need to see and test certain products before they buy. You might be able to purchase laptops, TVs and other products for less online, but the highest-resolution tablet screen in the world won’t properly convey the differences in clarity between 52-inch flat-screen X and 52-inch flat-screen Y. You’ve got to check them out in the store first.

And guess what? If people are trying to decide between a Kindle Fire and a Galaxy Tab, iPad, what have you, and they can’t see a Kindle Fire … well, they’ll be a lot less likely to buy a Kindle Fire — even if they’re not going to make the eventual purchase in-store.

Again, putting the kibosh on Kindles won’t stop the march of online retail, but it sure will knock the wind out of a major rival.

Analysts believe AMZN sells the Kindle Fire at a loss, so the purpose isn’t to make money on sales of the tablet itself, but to put the purchasing power of Amazon.com in peoples’ hands. In addition, Kindles bring in new subscribers to Amazon’s $79-per-year Amazon Prime service, which offers things like free shipping on orders and instant streaming video.

Of course, this strategy is a bit of a gamble, and it’s weighing heavily on profitability. Amazon might have celebrated an earnings beat in the most recent quarter, but the fact remains that net income dropped a whopping 35% from a year ago. Most telling was AMZN’s operating margin of 1.46%, which was lower than full-year 2011’s 1.79% — itself the lowest annual mark since 2001[7] — and a number that would make even a grocer shudder.

Amazon also faces the perpetual onslaught of the Apple machine, whose tablet market share grew to 68% — partially at the expense of the Kindle Fire, which dropped to about 4%. And AMZN probably doesn’t even want to think about the prospect of a smaller, cheaper iPad[8].

To make things worse, Microsoft (NASDAQ:MSFT[9]) just pledged $300 million[10] to Barnes & Noble’s Nook business, which includes huge annual chunks toward R&D.

Pair those competitive threats with Target’s recent action, and that has to make a potential follow-through jab all the more enticing for someone like a Best Buy. It might not put Amazon on the mat, but it could buy BBY and other retailers a little more time to regroup and figure out what they should have been brainstorming all along: how to tailor the in-store experience in a way that entices people to not only visit, but to bring their wallets with them.

If nothing else, it certainly beats playing a losing game of rope-a-dope.

Kyle Woodley[11] is the assistant editor of InvestorPlace.com[12]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley[13].

Endnotes:
  1. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  2. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  3. BKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKS
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  5. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  6. SPLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPLS
  7. the lowest annual mark since 2001: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/04/26/bloomberg_articlesM33KOV6K50Y901-M3424.DTL#ixzz1trhCJwRo
  8. smaller, cheaper iPad: http://investorplace.com/2012/03/friday-apple-rumors-new-ipads-planned-aapl-ipad-3/
  9. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  10. pledged $300 million: http://investorplace.com/2012/05/how-bns-deal-with-microsoft-could-shake-out/
  11. Kyle Woodley: http://investorplace.com/2012/03/author/kyle-woodley/
  12. InvestorPlace.com: http://investorplace.com/
  13. @KyleWoodley: https://twitter.com/#%21/kylewoodley

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