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Best Buy’s Amazon Price-Match Promise: Could Cost Best Buy inc Over $400 Million and Shareholders Billions.

  • 75% of Best Buy SKUs are cheaper at Amazon
  • Average price difference on cheaper products is 17%
  • Best Buy’s price-match promise could cost it over $400 million
  • EPS impact likely to exceed -$1.12
  • Price-match promise will only generate a gross profit with a 100% uplift in volume and an increased cross-sales value to 100%

Embattled electronics retailer, Best Buy, could lose over $400 million if it follows through with a controversial price-match promise against rival Amazon.com.

Analysis carried out using InvisibleHand’s Real-Time Price API shows that Best Buy would incur these losses, even if only 30% of Best Buy shoppers take advantage of the offer.

InvisibleHand’s Real-Time Price API compared the live prices of over 22,000 Best Buy products against identical products at Amazon.com. 75% of products were cheaper at Amazon, with an average price difference of 17% on those products.

Best Buy have mooted the introduction of a price-match promise to combat the growing use of “showrooming” in which customers browse Best Buy stores to touch and test prospective purchases, but then transact at competing online merchants – particularly Amazon.com.

The effect of Best Buy’s offer was calculated by combining Best Buy sales & revenue data – disclosed in their Q4 2012 earnings statement – with data from InvisibleHand’s Real-Time Price API.

The analysis revealed that if 30% of customers take up the price-match offer, Best Buy will see revenue growth of $537 million compared to the 2011 holiday season. However, gross profit would suffer a negative impact in the region of $400 million, as the retailer gives away an already slim margin on its products in order to match the lower Amazon prices. The hit on gross profit would have a direct impact on Best Buy Earnings Per Share (EPS) for the quarter, estimated to be in excess of $1.00.

In order to generate a positive impact at the gross profit level, the price-match promise would need to generate a 100% uplift in volume and raise cross-sale value to 100%.

The figures get bleaker if a larger percentage of shopper take advantage of the offer:

  • At 40% uptake, gross profit will be down by -$549mm with an EPS impact -$1.50
  • At 50% uptake gross profit will be down -$678mm an EPS impact of -$1.87

The effect on EPS is dramatic. BBY adjusted EPS guidance for FY 2013 is $3.50-3.80. In the first half of the year BBY announced an adjusted EPS of $0.92, meaning they would need to generate $2.58-2.88 EPS in the last 2 quarter of the financial year. A price-match promise would make it extremely challenging for Best Buy to hit its EPS.

Equity analyst, Michael Pachter of Wedbush Securities, commented “InvisibleHand’s proprietary analysis makes it quite clear that Amazon has a huge price advantage over Best Buy, driven primarily by Best Buy’s large physical presence.  While it is impossible to project the extent of uptake on the Best Buy price-match guarantee, InvisibleHand’s analysis appears soundly reasoned, with each 10% in uptake costing Best Buy $0.37 in EPS”

Yannick Roux, Associate at Forward Venture Partners, the investment company that backs InvisibleHand, commented: “We have watched as InvisibleHand has evolved beyond a consumer tool into a B2B2C pricing company that is powering pricing & real-time algorithmic decisions inside massive ecommerce companies.  Today any etailer at scale has to understand valuable competitive intelligence on a minute by minute basis”.

 

About INVISIBLEHAND Software Ltd.

InvisibleHand’s Real-Time Price API is the first and only service to provide real-time price and product-matching intelligence to business across millions of products at hundreds of retailers in United States, United Kingdom & Germany. It is built on InvisibleHand’s patent-pending technology which already powers 6 million downloads of the popular InvisibleHand browser extension for consumers; is used by many of the largest retailers & manufacturers in US & UK, and has found over $1 billion of savings for users.

 

About MICHAEL PACHTER

Michael Pachter is an electronics, digital media, video game & social media equity analyst with Wedbush Securities. He is also the Head of Research for the Private Shares Group, a Wedbush division.

 

About WEDBUSH, Inc.

WEDBUSH, Inc. is a leading financial services and investment firm that, through its holdings, provides private and institutional brokerage, investment banking, equity research, fixed income, clearing, sponsored-access, and execution, private capital, commercial banking, and asset management  to individual, institutional and issuing clients. Founded in 1955, the firm’s largest holding, Wedbush Securities, is one of the nation’s largest securities firms and a top ranked Liquidity Provider for the NASDAQ exchange. Headquartered in Los Angeles, with over 100 offices, Wedbush is dedicated to its delivering its clients relentless service, financial safety, continuity, and advanced technology. (www.wedbush.com)

 

About FORWARD VENTURE PARTNERS

Forward Venture Partners invests across digital media, publishing, ecommerce and advertising. Forward Venture Partners invests for pure financial return, but is able to bring expertise and insight from its sole Limited Partner Forward Internet Group, an independent web company with revenues exceeding £100 million

 

METHODOLOGY

InvisibleHand’s Real-Time Price API was used to compare over 22,000 live prices from Best Buy against live prices for identical products on Amazon.

Revenue, profit and EPS modelling were were carried out using Best Buy’s Q4 2012 earnings statement. The model’s key assumptions are:

  • BBY experience -5% YOY revenue growth – in line with latest quarters statements.
  • 30% of BB customers will take advantage of the BBY price match promise
  • BBY will gain 20% sales volume – because of uplift of customers coming into stores, and conversion uplift – as a consequence of the price match promise.
  • BBY will gain 20% revenue on sales from additional cross-sales (as a reference point Amazon revenue from cross-sell is in excess of 30%)

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