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Does the "Showroom Effect" Spell Trouble for Amazon?

Companies / Tech Stocks May 08, 2012 - 10:44 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticlePatrick Vail writes: Thanks to the "Showroom Effect," Target Corp. (NYSE: TGT) and Amazon.com Inc. (Nasdaq: AMZN) have parted ways.

That means Amazon's hot new Kindle e-reader will no longer be found on the shelves of one of the biggest U.S. chain retailers.

The "Showroom Effect" is a phenomenon in which consumers use brick-and-mortar stores to test drive certain products before purchasing them online at a lower price.


This isn't the first shot fired in the war between the world's largest online retailer and the second largest discount retailer in the United States.

The Beef with Amazon
Retailers have long complained of Amazon's unfair competitive advantage because the online retailer is exempt from charging state and local sales taxes.

Last spring, Target, along with Wal-Mart Stores Inc. (NYSE: WMT), Best Buy Co. Inc. (NYSE: BBY), The Home Depot Inc. (NYSE: HD), and other retailers threw their collective weight behind the Alliance for Main Street Fairness, a coalition that is leading efforts to change sales-tax laws in more than a dozen states, including Texas and California.

But the sales tax gap is just part of the problem.

During last year's holiday shopping season, Amazon offered 5% discounts up to $5 to "show-rooming" consumers who used the online giant's Price Check mobile app in a physical store-in essence, encouraging the Showroom Effect.

In response, Target sent a letter to its suppliers urging them to help combat the Showroom Effect, either by delivering more in-store exclusive products, or by helping to them to match the prices of Target's online rivals, including Amazon, TigerDirect, Overstock.com Inc. (NasdaqGM: OSTK), and eBay Inc. (NasdaqGS: EBAY).

Even still, retailers like Target have other issues with online competitors like Amazon - such as what happens after the sale.

Amazon's line of e-readers includes the Kindle Fire, a tablet computer that is ultimately a portal to send consumers to Amazon's Website to buy content (movies, music, and books) they might otherwise have purchased at Target.

Target's New Best Friend is Apple
Meanwhile, Apple Inc. (Nasdaq: AAPL) is currently expanding its retail presence by broadening its product selection in Target stores. The "store within a store" (SWAS) concept, which is currently being tested at two Target locations, will expand to 25 stores by the end of the year.

Success could lead to the SWAS concept expanding to a significant portion of Target's 1,700 stores.

There's even evidence that Apple is expanding further, with a SWAS in at least one Wal-Mart location already. It's a move that would give Apple access to Wal-Mart's impressive retail footprint-some 3,800 stores

While the Kindle Fire is one of the closest competitors to Apple's monstrously successful iPad (67 million units sold and counting), the two moves appear unrelated, at least for the moment.

In pulling the Kindle, Target is simply protecting its own profits and punishing Amazon for intruding on its bottom line. But it doesn't seem to be pushing aside the competition in favor of Apple.

While many retailers are hitching their wagons to Apple as it marches toward that $1 trillion market cap, and there's a certain cachet in carrying Apple products, there's definitely room for a slew of devices in Target's stores.

After all, Target will continue to sell Barnes and Noble Inc.'s (NYSE: BKS) Nook e-reader, as well as tablet computers by Asus Tek Computer Inc. and Sony Corp. (NYSE ADR: SNE).

Trouble for the Amazon Kindle
Since Amazon doesn't release sales figures for its e-readers, we don't know exactly how much this move is going to hurt Kindle sales. We do know that not all consumers shop online, which means brick-and-mortar exposure for products like the Kindle are important for wider adoption and continued growth.

International Data Corp.'s (IDC) numbers suggest that after representing nearly 17% of total tablet sales in the December quarter with 4.8 million units, shipments of the Fire dropped to less than 750,000 units last quarter. That number is likely to fall even further since it includes shipments to Target stores.

What's more, there's little room to move on price, so retail exposure is a significant piece of the puzzle.

While savvy consumers won't have difficulty getting their hands on a Kindle, consumers who frequent brick-and-mortar retailers will have an easier time getting their hands on a Nook or other tablet device, including the iPad.

Target's decision to drop all iterations of Amazon's Kindle comes at a time when sales of the flagship model are already in precipitous decline.

And it could get worse. Best Buy - which has also blamed poor sales on the Showroom Effect - could be the next retailer to pull the Kindle from its shelves.

Source :http://moneymorning.com/2012/05/08/does-the-showroom-effect-spell-trouble-for-amazon-nasdaq-amzn/

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