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Amazon Eating Best Buy's Lunch (AMZN, BBY)

December 14, 2010 12:09 pm
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By now you’ve likely heard the news: Best Buy’s (NYSE: BBY) third-quarter earnings were less than spectacular.

While this might sound like a worst-case scenario for the retail giant, Best Buy stores do not seem to be in any danger. Rather, the problem has to do with online sales growth, which was a mere 7% this quarter – down from 16% in Q2, and 26% in Q1.

If consumers aren’t getting their electronics from BestBuy.com, it’s not hard to figure out where they’re going. Amazon.com, Inc. (NASDAQ: AMZN) has consistently beat the competition in this sector. Even the once-powerful eBay (NASDAQ: EBAY) has felt the power of – and consumer preference for – the online retailer.

Simply put, Amazon offers more options than any other site. In addition to its own warehouse of items, the company allows other (and often independent) organizations to sell their items on Amazon.com. This gives consumers a plethora of additional pricing and availability options when shopping online.

At this time, Best Buy cannot be expected to do the same. But if it wants to survive in this highly competitive market, management must realize that item variety, availability, and website usability are three of the key ingredients necessary to design a successful dot-com.

Right now, BestBuy.com is very user-friendly. But item variety and availability leave a lot to be desired. During a recent trip to two separate Best Buy locations, I found numerous copies of the Vampire Diaries on DVD. But when a clerk checked to see if it was available to purchase online, the website said that it was on backorder*.

This is a serious issue that could further impact Best Buy’s bottom line. Had I been shopping at home, I would have assumed that if BestBuy.com didn’t have the DVD, none of the retail locations would either. And while you can check to see if an item is in stock at any location, that process involves an extra step – one that some consumers may not be willing to take when Amazon.com is one click away.

Physical locations notwithstanding, there are some consumers who prefer to do most of their shopping online. If BestBuy.com can’t keep up with demand, whose needs are being met? More importantly, whose needs are being thrown out the window?

*Note: Since that trip, BestBuy.com has replenished its stock of the Vampire Diaries.

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