The Problems with “Brick and Mortar” retail outlets…

July 3, 2009

(Disclaimer: This post is a personal opinion based on what I think the problems are with retail stores such as Best Buy, Circuit City, CompUSA, and others. I know some of these stores are closed or consolidated, but the information still rains true in my opinion)

As the modern world changes more and more with the integration of the web into our daily lives, it also changes the way that we shop and look for things to buy. There are many options now, whereas before, going to a retail outlet was often the only real choice. As things continue to change, the retail outlet stores role in shopping is becoming very different from what it used to be. Now, many people go to retail outlets and get a hands on with a product, and then will go home and buy it online for cheaper, often times with free shipping depending on the retailer. The reasons I think that “Brick and mortar” retail outlets will fail in time are these:

1) Operations cost to maintain a building and a full time staff make up a large part of the overhead on the buying price for the company and the price for the consumer.

Example: When you go to a retail store, such as Best Buy, you are not only paying the cost of the item you are buying, but the extra costs associated with operation. Including, but not limited to: Salaries, benefits, maintenance costs, power, and extra services. Depending on the business model for the company, these can vary a lot depending on the product.

2) In many cases, commission is a primary source of income for the sales people, and therefore they don’t often have the consumer in mind. Making the sales people focused on what brings in the highest margins and profit margins.

Example: Commission in retail stores is a standard practice, to help provide motivation for sales people to sell certain items with higher profit margins. I think this is also becoming well known by consumers, and instead of getting into specifics of what the average commission is based on certain products, I think it is more valuable to give you information about products to NEVER buy at the retail stores until absolutely necessary. I have listed items that have the most profit margin, to the ones that have the least.

A) Protection plans – Any extended warranty service on any item you can buy in the store.

From what I know of how these work, I’d say that only about 20% of the money made goes to pay out for the service bought. People will buy an extended warranty and have no problems while under warranty. This all becomes profit for the seller because no extra services were needed to keep the consumer happy. In the case that something does go wrong while under warranty, the cost for the company overall to keep your business is minimal.

B) Computer Accessories – USB Cables, FireWire Cables, Cleaning supplies, CDs/DVDs, Mice, Keyboards, etc…

Profits can range from between 100%-300% depending on the product. Never buy these things from retail stores if you can help it. Go to an online store and pay the price that is a fraction of the cost. Amazon sells cables for really cheap, as well as Monoprice.com.

http://www.monoprice.com

C) Televisions –

This often surprises people because they are a high cost item. A TV can provide as much as 50% profit for the store, and there is often a large commission associated with selling a TV especially with a protection plan. The profit margin depends greatly on the brand of the TV. Sony’s would have a larger profit margin than a smaller company like Vizio.

D) Upgrades – Computer Cases, Hard Drives, Graphic Cards, Sound Cards, Computer Speakers, etc…

Profit changes from manufacturer to manufacturer and item to item, but these can be a good place for sales people to sell an unnecessary extended warranty, which again, is where most profit is made.

E) Games + Software – There is a profit margin here, but on games it ranges from $5-$20, depending on the game and system, and software depends on many more

F) Computers – HP, Lenovo, Acer, Apple/Mac.

Most of the profit is made on ‘high end’ PCs running Windows, where you can buy a high end Dell and $100-$300 of the sale may be store profit, and can give as much as $50-$100 into the hands of the sales person. If they sell you an extended warranty on top of the computer sale, they will also make more on the sale overall, sometimes doubling their commission. Apple has the lowest profit margin in terms of sales because Apple charges only about $5-$10 below the MSRP or retail price. That is why you don’t really see Apple sales often, because stores can afford to take the hit on the product. When there are sales on Apple products where the price is lower than $20-$50 below the Apple store cost, the company is banking on you buying a protection plan (Apple Care) to recoup their loss. This is common knowledge within the industry.

3) Many sales people are either poorly trained or unknowledgeable of the products they are selling.

At best, you will get an employee who loves electronics and loves to study the products on the floor on their free time. If you get a sales person like that you will know right away that they know their information, just have to watch out to make sure they don’t push you or manipulate you into buying an extended warranty. On the other end, you can have someone who knows just enough to confuse the potential buyer (you), and make you feel like you need something when you don’t. They will lie to you and mislead you into a sale, and these are not the type of people you need to support.

4) Retail stores can’t compete with the online prices who do more efficient business and often provide more information about the products they are selling that is easily accessible to the buyers.

This is simple, operations cost of an online store is much cheaper than that of a physical “Brick and Mortar” store.

5) As the consumer becomes more knowledgeable about products, they tend to know exactly what they are looking for and in retail outlets the best items are often always sold out.

With internet access available in the hands of many consumers with smart phones, people are able to do product research on the spot. This scares stores a lot, because people can find and test a product in store, and then look easily on line for the same item at a cheaper cost. With the iPhone and the Google phone (G1+2) you can easily take a picture of an item and find reviews, prices online and local to your location, and find out details or problems that the salesperson may most likely not tell you. I feel customer knowledge is the biggest problem for stores, because it is easier for people to distinguish between and good and a bad product, and the reality is, is that most of the ‘bad’ products are the ones sold in the same price range as the ‘good’ products, therefore creating the profit needed to keep things running.

Okay…so yes, this is a biased opinion. I only shop for things in the store if I’m going to the grocery store, or if I want to see a product in person before ordering it online. But, it has gotten to the point that I don’t even really need to touch a product before deciding to buy it. With so many customer reviews, and so much information available to check out product user interfaces and potential problems the need to go into the store diminishes.

I realize that the biggest reason to go to a retail outlet is so that you can get an item immediately, but if you have the time and option to shop online and wait for the product even just enough time for it to ship, you can save a lot of money, and overall have a lot better shopping experience.

Some sites to check out for electronic bargains:

http://www.bensbargains.net – A site that updates often with new deals on consumer electronics.
http://www.newegg.com/ – A great place to buy computer upgrade parts and various computer components.
http://www.monoprice.com/ – A great place to buy cables for REALLY cheap. NEVER spend over $10 for a HDMI cable again!
http://www.amazon.com/ – You can find some great sales here on everything! Just look around.
http://www.buy.com/ – A great place to buy refurbs from companies that you know and trust.
http://www.pricegrabber.com/ – Find an item and it will compare prices from various online stores.
http://www.woot.com/ – a daily deal, but sometimes you can get a really awesome product at a great sale price.

I’m sure there are many more, but these are the ones that I check out on a regular basis. If you would like to suggest more, please comment and I will update my list!

Thanks, and please remember, this is just my opinion of these stores. I know many people that feel the same way, but people who don’t know why there are benefits to shop online, these are things to consider.

Best Always,

Kyle

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Posted in technology | Tagged amazon, bens bargains, best buy, biased, buy, commission, compUSA, monoprice, new egg, online, pricegrabber, woot |

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