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With the U.S. Senate poised to pass a bill to allow the collection of online sales taxes, mega-retailers such as Best Buy Co. and Target Corp. are close to a legislative dream they have pursued for years.
Only one problem: the issue might not matter as much anymore. Best Buy and Target, both based in Minnesota, have long argued that Internet giants like Amazon and eBay can unfairly offer lower prices because states do not require them to collect sales taxes. The federal legislation, called the Marketplace Fairness Act, authorizes states to require online retailers to collect the tax.
However, some experts say Amazon’s perceived dominance over Target and Best Buy has more to do with Amazon’s superior e-commerce operations — including technology, service, and inventory management — than a price advantage. In any case, passing the law might not erase the perception, long ingrained in consumers, that Amazon offers lower prices than its brick and mortar rivals.
“Pricing has long been a fixation” for retailers like Target and Best Buy, said Amy Koo, an analyst with Kantar Retail consulting firm in Boston. “It sort of misses the point.”
That’s not to say Amazon doesn’t enjoy a pricing edge. Analysts estimate Amazon’s prices, on average, are 5 to 7 percent lower than Best Buy, and that’s down from more than 10 percent years ago.
“Target is encouraged that the Senate is considering this important issue, and that there has been bipartisan support for the Marketplace Fairness Act,” the company said a statement. “We will continue to advocate for this legislation, as we believe it creates a level playing field for retailers.”
But how much of Amazon’s price power has to do with sales taxes is unclear. Given its size and reputation for efficiency, Amazon can consistency pass savings on to the consumer, even at the expense of profit margins.
The sales tax effect “is hard to quantify,” said David Strasser, a retail analyst with Janney Capital Management. “But it has to have an impact.”
A recent Stanford University study that examined data from eBay concluded that purchases fell roughly 2 percent for every 1 percentage point increase in the sales tax charged by the seller.
But aside from that limited study, hard data are rare, even for Best Buy.
“What we are seeing in states where we have a level playing field with Amazon, that’s where you can make some comparisons,” said Laura Bishop, the Best Buy’s vice president of government relations. “But it’s pretty early.”
Target and Best Buy also suffer the effects of “showrooming,” the idea that shoppers visit stores only to purchase products later online less expensively.
“One of the biggest beneficiaries of showrooming to date has been Amazon,” according to a recent report by analytics firm Placed Inc., “whose ability to offer goods at a lower price across multiple categories has left nearly no retailer untouched.”
Showrooming is more prevalent now because of “the near ubiquity of smartphones that bring the pricing power of the Internet through every retailer’s front door.”
According to its surveys, Placed estimates 10.7 percent of its customers visited a Target store in January, the second-highest percentage behind Wal-Mart. Best Buy placed fifth, with 4.8 percent of Amazon’s customers went to a Best Buy store that month.
Placed therefore concluded that Best Buy and Target in particular “face some of the strongest threat of showrooming in their aisles.”
That’s why Best Buy and Target said this year that they would match online prices all year around, a move that will cost both companies some profits. Forcing online retailers to collect sales tax might ease the pressure on Best Buy and Target’s profit margins, analysts say.
Sales taxes aren’t the issue
But experts say the sales tax is obscuring the more relevant issue that in many ways, Amazon is simply a better multichannel retailer than Target and Best Buy. Over the years, Amazon has pioneered user reviews and free shipping, which major retailers now have incorporated. The retailer also rolled out its own tablet, introduced cloud data services, and will soon stream original movies. With its foray into same-day shipping, Amazon will negate another reason for visiting a store.
“Amazon has a lot of other unquantifiable benefits, like the power of Amazon’s website as a research tool for consumers,” said Laura Kennedy, an analyst with Kantar Retail. “I never heard of anyone who shopped at Amazon because they didn’t want to pay a sales tax.”
Best Buy and Target are trailing in their e-commerce efforts, though both companies are trying hard to fix that.
Target, for example, hired a new executive to oversee multichannel retailing, including Target.com, and recently bought Cooking.com and Chef’s Catalog. Still, Target.com has yet to contribute meaningful sales, although it has improved the overall performance of the website.
Best Buy currently converts only 1.3 percent of the 1 billion annual online visits into actual sales. Customers who wanted to buy something ultimately didn’t for a variety of reasons. They listed the need for more product info, not pricing, as their top reason for not pulling the trigger. Among the other reasons: prices were too high, product was unavailable, the desire to see the product in person and the feeling that shipping takes too long.
In other words, analysts say, Target and Best Buy can do plenty to lift e-commerce sales without complaining about sales taxes. The issue will diminish if both retailers can reduce their heavy reliance on brick and mortar stores.
In the meantime, Target and Best Buy will seek to improve their competitive positions any way they can.
“In many ways, there’s probably more urgency to [the tax bill] as our e-commerce efforts open up,” said Bishop, Best Buy’s top lobbyist. “We can compete on products, selection, and availability. We can’t compete with the sales tax.”