Is Amazon Losing It's Pricing Advantage?

We have become accustomed to finding things cheaper online. Amazon has been so successful at accumulating inventory, then marketing and selling it for less that it has eviscerated entire industries.

But more established retailers, after reeling from defeat to defeat, are starting to fight back. They have learned how to combine digital and physical offers, reconfigured their customer service operations to address how consumers actually comparison shop. And they have made a virtue of their advantages, like selection and the ability to touch the merchandise.

At the same time, Amazon has become a victim of its own success. The flagging economy, lagging tax revenues and the tens of thousands of jobs Amazon has destroyed have combined to reduce whatever sympathy it still enjoyed as an internet 'startup.' The imposition of taxes has reduced the gap between Amazon's price and that of its competitors.

Furthermore, as the following article explains, years of relentless cost cutting have given traditional bricks and mortar, store-based retailers margins which permit them to 'invest' in market share. This is another way of saying that merchants can afford to take losses on some products in order to drive volume and still emerge profitably.

For consumers this is all largely good news. Amazon has succeeded in creating a lower cost floor for a variety of products. But they are no longer the only merchant who will benefit from it. JL

Tom Gara reports in the Wall Street Journal:

Amazon's competitors including brick-and-mortar giants and online upstarts have spent years trying to beat the famously low-margin company on prices. And they are starting to succeed: The world's biggest online retailer is no longer the cheapest.

For a brief period, the world's biggest e-commerce site went offline. Amazon.com Inc. AMZN -1.06%customers hungry for an Internet bargain needed to go look somewhere else on the Internet.

They should get used to it.

At least in some markets it isn't. Those looking for fluffy white towels, scented candles and curtain rods will now find cheaper prices, on average, at the brick-and-mortar Bed Bath & Beyond BBBY -0.35%than they will at Amazon, according to research from BB&T Capital Markets.

Amazon declined to comment.

Since early 2012, BB&T analysts have been tracking a basket of 30 products at both retailers, comparing the prices. When they started tracking, Amazon was, on average, 9% cheaper. In their latest study, released this week, the tables turned: Bed Bath & Beyond was cheaper for the first time, by an average of 6.5%.

The home-goods chain isn't alone in catching up to Amazon, which has spent the best part of two decades making a name by undercutting rivals on price, and earning little to no profits in the process. Others like Best Buy Co. BBY -0.96%have made guarantees to match or beat Amazon's prices in their stores. On Monday, online seller Overstock.com said it would permanently match Amazon's book prices.

"I don't think this is a seasonal thing," said BB&T equity analyst Anthony Chukumba. "Retailers across the board are just realizing that for better or worse, Amazon isn't going anywhere. One way they have to respond is through price."

One factor pushing Bed Bath & Beyond's prices lower is the 20% off coupons it regularly sends to its customers. Once you adjust for those, the price gap widens to 25%, BB&T said.

Shoppers don't just go to Amazon for low prices, of course. The company has a reputation for good customer service, and its technology is generally well ahead of its Main Street competitors.

But price is still a defining factor in the Amazon experience, and the gap is being whittled away. Not only are traditional retailers "investing in price," essentially sacrificing profits for sales, they also are set to benefit from the online retailer having to collect sales taxes in a number of states, including heavyweight markets such as California, Texas, Florida and New Jersey.

Those taxes add between 5% and 10% to prices, closing the total price gap even further. Amazon seems to believe that collecting sales tax in every state is inevitable, because along with brick-and-mortar giants, it has supported a proposed federal law that would open the door to just that.

In a long-run price war, it is tough to see which side would blink first. Amazon has the advantage of being able to run on thin or nonexistent profit margins without its investors blinking an eye.

"If [Amazon] was a retailer, Jeff Bezos would have been fired years ago," Mr. Chukumba said. "There's a fundamental disconnect between how investors evaluate Amazon and how they evaluate brick-and-mortar stores."

On the other hand, some traditional retailers have an asset that their online nemesis lacks: Solid profits and healthy margins. In the 12 months to June 2013, Bed Bath & Beyond reported margins before interest, taxes, depreciation and amortization of 16.4%, suggesting the company still has room to "invest in price" while remaining profitable.

But whether investors would give the Union, N.J., company the benefit of the doubt if its profitability slipped to Amazon-like depths is another question entirely.