Are Exploding Online Holiday Sales A Sign Of Good Things To Come?

This Thanksgiving holiday weekend witnessed a dramatic rise in online traffic on websites of retail majors. The trend is unmistakable. While e-commerce accounts for less than 10% of consumer spending right now, it is growing at a much faster rate than bricks-and-mortar retail. Going forward, we think that any retail player not having a robust presence in this space might have to shut shop altogether. Specifically for Best Buy (NYSE:BBY), its decision to invest in the online channel seems to be paying dividends.

Shoppers took advantage of deep discounts in stores as well as online. While overall online traffic increased by 3% over last year, traffic to websites of top retail stores rose by 8% on average. Black Friday online sales crossed $1 billion for the first time, according to comScore, which measures online behavior. The National retail Federation conducted a survey according to which retailers’ sales increased by 12.8% and more than 35 million people visited retail stores and websites, up from 29 million last year.  Online sales this holiday season are expected to reach $96 billion, a 12% rise over last year. The survey sample size was 4,005 consumers and the estimated margin of error was plus or minus 1.6%. ^[1]

According to Experian Marketing Services, Best Buy was the fourth most visited retail site on Thanksgiving Day this year, with traffic exceeding 11 million viewers. The top three spots were grabbed by Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Best Buy’s online traffic on Thanksgiving was a 104% increase over its previous day’s traffic of just over 5.5 million.  This data doesn’t take into account mobile traffic so the overall figure would be much higher given the extensive use of smartphones by shoppers these days to compare prices once they are inside a store. ^[2]

See our full analysis for Best Buy

This holiday weekend was being watched as a barometer of the sign of things to come in the next five weeks, given the sluggish economic conditions and the prospect of tax increases on account of the fiscal cliff early next year. The burgeoning online sales seem to indicate robust consumer sentiment. This could be a result of a nascent recovery in the housing and job markets reviving consumer confidence.

What Does It Mean For Best Buy?

Best Buy, which reported an unexpected third quarter loss a few days back, desperately needs a good holiday sales season to recover its mojo. It has a new CEO at the helm and underwent an organizational restructuring recently.

With launches of several new smartphones and tablets expected this quarter, it is hoping to get a bigger slice of consumer spending on these. Tablets and smartphones have turned into major gift-giving categories and a lot of people would be looking to upgrade their systems or devices. Many consumers are believed to have held back from spending last quarter in anticipation of new product launches. With competition in this space being tough among retailers and the gross margins relatively less, higher volumes are key to profitability. Best Buy has offered to match prices offered by Amazon and other online retailers within its brick-and-mortar stores this holiday season. Price matching is sure to erode Best Buy’s margins even further which makes higher volumes all the more crucial to drive profitability. We are interested in watching how this plays out. ^[3]

Will consumers prefer to drive to a Best Buy brick-and-mortar store to check out products first-hand? Or will they prefer shopping from the comfort of their couch at home using a smartphone or tablet? The market data generated at the end of holiday season will provide some key insights into customer behavior and preferences and shape business strategies for retailers going ahead. So far, we haven’t had a scenario where online and store prices are equal. This holiday season will help evaluate what customers prefer more given equal prices.

We have a price estimate of around $25 for Best Buy which we are in the process of revising now that the third quarter earnings results are out.

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1. Online shopping on Black Friday tops $1 billion, NBC [↩]
2. Thanksgiving Day retail traffic increased 3% in 2012, Experian [↩]
3. Best Buy Suffers From A Perfect Storm Of Weaker Margins And Sales, Trefis [↩]