Target and Best Buy Could Get Desperate with Free Shipping Deals

It looks as if some brick-and-mortar retailers are even more desperate than we thought. Best Buy (NYSE: BBY) will be offering Free Shipping on Everything all season long and there is an internet rumor that Target (NYSE: TGT) could be considering the same move.

It sounds as if Amazon.com (NASDAQ: AMZN) has these big retailers running scared, so they are moving to match its deals. Walmart’s (NYSE: WMT) recent online expansion could also have these retail stalwarts spooked.

Naturally, the Best Buy and Target fans in the stock blogosphere hailed these moves, but it is too early to tell if they will do any good. One big problem here is that neither retailer might have the online infrastructure to fulfill all those orders. Amazon is the king online because Jeff Bezos has been willing to spend the big bucks needed to make sure orders reach the customers.

Why Target and Best Buy Cannot Compete with Amazon

Even though they can easily match Amazon’s prices with a few keystrokes, Target and Best Buy cannot make Amazon’s vast ecosystem, with scores of gigantic fulfillment centers, appear instantly. It took Amazon 15 years to build up its supply chain; Best Buy and Target just started trying to match it.

A giant Target Fulfillment Center under construction near Tuscon, Arizona.
A giant Target Fulfillment Center under construction near Tuscon, Arizona.

Okay, to be fair, Target is spending $1 billion on online infrastructure and it is building two giant fulfillment centers to augment its existing ecommerce supply chain of seven fulfillment centers, The Wall Street Journal reported. It’s hard to see how that can compete with the 103 fulfillment centers that Amazon operates in North America according to Chain Store Age.

Amazon actually operates two fulfillment centers in one major metropolitan area –Chicago – and a one million square foot center in Boston, Channel Advisor reported. Amazon even operates two fulfillment centers in the Minneapolis/St. Paul Twin City region—right in the backyard of both Best Buy and Target, both of which are based in that area.

Another problem facing Target is that it simply may not have the money to build all the infrastructure that it would need to go head to head with Amazon. Amazon.com reported having $14.43 billion in cash and short-term investments on September 30, 2015, meaning it can self-finance a lot of its expansion or borrow the money it needs at low cost. Target reported having just $2.742 billion in cash and short-term investments on July 31, 2015. Best Buy reported having $3.49 billion in cash and short-term investments on July 31, 2015.

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That means these companies may simply lack the cash as well as the resources needed to compete with Amazon. It could be a battle between a 900-pound gorilla and Pee Wee Herman. Both Target and Best Buy could be in for a serious beating.

Best Buy could be in worse shape because it uses third-party fulfillment centers. One lesson that Jeff Bezos clearly learned from Sam Walton early on was to have as much control of your supply chain as possible. Both Amazon and Walmart are highly successful because they are masters of logistics.

Why Walmart Could Be Able to Compete with Amazon

Walmart would seem to be in better shape than Target or Best Buy because it has around 14 ecommerce fulfillment centers in the United States, according to The Wall Street Journal. Four of these are giant one million square foot ecommerce facilities clearly modeled on Amazon’s. Walmart, like Target and Best Buy, is also experimenting with ship-from-store options.

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Walmart also has plans for at least one more giant fulfillment center in Polk County, Florida, near Tampa that will open next year. That facility will be between 900,000 and one million square feet in size. Ecommerce Bytes reported that there could be at least other one Walmart fulfillment center in the works in Florida.

It looks as if Walmart, unlike some other brick-and-mortar legends, has the financial resources if not the cash to compete with Amazon at its own game. Walmart reported having $5.751 billion in cash and short-term investments on July 31, 2015—less than Amazon but considerably more than competitors. Walmart can also leverage the $485.62 billion in revenues it reported on July 31, 2015 to finance expansion.

My guess is that if any American retailer survives and perhaps thrives in a head-to-head battle with Amazon.com, it will be Walmart. The behemoth from Bentonville has the resources and the logistics expertise needed for such a battle; I do not think Target and Best Buy do.

How Free Shipping Could Hurt Best Buy and Target

There’s an obvious way in which free shipping offers could hurt Best Buy and Target terribly—by being too popular. If the offers are popular, and I think they will be, both chains could get more orders than they could handle. Their fulfillment centers could get swamped, and merchandise will not get sent out.

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That means instead of legions of new customers happy about free shipping, the two retailers will face armies of pissed off consumers angry that they never got their package or steaming because the Christmas present arrived on January 5, 2016. Such a situation could quickly turn customers against both brands in the same way they have been turned against Sears.

Media coverage of such a debacle could do even more damage by scaring off potential customers and inciting shareholders to sell. Those that doubt it could happen should look at Target’s recent track record, including Canada (the worst retail disaster in recent memory) and the Lilly Pulitzer mess in the spring. Best Buy doesn’t have such black marks on its record, but Christmas 2015 could produce them.

It’s going to be a long holiday season at both stores, one that could get very ugly very fast. The 2016 holidays and the free shipping offers may prove whether Target and Best Buy are going to be major players in the world of online retail or not. One just hopes that management teams are not betting the company on such offers. If they are, the death spiral could be closer than we think, especially for Target.