An American Editor

June 20, 2012

Should Internet-Only Retailers Pay a “Showroom Tax”?

Not so long ago, Amazon encouraged consumers to go showroom shopping at local stores and then use a smartphone app to connect to Amazon to see if the item the consumer was interested in was available at Amazon for less. Essentially, Amazon was using brick-and-mortar (b&m) retailers as auxiliary showrooms. Needless to say, this didn’t go over well with the b&m retailers, especially the small, independent bookstores, and for good reason.

Of course, there is no practical way to prevent such comparison shopping by consumers. A b&m retailer can fight back by no longer carrying any Amazon-branded merchandise, which is the approach Target took, but that will, for the most part, be an exercise in futility — how many Amazon-branded products are there and how many are sold by the b&m retailer? Perhaps a smarter approach would be to assess a “showroom tax” on products sold by Amazon (used here as a euphemism for Internet-only retailers) and passing the tax receipts on to the b&m retailers either directly or indirectly. Such a “tax” (I am using the term tax very loosely; a term such as surcharge or fee or service adjustment or other similar-concept euphemism works just as well) would have Amazon contributing to paying the costs of maintaining a b&m store without chasing customers away because they openly are comparison shopping (which, it has been reported, some independent bookstores have done).

There are a couple of ways that a showroom tax could work. (Although I use Amazon as the example, the idea is for any Internet-only retailer to be charged the tax, not just Amazon.) I think the easiest way it could work would be if the wholesalers/manufacturers of goods that are sold to both Internet-only and b&m retailers charged and collected the tax and either used the proceeds of the tax to lower the wholesale price of the same goods sold to b&m retailers or provided b&m retailers with a rebate equivalent to the amount of tax collected.

Essentially, it could work like this: If Amazon buys/sells 100 Sony TVs, Sony would collect the tax (say $1 per unit) from Amazon in addition to the wholesale price. Then when Target buys/sells 100 Sony TVs, it would either have $1 deducted from the wholesale price of each unit or it would pay the same wholesale price but receive a rebate of $1 per unit.

The alternative would be to really make it a national (federal) tax that is collected by the government and then distributed to b&m retailers by way of a tax break that is available only to b&m retailers.

I realize it is not as simple to do as I make it appear, that we are talking about a fixed pool of money that would have to be divided equitably, and the per-unit tax would need to be of a sufficient amount so as to be meaningful, but it could be done. I don’t want to nitpick details; it is the broader concept that is of interest at the moment.

The argument will certainly be made that b&m retailers are not worth saving if they cannot compete effectively; after all, there is a cadre of ebookers who currently take that position as regards b&m bookstores. Many of those who make that argument see nothing wrong with Internet-only retailers making use of the b&m stores as free showrooms; a few ebookers have boasted that that is exactly what they do: visit a local b&m bookstore to check out an item and then order it online because the price is less or they save sales tax.

The problems with the ineffective competition argument are that it (1) compares apples with oranges, that is, the playing field for b&m and Internet-only businesses is not — and cannot be, as currently contrived — level, and (2) it assumes that if all retail went Internet-only the consumer would be better served, a proposition that has neither been field-tested nor proven and on its face strikes me as inherently incorrect. It is easier to accept with certain products, like books and music, than with others, such as TVs. (If you couldn’t showroom shop TVs, how would you determine whether you like the picture and features better on the Panasonic than on the Samsung or Sony LCD TV?) Even companies like Apple and Leica have found that showrooms are important sales tools.

Companies like Amazon are able to reduce their costs, and thus offer a lower price to the consumer, because they do not have to support b&m storefronts in order to sell their goods — someone else already has a b&m storefront where those goods are displayed, and that someone else absorbs all the costs of the b&m store. I’m not suggesting that this advantage of the Internet-only retailer is illegal or immoral; instead I’m suggesting that even Internet-only retailers recognize the importance of showrooming, as witnessed by their encouraging consumers to showroom shop locally but buy online to save money.

Such consumer behavior cannot (and should not) be forbidden, In fact, it probably should be encouraged, but only if the playing field is leveled. It is impractical to devise methods to force currently Internet-only retailers to become also b&m retailers. Besides how many more b&m retailers selling the same merchandise do consumers need? The issue isn’t purchasing options, which now exist in abundance; the issue is spreading out the costs of showrooming among all those who rely on it.

Local b&m retailers would be able to compete better with Internet-only stores if their overhead costs weren’t burdened with the extra costs that are part and parcel of having a physical presence that is open to the public. Because the Internet-only retailers rely on the ability of the consumer to see the merchandise at a local b&m, the showrooming effect, it seems appropriate that the Internet-only stores should share the cost burden of maintaining the b&m showrooms.

In a way, Amazon demonstrates the correctness of this approach of cost-shifting/sharing. When a consumer buys an ebook from Amazon, Amazon charges a delivery fee to the author. Unlike some other ebook sellers, Amazon doesn’t absorb the costs of delivery as a cost of doing business; instead, it takes ancillary costs like delivery off the top and then does its split with the author/publisher. The consumer doesn’t directly see this, but it is a factor that goes into (or should go into) the author’s calculation of the ebook’s price. Whether fair or not, by not absorbing all of the delivery costs, Amazon is able to charge less for ebooks than competitors who do absorb some or all of the delivery costs.

Similarly, by not needing to have b&m showrooms, Amazon is able to sell products for less because its costs are less, yet it is able to also take advantage of the showroom effect because it can encourage consumers to check out a product hands on locally and then buy for less online.

It seems to me that under the circumstances, Internet-only stores should pay a showroom tax to help support the b&m showrooms they rely on and to help level the playing field from a cost/price perspective.

3 Comments »

  1. This is a great article. I agree wholeheartedly–I do not want our b&m stores to fall by the way of the dinosaurs!

    Like

    Comment by Deb Nichols — June 20, 2012 @ 9:13 am | Reply

  2. The unfairness is that a b&m retailer invests in inventory while an on-line retailer does not. They buy what they get orders for and, in most cases, the product is “dropped shipped by the vendor to the customer.” hence, the on-line retailer never touches the item(s) . . . they are, really, order takers. If a b&m retailer had all their merchandise on consignment, while they would have some costs such as rent, warehousing, etc. they, too, could work on a shorter markup.

    The solution, maybe, that vendors charge the on-line only retailer a “drop ship fee” that would be large enough that if the fee were passed on to the customer, there would be no saving.

    It has been said by many, and it may have been said on this forum, there are too many people selling the same things . . . a glutton of resources that turns what used to be products with a personality into commodities. That’s a sad commentary on the state of retailing today.

    Like

    Comment by Alan J. Zell — June 20, 2012 @ 12:25 pm | Reply

  3. […] retailers of goods that are becoming increasingly intangible, like books and other media? Is there a solution to the question of showroom vs. sales floor? Can we have physical stores whose main revenue comes […]

    Like

    Pingback by Digital gets real « appazoogle — September 26, 2012 @ 10:01 am | Reply


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