Best Buy and the Holiday Retail Prisoner's Dilemma

Consumers may be the only cheerful ones this holiday season; for retailers, it’s going to be a skinny Christmas. That was the message from Best Buy this morning as it warned about an “increasingly promotional environment.”

The retailer said it would keep pace, sticking to a price-matching policy it made permanent in February and similarly matching the early opening decisions of its rivals by welcoming shoppers at 6 p.m. on Thanksgiving. Best Buy Chief Financial Officer Sharon McCollam said the company is “highly aware” of just how much its competitors will be slashing prices in the holiday blitz from Thanksgiving to Dec. 25. “It is table stakes in our transformation,” she said of the decision to follow their lead.

Best Buy may have its hands tied, but a lot of retailers have the same complaint. None of them wants to have huge sales, but they don’t want to miss out on the crowds. Slicing off a big chunk of profits is just what it takes to get into the holiday shopping game these days.

This provides a decent example of what game theorists call a prisoner’s dilemma. If all the major retailers chose not to offer sales, each player in the sector would fare better. But if any one of them is going to cut prices eventually—like a prisoner squealing on cellmates—it pays to beat the rat to the punch.

This year, Macy’s grabbed the first-mover advantage in mid-October, when it announced aggressive sales and an early Thanksgiving Day opening time. Best Buy, cast in the role of Prisoner No. 2 in the dilemma, got shanked and thrown in solitary.

Cutthroat competition aside, Best Buy has been surviving fairly well. It has been a stock-market darling since it hired Chief Executive Officer Hubert Joly a year ago and set  to turning around its business. The company has cut costs, reorganized showrooms, and spiffed up its Web platform to drive a 15 percent increase in online sales.

In the recent quarter, Best Buy posted $54 million in profit, swinging from a $10 million loss in the year-earlier period. Sales at stores open more than a year were virtually flat, which was a sort of victory—if a hollow one. “Our mission is to be the destination and authority for technology products and services,” Joly said.

But the company has little margin left to give up. While it’s no longer losing heaps of money, Best Buy barely broke even in the year’s first nine months. In short, the prison gruel is getting thin.

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