April 12, 2005

What happens when the rebates end?

Best Buy has announced that it will discontinue consumer mail-in rebates within the next two years. According to the Minneapolis Star-Tribune :

"In response to customer complaints, Best Buy Co. Inc., the world's largest electronics retailer, promised Friday to eliminate mail-in rebates within two years. Best Buy's rivals, including Circuit City Stores and CompUSA, are expected to follow suit."

Although I believe Best Buy when they say they are acting in response to customer pressure (as a consumer, I'm pretty fed up with rebates, and the Star-Tribune quoted a Best Buy customer as saying, "I think I can speak for the average consumer in saying that it's not a pleasant experience. It's unclear why retailers would continue a marketing scheme that annoys people when there are plenty of other promotional tools available"), still, I suspect that the FTC may also have played a role in the decision. Here's another quote from the article:

"Last month, the Federal Trade Commission said for the first time that retailers could be held liable when manufacturers fail to honor rebate requests. The FTC said CompUSA told consumers that rebate checks would be mailed within six to eight weeks, but many consumers experienced delays of months and never got their checks."

Just a coincidence? Could be, but I don't think so.

The impact of this action will depend to some degree, of course, upon whether other retailers follow Best Buy's lead, as the Star-Tribune suggests they will. There's always the possibility that Circuit City, for example, might see an opportunity in taking the opposite approach. When Universal Music Group cut out their co-op/mdf program not long ago, their rivals responded by increasing their programs, and Best Buy's competitors might try a similarly contrarian approach.

More likely, though, the others will do the same as Best Buy, since they hear the same complaints from customers, and have the same worries about the FTC. The movement may or may not spread into other channels, since few other channels have as many rebates as do computers and peripherals, but the impact in that channel alone will be significant.

Some manufacturers in that channel effectively pay for their circular space with rebates; almost 100% of their ads include rebates (it takes larger rebates to get a back cover, and still larger to get front cover, of course). In last Sunday's Chicago Tribune (I just finished counting), 63 of the items in Best Buy's 28-page circular offered mail-in rebates (I didn't count instant rebates, which are just TPR's, nor did I double-count items on which multiple rebates were offered). Circuit City had 48 rebates in their 16-page circular. In some categories practically every item had a rebate.

What will these manufacturers do if their leading retailers tell them to discontinue rebates? Well, first of all, they'll discontinue rebates, of course. And the next step will be to determine whether and how much to cut their list prices. But then (and presumably the reason Best Buy gave them two years' notice) they will have to reassess their trade promotion programs. Somehow, they and their channel partners will need to find a new model, or perhaps an old model -- some variation of the accrual and plan-based trade promotion programs common in other product categories (and common in these categories until the past few years).

It may be back to the future for Best Buy and their suppliers.

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