Shares of the electronics chain spiked nearly 4% Wednesday, April 18, after CEO Hubert Joly announced that the company has entered into a partnership with Amazon.com Inc. (AMZN) - Get Report to sell televisions that are programmed by Amazon's Fire TV operating system.
Terms of the agreement all point to mutual benefits for the two retailers. Best Buy will sell the Amazon-powered TVs -- so far, 11 models including ones from Toshiba and its own brand, Insignia -- in stores and online, while Amazon will sell the same products on its website, with Best Buy as the exclusive vendor.
It may seem like a win-win scenario at first glance, but over time, sources said, the relationship could tip in Amazon's favor and erode customer relationships for Best Buy. Retailers overall need to be careful when dealing with Amazon, whose tactics undermine the businesses of its suppliers, they said.
"Retailers need to tread carefully when partnering with Amazon," said Cooper Smith, head of Amazon research at Gartner L2, pointing to Circuit City Stores Inc., Borders Group Inc. and Toys 'R' Us Inc., which all went bankrupt.
"In the early 2000s, Circuit City, Borders, and Toys 'R' Us each outsourced their e-commerce businesses to Amazon, which ultimately was a bad decision and contributed to their downfalls," he said.
While the Best Buy deal makes sense for now, it faces the risk of cannibalized sales and Amazon creating vendor relationships of its own, according to Ronald Goodstein, professor at Georgetown University's McDonough School of Business.
"The two dangers are that Best Buy becomes a showroom, while all the actual purchases are made on Amazon, or that Amazon gradually gain access to vendors [such as Toshiba] by being a Best Buy reseller," he said. "How long is it going to take for Amazon to say, 'Hey, how about you make us a TV and become one of our priority products?'"
The latest partnership between Amazon and Best Buy wouldn't be their first, however. Amazon products such as the Kindle have been sold in Best Buy locations before, but this will be the latter's debut on Amazon.
"This time it's a two-way street," said Josh Blechman, director of capital markers at Exponential ETFs, an exchange-traded-fund provider. As for partnerships with Amazon at large, he said, "it should be a case-by-case thing."
Smith added that the Best Buy-Amazon alliance could be positive, likening it to Kohl's Corp.'s (KSS) - Get Report deal with Amazon last year, in which Kohl's featured Amazon's Echo and other smart-home products in its stores. It also allowed Amazon returns at certain locations.
"Kohl's ended up reporting very strong Q4 earnings with same-store sales up 6% during the holiday period, so I wouldn't be surprised if that influenced Best Buy's decision to do a similar deal with Amazon," he said.
"In the short term it's a win-win situation: Amazon can showroom and test in-store demand for its own devices before expanding its own brick-and-mortar footprint," Smith said, "and the partnering retailer hopes that when people go to store to buy that Alexa speaker or Fire TV that they'll also buy something else."
Still, Goodstein warned, it's perilous for retailers to expose their customers to Amazon, which diminishes a product's "brand equity."
"You end up selling the product but sacrificing your affinity with the customers," he said. "My suggestion is, proceed with caution."