Best Buy is certainly struggling. The company’s stock was above $50 per share back in 2007. Today it is trading at about $20. The company is closing stores and analysts are skeptical about the future.
The company has a number of issues to address but I suspect the most important issue is what I call the Great Amazon Tax Subsidy.
The Great Amazon Tax Subsidy comes from the strange way local sales taxes are applied in the United States. Many municipalities raise revenue by taxing retail purchases. But companies that don’t have a physical presence in a given area don’t have to pay the tax. The result is that a retailer with a physical store location is at a substantial disadvantage when compared to an on-line player. In some cities this is a meaningful figure. In Chicago, where I live, the sales tax is 9.5%.
This means that in Chicago Amazon has a 9.5% cost advantage over Best Buy. This is a hopeless situation for Best Buy. In 2012, Best Buy only had a 2% margin (pre-tax income/revenue). There is virtually no way that Best Buy can overcome this.
Customers that buy from Best Buy have to pay a substantial premium versus Amazon. They get the item immediately but in many cases waiting one or two days isn’t a big deal. Amazon is also more convenient and probably has a wider selection. Best Buy can’t win this battle.
Best Buy will continue to struggle if the tax policy remains in place. The company might not survive at all.
Of course, this isn’t just Best Buy’s issue. Many local retailers face the same problem. Politicians should shut down the Great Amazon Tax Subsidy and do it quickly before more local retailers go out of business.