This week brought more bad news from Best Buy. Profits fell 91% in the latest quarter, same store sales dropped and the company’s stock continued to decline. It now trades at about $17 per share, down from almost $45 in 2010.
Best Buy’s slide raises interesting business questions: can anything stop the fall? Is Best Buy doomed?
Traditional retail is a difficult space. There are big fixed costs: real estate, inventory and staff. Margins are usually tight because one store can only charge so much more than the next. Consumers will move if the price difference is significant.
Once a retailer stumbles it can be difficult to turn things around. When sales slow, the financial situation deteriorates quickly. This makes it hard to invest in the store environment, salaries and employee development. The customer experience then erodes and sales fall further, which puts more pressure on the financials and the shopping experience gets worse. And then it all ends.
It isn’t a surprise that the world is full of failed retailers: Borders, Circuit City, Ames, Wards, the list goes on.
Best Buy is in a particularly bad spot because on-line retailers provide comparable or greater selection and lower prices. The very odd sales tax situation in the U.S. means that Best Buy customers often have to pay significantly higher taxes. This puts Best Buy at a fundamental price disadvantage.
Customers can visit a Best Buy, try out the item they want, immediately order it on-line via their iPhone and pay less money. They then receive it in a couple of days, which is often just fine.
The only way Best Buy can succeed is if the company’s transforms its business model, focusing on goods and services that can’t be easily replaced by cheaper players. Service, for example, might be an opportunity.
The problem is that Best Buy is locked into real estate leases. The company has massive stores all over the United States that it simply doesn’t need. This means Best Buy has significant fixed costs that it has to cover somehow.
So can Best Buy survive? There might be a way: amazing things happen. But it doesn’t look very likely to me.
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My new book is now available for pre-order on Amazon. You can see it here:
In Defending Your Brand: How Smart Companies Use Defensive Strategy to Deal with Competitive Attacks I explore the shadowy world of defensive strategy. The topic is rather controversial; I think it is fascinating and important.
It might have helped the folks at Best Buy. I fear it is now a bit too late.