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.
An intriguing discussion is worth comment. I believe that you should
publish more on this topic, it may not be a taboo matter
but generally people do not speak about such issues.
To the next! Many thanks!!
Is there a typo above:
The customer experience then erodes and sales fall further, which puts more presume on the financials and the shopping experience gets worse. And then it all ends.
Should “presume” be “pressure”?
Ken—Good catch. I updated it. Thanks!
Tim, I recently blogged about this very issue with a focus on B&N, and a mention about Best Buy. I highlighted the same flaw you’re bringing to light here: if its easier and cheaper to buy from home, the only reason to leave the house is for a great in-person experience. Unfortunately, Best Buy employs “geeks” who know a decent amount about the product, but who are not “people” people and therefore fail to deliver on exceptional customer service. I actually avoid their staff when I (rarely) enter a store for fear of getting caught up in a conversation about the geeky details of a product I could care less about.
If an amazing customer experience is what’s going to save them, they had better get a move on, or I agree, they’ll be following Circuit City right out the door.
You can check out my take on this subject here: https://www.roundtablecompanies.com/blog/article/customer-experience-is-everything-or-why-bn-will-be-out-of-business-in-no-t
Thanks for the great read!
Given the amount Best Buy is paying to its new CEO ($32 million package over 3 years, 2.5x more than its most recent quarter’s net income) it had better survive!
I wonder if they ever passed the law that required leases to be listed as a long-term liability for the full value (duration) of the lease. This would’ve alerted people years ago about the true assets & liabilities picture of companies such as Best Buy.
The Amazon sales tax advantage will be gone in the near future as laws are passed forcing online retailers to collect sales tax whether or not they are located in a given state. And Best Buy is already trying to focus on service. They have Geek Squad and they always push warranties and accessories (high margin) heavily.
Electronics retailing margins are notoriously slim. I think in addition to focusing on service, warranties, high margin products such as accessories, and trying to get exclusive rights to sell certain hot products (ala the AT&T/iPhone strategy), Best Buy should focus on trying to get people to come into their stores.
If I’m looking for a camera, it’s so easy for me to be on Amazon.com and have already flipped through five different cameras in the time it takes me just to put on some shoes and get in my car. People used to have enough leisure time years ago to be able to stroll through a Best Buy, but not in this economy where everyone is working hard simply to stay afloat (and are discovering many more interesting leisure activities such as 50% off kayaking, for example, thanks to Facebook/Groupon).
But if Best Buy focuses on increasing its foot traffic, it may see an increase in at least impulse purchases. Even if Best Buy doesn’t sell “big ticket” items that people are more likely to comparison shop for such as TV’s and laptops, they can try to get customers to buy a low-dollar item such as an accessory….which may have almost as much in profit dollars as much more expensive electronic item anyway ($50 laptop bag vs an $800 laptop).
And they definitely need to outshine everybody else in customer service. That’s one thing they are already paying for anyway with their staff, why not make it perfect so that they can really market that advantage to customers?
It’ll be interesting to see what they end up doing.