The Collapse of the Big Box: Best Buy
Every Christmas my son comes home and does his Christmas shopping at the Best Buy store about 5 miles from our house. This year he discovered his favorite Best Buy (BBY) store was closed and out of business.
In one of the year-end stories in the Wall Street Journal, For Four Retailers, Do or Die, Best Buy along with JC Penney, Radio Shack, and Sears were singled out as survival risks for the New Year. Since I wrote about JC Penney last month, I now want to focus on Best Buy.
“Best Buy is in trouble,” wrote Bryan Gruley and Jeffrey McCracken in the October 18, 2012, Bloomberg Business Week. Last March it posted a quarterly loss and same-store sales have been declining steadily. Founder Dick Schulze is in the process of acquiring enough stock to regain control of Best Buy and take it private. Common stock shares, however, are selling well below the $24-$26 that Schulze offered in his takeover bid.
In short, Best Buy is dead in the water, but not yet dead.
One of the biggest problems is failure of the company to adapt to modern buying behavior. What Best Buy stores have become are showrooms for their online competitors. Gruley and McCracken describe this ‘Showrooming’ phenomenon: “…in this age of digital goods, same-day delivery, and apps that’ll tell you in an instant whether the 80-inch TV you covet is cheaper somewhere else, turning stores like Best Buy into ‘showrooms’ for online competitors. It’s an expensive way to go out of business: Best Buy pays for the building, sales people and cash registers, and Amazon.com rings up the sales. Showrooming hurt Borders bookstores and chains that sell hardware, toys, clothing, sporting goods and groceries are vulnerable too.”
What makes it so difficult for Best Buy is their online presence is dwarfed by Amazon.com, Staples.com, and Apple.com. Best Buy had $3 billion in online sales in 2011 compared with $48.1 billion for Amazon; $10.6 billion for Staples, and $6.7 billion for Apple. Sales per square foot, another measure of retail vitality, were $865 for Best Buy as compared with $1,031 for Costco and $1,015 for GameStop.
Yet another measure of retail success is the conversion rate of shoppers to buyers: 25% percent of online shoppers visit Best Buy and 31% of these actually buy something; 41% of online shoppers visit Amazon and 81% of those end up buying something, and only 3% of online shoppers visit Apple but 76% of those buy something on the Apple website.
Forbes points out that another ailment afflicting Best Buy is that electronics aren’t such hot gifts anymore. TVs, computers, home theater systems, and video games are all facing declining sales. This year U.S. consumer electronic sales for Black Friday were down 5.6%, and last year they were down 4%.
In last year’s second quarter, Best Buy sales declined 3% and earnings fell 90%. The company was hoping the fall introduction of Windows 8, new tablets, and new smart phones would spur sales, but these innovations failed to turn the tide. On March 29, 2012, Best Buy reported revenues of $50.7 billion for the fiscal year that ended March 3, but that sadly translated into a bottom-line loss of $3.36 per share. “In an industry where margins are traditionally very thin, this is very close to a disaster,” according to Forbes.
While Best Buy suffers, it still breathes. What they seek is a “differentiator”, something they can offer that customers can’t get online or from another retailer. One idea being tested at a newly refurbished outlet near Best Buy headquarters is a bank of counters in the middle of the store called “Solution Central.” It is similar to Apple’s Genius Bar. In this bank of counters are “Geek Squad” personnel who help customers figure out how to use their new products and interface them with other products like cell phones and computers.