Is Best Buy On Life Support? An Analysis

April 17th, 2012 · 13 Comments · 3D HDTV, Blu-ray Discs, Connected TVs, LCD Flat Panel, LED LCD Flat Panels, News, Plasma, Sound Bars

The once great and expanding Best Buy (BB) has begun a path to self-destruction, with a recent quarterly loss of  $1.7 billion.

Circuit City, Silo, Crazy Eddie, Incredible Universe and the Good Guys have already passed on as US consumer electronics chains.  This Best Buy loss reflects a withdrawal from Europe and the closure of 11 UK superstores, its European online store, and of course, lower overall US same store sales.

But there’s more to it than that.


Let us say first that we would hate to see Best Buy disappear, largely because in many markets this  would leave Wal-Mart and/or Target as the only local stores that sell TVs. However, Best Buy’s recent announcements of 50 super store closings, 400 planned layoffs at its Minnesota headquarters and the resignation of CEO Brian Dunn (with reports that he is alleged to misuse company assets in the course of a relationship with a female subordinate) do not bode well for Best Buy’s survival. When Circuit City began its downward spiral, it too cut staff and closed stores, only to accelerate its demise with lower revenues and mounting losses.

In our opinion, Best Buy created many of its own problems by continuing the same old business model in a new Internet economy. A few examples:

Best Buy maintains a two-price policy for many items, an in-store price and a lower Internet price. Best Buy continues to run its website as if it is its own competitor, not a part of the same company. This policy puts folks without Internet access at a price disadvantage. It also teaches BB brick and mortar shoppers to look at products in person, then check the bestbuy.com or other online competitors’ price, only to inevitably buy the item online. This is called “showrooming.”

Worse,  if you let a blue-shirt BB salesclerk know you want to pay the lower online price, he/she has to perform a rigmarole to permit the customer to pay the online price while in-store. Remember, this is often Best Buy’s own price! Best Buy needs to have a one-price policy. Why should online shoppers have a price advantage only to continue a policy that results in bad will from in-store shoppers?

Best Buy continues to devote significant floor space to music and movies, disregarding the shift to streaming movie services, iTunes and Amazon pricing. Recently, we were denied a Wal-Mart price match on a 3D Blu-ray disc, even though it is Best Buy’s policy to match Wal-Mart disc pricing. We finally bought the disc at the Wal-Mart price when we made the purchase at another BB located next to a Wal-Mart. Why does one store honor this policy and the other does not? It’s either bad training or a directive by a given store’s manager to inflate profit margins. Ultimately, we blame it on poor oversight by BB executives.

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High Margin or Low Margin Items

 

HDTVs are low margin items. Currently Best Buy stores offer every major brand of TV except Vizio. They also sell their store brands, Dynex and Insignia, competing directly against the name brands and reducing revenue, as the BB store brands are priced below the major TV manufacturers’ comparable products. Is Best Buy a TV maker or a retail store? We fail to see the logic of cannibalizing a sale, requiring store back-end support such as warranty parts and service. By doing this BB generates lower revenue. They also offer a free two-year warranty, negating the sale of extended warranties to Insignia TV buyers.

When a blue shirt sells a TV he pushes an ISF calibration and an extended warranty. I never hear a sales clerk explain the advantages of improved audio. Worse, the clerk can’t provide a demonstration as none of the TVs on display are connected to a sound bar or a surround sound system. These items are  sitting on their own on a distant shelf. As one can never perform an audio demo online, Best Buy loses this opportunity for consumer benefit and increased revenues and profits. They will happily push a $100 HDMI cable that offers no increase in performance, when a $200 soundbar will benefit the consumer significantly, and for years to come.

The massive Best Buy TV department continues to employ overly bright lighting and poor demonstration material via an antiquated RF signal distribution system, making it impossible to see the difference between a 720p low-contrast HDTV and a top quality 1080p model. Except for observing the cosmetics of a given HDTV, a Best Buy demonstration of HDTV image quality is futile. Give consumers a home-like viewing environment with a high-quality signal and they will be able to see a difference between the store brand and a higher end TV.

Another area where Best Buy can make more profits and provide a service to its customers is the selling of high quality audio/video furniture and DVD cabinets. Right now most of the furniture and racks Best Buy offers are inexpensive and often poorly made and of dubious aesthetics.

You can only see and feel the quality of good furniture in a store. Best Buy offers assembly and system set-up along with delivery, giving them a huge advantage over online retailers, as nearly all A/V furniture is shipped unassembled.

Good News

Best Buy has put into place a very thorough installation and set-up department with its Geek Squad services. This needs to be expanded, with better-trained employees able to explain their services to customers. You simply can’t get an online etailer to offer assembly, wiring, Smart TV setup and audio system installs.

Overall, Best Buy needs to give the customer a better shopping experience, and with that will come higher revenues and profits. They should stop fleecing consumers with overpriced HDMI cables and accessories that any consumer with can find vastly cheaper online . Instead, they should concentrate on selling higher margin products (such as audio and furniture) that consumers will want to hear or see in person, along with the convenience of delivery, assembly and installation.

Best Buy better make changes quickly. Many analysts believe it has to start turning around in months, not years. Otherwise, they will face the fate of Circuit City and disappear.

 

 

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13 Comments so far ↓

  • Ray Ayyelos

    On the whole, I agree with the direction things are pointing. I really hope they get their act together. I don’t mind shopping online, but I am very much an impulse buyer. When I want something I’ll research online then I’ll make the trip to go buy it in person. Its a gratification thing for me. So, yes, that means I’ll drive a distance rather than wait for shipping to occur. Anyhow, aside from that personal thing, I have had great experience with Best Buy and their products. Their reward programs are meh, but I use them and they are better than nothing. Do people shop at Best Buy for washer and dryers? That seems silly (to me). Anyhow, here is hoping they don’t fade. Where will I go to take a tech stroll if they go… :(

  • james

    Best Buy is doomed, but their TV sales areas are not as bad as you say – at least not here in NYC. They do have the sets in an area with dimmed ambient light and a decent signal. What they don’t have are sales people with meaningful product knowledge. Even in the Magnolia stores I can never find anyone to help, let alone answer questions about different subwoofers or televisions. I literally could not buy a sub one weekend – my old one had just died and I went to Best Buy on Broadway at 63rd. When I was able to get someone’s attention they each (three different ones!) promised to send someone else “who knew” over. Hah! I had to go to the Union Square store where I gave up and just bought the most expensive one they had. It proved to be inadequate and I returned it. I asked what they had that would fit my need better (after explaining why I was returning it) and the only response I got was “this is our most expensive” subwoofer… In all honesty, I only went to Best Buy because my favorite audio shop was closed; but, had BB bothered to sell me the right product they would have kept the sale.
    I won’t even go into how many times – at multiple stores – I tried to buy a TV and couldn’t get anyone to talk to me. Or, when I did get some well meaning person, they knew less than I about the sets.

  • John Doe

    Oh, and when you figure out the cost for training and testing on those certifications I had, it equaled 20% of what I would have earned…

  • John Doe

    (Disclaimer: I was a former BB employee) When I went to work for BB it was one of the 10 “best” companies to go work for. Salesmen were on commission, but they knew what they were selling and knew how to support it. I ended up being the head of the computer/small electronics dept. and made sure all my employees knew the differences between between computer components from the hard drives to the processors and everything in between. Our stores computer sales were the second best in the country and I was the highest volume salesperson in the company. We had the lowest return rate and highest customer satifaction. This all changed when they went to a hourly/salary rate structure. Within 3 months I had lost my 6 most knowledge and experienced people to have them replaced by high school kids working a part time job so they could take their dates out to movies in their moms car. Our sales dropped to a level that even I found disgusting. I lost my 3 best customers because if I wasn’t there they couldn’t get support. I went from 70k a year to a salary structure that IF I hit all their “target” figures (impossible to hit) I would have made half that amount and had to have worked 30% more hours. They also canned our manager after the store didn’t hit the new quotas after two months. I knew then that the writing was on the wall. The policies they implemented in the short time I was there afterwards (4 months) made me realize that it was only a matter of time. The internet was just starting to make an impact on the world at large and I knew that sooner or later Best Buy was doomed.
    I give them 3 years max. before they fold. Do not buy an extended warrenty for a term longer than that if you buy from then. I was making 60k a year a few years ago and for grins I applied at Best Buy Geek Squad… They offered me 12 bucks an hour with the 3 degrees, up to date MCSE & A+ certifications, 30+ years experience, and 4 years instructing university computer programming. LOL! This gives you an idea of their service commitment.

  • chris

    good guys (didn’t go out of business) got bought by compusa, circuit city was 1billion in debt just to sony. compusa, well Carlos slim ran it into the ground. you can make money if you keep sending your employees (100 business reps) to mexico for award ceremonies (compusa, one year before the closed)

  • Kat

    Best Buy is going out of business because it rips-off customers. You can try to blame the showroom, or lack of one, or some ridiculous notion that cutting their customers a better deal when they buy online is somehow bad…but that’s not it. Anyone with half a brain when it comes to computers and electronics is appalled by how they take advantage of the ignorant.

    When my mother had her DVD drive fail in her laptop, BestBuy was the only authorized place for repairs around. It was a free warranty repair, but they tried to scare Mom into purchasing (for $75!) someone to install for her Microsoft’s free Windows Update! They scared her by saying her computer would *definitely* be taken over by a virus if she didn’t pay someone to run Windows Update. All of us who know anything about computers trash the company because we’re disgusted. That’s what you get when you have people work on commission and give them free reign to be jerks in pursuit of it. Karma is simply coming around to them.

    The real take-home lesson is : Don’t try to sell everything! (Washing machines and toaster-ovens next to computers?) Carry what people want to buy, offer fair prices, and have salaried sales-persons!

  • chew

    Hello mr stringfellow,me and you probably have long discussion on audio and video cables,i never buy cheap cables again,i seen the results from them,all the stuff i by midrange and close to high end,i want my shit run right my friend.

  • Stringfellow

    @chew, I do not believe HDGURU meant any malice toward Best Buy, on the contrary, I feel HDGURU has given them tools to succeed. From what I understood, HDGURU was simply advising Best Buy to have a uniform pricing structure between the store and the website. People use the website to verify something is available and in stock at their local store, so having the same price would reduce confusion when a customer walking in remembers it was cheaper on the website.

    On a side note, HDGURU, CNET, HomeTheater, etc, have good articles discussing the importance of not overspending on costly HDMI cables.

    With that, I wanted to give a plug to bluejeanscable (google them), they are honest folks and offer high quality cables (HDMI, Speaker, etc) that are mostly made in the USA, and they are not that expensive.

  • chew

    Best buy sell the best tv’s on the market and recievers and high end hdmi cables and speaker wires,but consumers don’t wont pay for quality,then consumers by cheap shit,they wonder why they always bring cheap junk back,i see it all the time. so stop complaing about prices these people who work at best buy need job too.

  • Gave ULTE best 4Q ever

    Its sounds like what they need are knowledgeable low pressure commision sales people at every level, at least GM down. But then they would have to pay them based on performance and that would make to much sense for a store trying to make a profit. As a salesperson I matched every legit internet price and made a killing by attaching things people needed to properly enjoy their TV’s (like audio and furniture) and my customers loved me and my prices.

  • Stringfellow

    HDGURU,

    Thank you, on behalf of Best Buy (I do not work for them) for this wonderful analysis and consulting legwork. You have given Best Buy exactly what they need to prosper in the current market. I agree with you on everything, and hope their marketing teams, C-Suite, and Executive Board have heard you.

    QUESTION 1:
    Would it be sufficient to setup (Magnolia type) rooms in all Best Buy locations with two of the same model TVs with one calibrated and the other in standard/vivid mode. With that, a representative discusses the difference, and walks through the “un-calibrated” TV’s settings to calibrate it and make it look like the calibrated one? In addition, the representative would then offer an explanation on what the standardized color gamut is and what to focus on when buying a TV.

    QUESTION 1:
    To make it less complicated, would it be better to setup a bi-weekly (Saturday Night and a weekday night) town-hall for all customers where a trained Geek Squad representative demonstrates the calibration of a TV and discusses the importance and offer an opportunity for Q&A.

  • Nick

    Ben, a GOOD Best Buy should give an audio and calibration demo? Sound to me like they all should. They stress the “Art Of The Demo” hard to their Magnolia employees but somehow that doesn’t transition to the blue shirts. That’s piss poor management. Too busy preaching high end HDMI that most blue shirts couldn’t even explain.

    The fact that the final decision to price match comes down to the manager makes sense. However, you missed the point of the article. Sure, there has to be stipulations on what and how you can match, but you said “If it is within the guidelines of the policy then the manager is either honorable and matches it, or he/she is a greedy bastard and refuses.” HA! If your’e matching your own company’s price, there should be no need for management to get involved so long as the price can be proven. The fact that their are inconsistencies between management is just another reason why BB is tanking. You want a great deal, the most knowledgeable HDTV experts AND the best customer service? Go check out Paul’s TV if you live near one.

  • Ben

    Employees at any GOOD Best Buy are encouraged to give audio and calibration demos, but they are usually not tied into a main display that is easily usable.

    Often times the final decision for a price match comes down to the choice of a manager to honor the match. If it is within the guidelines of the policy then the manager is either honorable and matches it, or he/she is a greedy bastard and refuses. sometimes it all depends on a good business decision. If a customer wants to match the price of a tv from an online etailer, but is getting audio/accessories/furniture as well (read: high margin items) there is not a manager that will turn it down.

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