Is Best Buy On Life Support? An Analysis
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.
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.
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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