Is Best Buy a lost cause? Not yet

Is Best Buy a lost cause? Not yet

Summary: The sharks are circling around the U.S. technology retailer as it reveals disappointing quarterly results and a weak defense against rivals Amazon and Walmart. Can it turn itself around?

TOPICS: E-Commerce

"It's like rearranging the deck chairs on a sinking ship." So goes the oft-used simile that references the legendary 1912 sinking of the RMS Titanic. The phrase has been used to describe everything from government disfunction to professional sports disappointment (Andy Reid, I'm looking at you), but today, I will apply it to the business of big box, brick-and-mortar consumer technology retail. And there's no bigger ship in this shrinking sea than Best Buy, the American electronics retailer.

First, the facts: Best Buy posted disappointing third quarter results this morning The company recorded a loss, fed by slumping sales and the burden of an ongoing restructuring that aims to address the growing trend that Best Buy has become a physical showroom for rivals Amazon and Walmart. (Customers stop into the blue-and-yellow, play with a gadget of interest, then return home and buy it for a lower price on Amazon. This isn't some strange boardroom perception; I myself have done the same.)

"Disappointing" quarterly results, I'll remind you, are only disappointing to investors and their expectations -- even Apple can disappoint while posting record sales and profits. For Best Buy, however, something far more dire is present: average store revenue is slipping; sales of laptops, cameras, video games and televisions are down (and not fully offset by growth in sales of phones, tablets, e-readers and appliances); and the company's latest savior -- turnaround specialist Hubert Joly, installed in mid-August -- has yet to make a dent, though he has only held the company's top position for two months' time.

"Our overall performance was unsatisfactory," Joly said, bluntly, during the investors' call that followed the release of the company's quarterly earnings.

Let's assess Best Buy's chances, shall we?

The good:

Best Buy's brand remains extremely well-known.

Best Buy has plenty of cash on hand to buy (no pun intended) it time to turn itself around. It can afford to reinvest.

Microsoft's Windows 8 has been officially released to the world. Thanks to enormous support from partners, a PC resurgence could insulate Best Buy from Apple's grip. (Slightly worrisome: executives refused to speculate on the upside.)

Best Buy's "Holiday Price Match" strategy, which promises to match rivals' online prices. The move could attract shoppers to its stores during the crucial Q4 push, but could just as easily backfire if individual store managers make it difficult for shoppers to obtain reduced prices.

The bad:

Best Buy is racing against the clock. A private-equity group led by founder Richard Schulze is angling for a possible buyout; the weaker the company, the easier this is to accomplish.

International margins are "challenged." With domestic sales under fire, that means Best Buy has no growth area to buoy its losses in other geographies.

It's still the hardware business. Margins are thinner than ever, thanks to shrinking screens and devices (even smaller TVs are doing better than their larger counterparts). Best Buy's services business should be a good hedge to this, but it's directly attached to hardware sales, and is therefore seeing corresponding declines.

The ugly:

Best Buy, like American rivals hhgregg and Fry's, is still coasting on its turn-of-the-millennium successes. The electronics marketplace is rapidly changing, and retailers -- ever the middlemen -- are finding themselves squeezed from both sides. Today, Apple dominates on sales of its own popular products and Amazon and Walmart undercut Best Buy at every turn, without the burden of square footage. Where can -- and should -- Best Buy compete in this new world order? Should it launch a competitive online division under a different brand name to address the price-sensitive, supply chain-squeezing area of the market? Should it invest heavily in customer service and its stores to differentiate based on experience? (Can it preserve its massive stores and store network with this strategy?) Should it consider pitching Google to run, like a white label service, a network of Google Stores to compete with Apple and Microsoft?

Forget where Best Buy has been. If the company were launching its first store next year, what would it look like? How big would it be? What would it sell? For how much?

Twelve years ago, Clayton Christensen and Michael Overdorf wrote in the Harvard Business Review that large companies faced with market disruption often move to make drastic changes -- to their own peril. "In trying to transform an enterprise, managers can destroy the very capabilities that sustain it," they wrote. Instead, established companies should create capabilities within the organization that can succeed in the new market environment.

What we can see above, in the case of Best Buy, is that the company is still carefully managing an old business in an increasingly new market. Its executives are doing as best a job they can in minimizing the declines rendered by shifting customer preferences, but it's clear that Best Buy is no longer the best buy, for consumers or investors. This is irreversible with the current structure.

The deciding factor: whether Best Buy can obtain -- by home-growing or acquiring -- a business that can take it beyond its big box retail roots. It has the time, resources and cash to do it. The question is whether its executives are bold enough to go beyond the blue.

Topic: E-Commerce

Andrew Nusca

About Andrew Nusca

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. During his tenure, he was the editor of SmartPlanet, ZDNet's sister site about innovation.

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  • Umm

    Brick and Mortar shops will survive if we start taxing Internet Sales. Sure somethings will be cheaper online but, a lot of stuff will come back to local.

    As for Best Buy, I bought 3 Nab is and a Fuji JX520 yesterday on their early access sale. The Nabis were $129 each and the Camera was $50! All 4 items had free expedited shipping.

    I also got about $10 back in Best Buy cash so that adds to the savings.

    Anyway, the point is that they take care of their loyal customers just as much as Amazon does.
    • I second that

      local taxes and space rental make then uncompetitive. Their only chance is to sell exclusive products (i.e. dynex electronics) but who would buy those.
      The Linux Geek
      • The Linux Geek I pay taxes when I purchase from New Egg, but not from

        Tiger Direct. I get better terms & free shipping MOST of the time from NewEgg and less of a hassle if something needs to go back To me Best Buy has become over priced, not terribly but still overpriced. I also think HH Gregg,Castco,Sams and BJ have more up to date Items than Best Buy does.....To me Best Buy sneeks in close outs and promotes them as current items, which is a no - no..........and I didn't even mention Wal-Mart....their prices are pretty good also.......

        Not fun to be a retailer these days...
        Over and Out
      • Best Buy Exclusives

        I know some people worry about the reliability of their exclusive products, but in my experience there's no reason to, I even recommend them to my friends and family. I've had 2 Dynex and 2 Insignia televisions for several years now, and they've been perfect... I can't think of one bad thing to say about them. I get the Rocketfish stuff too, and it's all seemed to be decent quality to me.
    • Agreed...

      I agree. And honestly, I'm stunned that the owners of brick and mortars like Best Buy and Barnes & Noble aren't making a full court press legislators to remedy the sales tax situation.

      As much as we all like to buy stuff without paying taxes, ultimately its our own communities that suffer, as employment opportunities take a dive and local tax revenues go south with them.
    • I tend to disagree

      It isn't the taxes that keep me away. It is the buying experience. They kept trying horrible gimmicks like opening up new laptops, performing 'Geek Squad services' on them, closing them back up and charging for the 'service'. Them downloading the Windows update is not a 'service' I am willing to pay for. You would have to ask for one that hadn't been touched. Then it was so loud when I would go in there I couldn't hear myself think. I had to hunt for a sales person last time I was in there. Found them chatting by the tablets. So it isn't the taxes that are the problem, at least not from my perspective.
      • It's clear that we have two problems here.

        On the price-sensitive side, brick-and-mortar will never be cheaper -- even with taxes.

        On the customer experience side, it's...lacking.
      • just what we need

        More taxes...
  • Let it die

    High prices, poor customer service and too many pissed off customers give the company no reason to survive.
    • Reminds me of...

      Best Buy > Apple.
  • Good luck to them

    But I get the feeling I have seen this movie replayed too many times and it seems to end the same way every time.
  • I likeBest Buy

    I like Best Buy, and I think losing them would be a shame. Their 30 day return policy is great (if it doesn't work or you don't like it, just take it back to the store, no boxing, no shipping) and I also appreciate their 18 month no interest financing on $500+ purchases. It's how I bought my Plasma screen back in 2004, my HTC Flyer in 2010, and my ASUS Transformer back in April. Every month I write Best Buy a $50.00 check. Easy peasy and a lot less painful than handing over a big chunk of change all at once to get the stuff I want.
    • Other Incentives to keep Best Buy.

      No return shipping, and they don't get you with the restocking fees.
      • Good points, all.

        Thanks for highlighting these policies.
  • Poor customer service and return policies...

    Poor customer service and return policies are what drove me away from Best Buy. If I want to purchase something I shouldn't have to spend 30 minutes in check out process (even if ordered online for in-store pickup). And should there be something wrong with the item I have NO tolerance for Best Buy's restocking fees.

    If they fix that and get back to being more competitive on pricing then I'll start shopping at Best Buy again.
    Keeping Current
    • Never had to wait anywhere near 30 min.

      Also,Bb has no restocking fee. These are your neighbors you are putting out of a job by going to amazon. Going to the cheapest price is not always the best policy. Look how large wal mart is. Yet a large portion of their employees have to be on food stamps.
      • Going to the cheapest price is not always the best policy?

        You have failed to explain to me why going to the cheapest price is not always the best policy. Let's take Walmart for an example. The majority of their goods are made in China and by buying from Walmart, we are supporting the Chinese. This is good because we live in a global marketplace, not a local one. By looking only at the local market place you are simply short sighting yourself, not looking at the bigger picture.

        Who holds the majority of American debt today? The Chinese. Where did they get all the money? From us. It's all come full circle. The money we've pumped into their economy is helping to prop ours up. We would have gone into the tank long ago if it weren't for the Chinese, but you never read about this in the papers.

        Sorry to get off topic, heh. Personally I don't like to shop at Best Buy. I walk in there, get greeted by the security guy like I always do, and then I walk into the store and there's always half dozen employees either chatting among themselves, checking their smart phones, or playing toss in the corner. They don't bother to ask if I need any help and I walk right past them.

        If they go outta business fine, I won't miss them. They are like every other electronics retailer, they have failed to adapt to modern times.
  • Amazon All The Way

    My last purchase from Best Buy was an Eminem CD in 1999. I believe I was 14 years old at the time. I frequent Best Buy when I want to blow some time and check out gadgets. The customer service there is horrendous too. The employees lack knowledge on anything, and are very rude at times too.
    Emmanuel Figueroa
    • LOL

      LOL, I have to admit that one of the most anguishing and gruelling experiences for me is overhearing a Best Buy sales guy "helping" a customer with a purchase. It takes all the self control I've got to not push the sales guy out of the way and describe the actual specs/capabilities of the product at hand and the advantages/disadvatages compared to a competing product.
  • Sales taxes don't hurt Costco

    People who think sales taxes have anything to do with Best Buy's problems are deluded, Best Buy problems are entirely of their own making. Costco charges the same sales taxes as Best Buy and they are going gangbusters. I do my shopping at Costco, Newegg and Amazon, in all three cases it's a great shopping experience because they all know what they want to deliver and they execute their strategies perfectly. CostCo offers a limited number of choices but the customer can be confident that what they sell is high quality, reasonably priced and easy to return. Newegg's site offers detailed information and easy comparisons, comprehensive reviews, fair prices and nearly immediate delivery. Amazon offers everything under the sun at good prices, good reviews and the illusion of free delivery although they are a lot slower than Newegg. Best Buy on the other hand has no idea what experience they want to sell. The stores are uninviting, the staff is clueless, and even though they seem to have a vast array of electronic goods they never seem to have what you want. The Best Buy near me is in New Hampshire (no sales taxes) but I almost never buy anything there. I do go in as part of my due diligence but I never seem to find what I'm looking for. The goods are displayed hap-hazardly and the staff is useless, the last couple of times I was there they didn't even know what bluetooth was. This wasn't true in the 90s, back then Best Buy was a great place to shop, but it's true now. If Best Buy is to survive they need to rethink their whole way of doing business. They have some examples of how to do things right, Costco and Apple. Costco because they know how to provide value and quality in a brick and mortar setting, and Apple because they know how to provide great service and support.