6/14/2011 12:38 PM ET|
What's the problem at Best Buy?
Disinterest in big-box stores, fierce online competition and still-struggling consumers have soured investors on the electronics giant. But the Blue Shirts should make it through.
Is it time to say bye-bye to troubled Best Buy?
A lot of big-picture trends are running against the electronics giant and its team of Blue Shirts:
- Online competitors like Amazon.com (AMZN, news)continue to steal business from Best Buy (BBY, news)with better prices. One running joke has it that Best Buy's role now is to serve as Amazon's showroom. Big chains like Wal-Mart Stores (WMT, news)also compete heavily on price.
- Who buys CDs and DVDs at Best Buy (or anywhere) anymore, now that it's much more convenient to download them or to watch or listen online?
- Consumers are on the ropes. About 6 million of the jobs lost in the U.S. since the recession started have yet to be replaced.
- And for those who do have jobs and money, there's no new consumer-electronics craze on the horizon, like flat-screen TVs, to drive people into Best Buy's big-box stores. Sure, Apple (AAPL, news)keeps cranking out hit products like the iPad -- but Best Buy has to complete with Apple's own stores for those.
All of these trends continue to put downward pressure on Best Buy results. The company reported a 1.7% decline in sales at stores open more than a year, as well as lower profit margins. On June 14, Best Buy also reported earnings of 35 cents a share, a penny lower than a year ago. Last year's sales fell by a similar amount, following two years that saw healthy sales gains of 5% or more.
The market hasn't forgotten that similar trends forced Circuit City to close its big boxes in 2009. (The brand survives online.) Since Thanksgiving, shares of Best Buy have fallen 34% to about $30, yet it still ranks among the most heavily shorted Standard & Poor's 500 Index ($INX)stocks, as many investors bet it will fall even further.
Can Best Buy weather the storm? I think so, although it may look different in the future. In fact, the stock may be a buy for investors right now. To see why, here's a look at the challenges that have investors nervous, and why Best Buy should overcome them.
The big box is dead
Across retailing, from Wal-Mart to Target (TGT, news)and Kohl's (KSS, news), national chains are moving to smaller stores. "The biggest winners are the people with smaller boxes," says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm, citing the success of retailers like Dollar Tree (DLTR, news). "There's a sea change out there."
The backstory: In a sense, big-box stores -- which sprung up in the 1980s -- were the precursors of Internet shopping, says Eric Johnson, a professor at the Tuck School of Business at Dartmouth. They offered a vast array of products in one place at cheap prices. When the actual Internet came along, big-box stores looked outmoded. "There really isn't anything compelling about big-box stores anymore. They can't compete on cost or product offerings," says Johnson.
Consumers now favor smaller stores that force retailers to select the best merchandise rather than just putting everything on the shelves, says Davidowitz. "That's one of the reasons consumers hire retailers."
In this environment, Best Buy looks like a paintball target. Most of its 1,317 U.S. stores, 1,100 of them, are big box.
But the Blue Shirts are on the case.
In a recent meeting with analysts, Best Buy announced plans to reduce the square footage of its big-box stores by 10% over three to five years. The chain will also lease out floor space to other retailers, says BB&T Capital Markets analyst Anthony Chukumba.
The retailer also plans to add 600 to 800 small-format Best Buy Mobile stores over the next five years, on top of a current base of 180. That'll help boost profit margins, which are higher on smartphones and mobile-phone-service contracts. Best Buy has only a 6% market share in mobile phones, compared with a 22% share in most lines of consumer electronics, suggesting there's plenty of room for growth, says Chukumba.
Besides, while smaller stores are popular, it's not really clear that the big box is dead, maintains George Whalin, a retail sector expert at Retail Management Consultants. He cites the recent success of Costco (COST, news), Macy's (M, news)and Nordstrom (JWN, news). "The superstore is dead -- that's just nonsense," says Whalin.
Amazon, Apple and Netflix steal business
There's no question that a lot of Best Buy's business is shifting to online retailers. Internet delivery of music and video is hurting Best Buy CD and DVD sales, which used to drive a lot of traffic into its huge stores, points out Stephan Hoch, a marketing professor at the University of Pennsylvania's Wharton School. Entertainment-related revenue plummeted 13% last year at Best Buy.
Plus, in TVs, laptops, tablets and cameras, online retailers like Amazon can beat Best Buy on price, since they have lower overhead and typically do not collect state sales tax. A lot of consumers check out products in Best Buy stores, then buy them online at a lower price.
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Buy online because it saves sales tax, but the same people gripe because their state/local governments don't have enough revenue and are cutting services like teachers, firefighters, police officers! Buy online -- yeah that's the ticket -- another company down the drain that actually employs people that possibly live next to you (or even you if you are in a related industry). For those of you with customer service complaints -- If you return a product before the manufacturers warranty is up, all manufacturers require the product to be fixed and/or returned to them. If you buy an extended warranty, it is an additional period added to manufacturers warranty and then the product is replaced/fixed in-house. I have never had a BB salesperson or checkout clerk force me to purchase extended warranty-- they merely ask -- same as Wal-Mart asks, (Circuit City was already included in their pricing), same as Target. I work in the accounting department of a business -- I must convince the airheads who want to order online that even though they are not charged sales tax as a business we are required to pay use tax to the state on all purchases brought into the state -- thank goodness I accrue and pay the use tax if they do purchase without paying sales tax because we recently had an audit and we could have been made to pay the tax plus penalties and interest.
I used to think BB was a great place, but the last time I bought a computer there (thinking it was a great place) I had trouble from day one. They did not give me the software for my tower even though I requested it, so every time I had problems with it, I had to take it to the Geek squad. The first time was a 3 month sleep over. When I got it back, they had added an "adapter" that I had to plug in to in order for it to work. That lasted 6 months--then another sleepover for 2 months. Out of the first two years that I owned that computer (thank goodness I bought the warranty plan) it was in my house and in use for 16 months--they would not replace it because I did not take it in over 4 times--some kind of 'lemon' clause. The third time I got it back, there was a sticker on it from the home company for $412, but they fixed it with a new video card a gave it back to me.
Instead of Best Buy, it should read Buyer Beware!
But as I said before Best Buy needs to seriously work on Customer service at the store level and company wide. I had an issue with a local store I tried to get a resolution and got no response so I wanted to take it up the chain...no luck all issues get rerouted back to the local store and no one from upstairs hears about it.
The product availability should be a major concern for Best Buy. With places like Amazon as this article states is an easy enough place for people to buy their items. You go into a best buy because you want the item NOW. Case in point, I went to Best Buy to purchase a iPad 2, I waited about a month after they came out to go into the store. None on the shelves. I went back to best buy over the next 4 weeks, finally I was told by a person there that, "Yeah there is a waiting list of almost 100 people so good luck getting one, as soon as they come in they are gone." I found that quite odd but was able to confirm that with another employee at a later date. Just yesterday I was getting my tires worked on and decided to go for a walk. I walked into a local and asked if they had an iPad 2 and sure enough I was able to get one right away.
I was under the impression that Apple was hoarding the supply I guess a big chain like Best Buy didn't think it was necessary to order enough iPads for their customers.
Good, I'm happy to see best buy go. Their business plan has totally changed, whenever I go into any of their stores and ask them "Do you have *blank*?", They ALWAYS say yes, but you have to order it online: which gets me thinking "What's the point of stores than?" I would rather go in to a store talk to someone about a product, especially if it's over $100 and get their opinion. I used to work at circuit city, at least their we had products in store; not online. It will be good to see Best Buy go at least they can stop saying that THEY caused circuit city to go bankrupt.
Walmart is the place to go., It's more of everything , but even then I don't go there much.
Best Buy reminds me of Circuit City..
Circuit City never Ever gave you a deal..
Someone commented that as soon as you walk in the door your swamped by salesmen ..
OHH I can't stand that.....Thats true.... Circuit City I would walk in and they would fallow you around ..
I'm Like >. "I'm coming in to look at your stuff, Don't fallow me around Ok.. Go about your business .. Go stock a shelf or something ..."
It made me real uncomfortable to go in there.. Now their out of business so I guess their idea didn't work...
As far as Best Buy , I have no desire to go in there , No matter what they do to it.. I have everything , I don't really need anything . I can pick and choose where I go.
The poor economy has forced our Mall to close almost.. There's a couple stores still in there , but you go in this big huge mall and you can count 25 to 30 spaces empty >> so it's not just Best Buy
I think places like Food Lion and Harris Teeter is going to bust .. You go in one day and prices are $2.50 on one item then it jumps to almost $5.00 . That's OK - I can get things cheaper somewhere else or change my habbits.
I can go in and get a box of BC powder and a gallon of milk and it's $10 dollars.!
Only 2 things ...
People buy their groceries with credit cards .. That's not good....
Best Buy is a high pressure boiler room of store credit cards and extended warranties. I can see where they may do well in blue collar areas but they must be hurting with the more affluent consumers. They do have some good sale prices from time to time on certain items but avoid their ripoff added services such as Geek Squad, store credit, and extended warranties as well as wildly overpriced cables.
Copper is an element. You cannot improve an element. There is no way that Monster Cable uses better copper to make a cable be worth sixty or eighty dollars. You can get a six foot HDMI cable from newegg.com for about five bucks and ninety-nine cents for shipping. Or a thousand other places that are not Best Buy.
They do not pay for all of those ads during major TV sports shows by selling $ 349 TV's and laptops. They make their margin on all of the overpriced extras. Avoid those and you can still get some reasonably good deals if you watch the sales.
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