Best Buy Becomes Big Sell

Discussion
Dec 15, 2010
Tom Ryan

By Tom Ryan

Shares of Best Buy fell nearly 15 percent on Tuesday after the
retailer reported an unexpected decline in third-quarter profit and cut its
full year earnings outlook due to sluggish sales in televisions, notebook computers
and videogames.

Margins widened 90 basis points year-over-year to 25 percent,
driven primarily by the growth of Best Buy Mobile. But domestic comparable
store sales in the quarter fell 5 percent due to weakness in key categories.

"We end up at the challenge that consistently haunts this company: given
secular issues, it is extremely difficult for [Best Buy] to drive both sales
and margins simultaneously," J.P. Morgan analyst Christopher Horvers
told Marketwatch.

Some on Wall Street were more dismayed to hear Best
Buy estimate that its U.S. market share declined 1.1 percentage points, losing
traction in TVs and gaming software. Best Buy expects its share for the year
to decline.

Among the reasons given for the shortfall:

Timing: A double-digit decline
in unit sales of TVs was attributed in part on its decision to promote entry-level
32-inch TVs in December this year instead of November last year. Window 7’s
launch also boosted last year’s laptop sales.

Consumer caution: Management indicated that budget-conscious consumers
were slow to buy new 3D and internet-enabled TVs. Notebooks were also hurt
as shoppers switched to tablet devices instead. Said Jim Muehlbauer, Best Buy’s
chief financial officer, on a conference call, "There’s interest
there from consumers on the latest and greatest, but really they are making
trade-offs."

Category weakness: Best Buy pointed to industry-wide weakness in electronics
sales and that was somewhat confirmed by the Commerce Department reporting
that electronics and appliance sales declined in November while apparel and
other areas showed gains.

Competition: "There was an awful lot of activity in opening-price
point" of third-tier branded TVs by large discounters, chief executive
Brian Dunn told analysts. Sales of lower-priced laptops from competitors was
also blamed. Some analysts said Best Buy wasn’t promotional over Black Friday
weekend. Said David Strasser of Janney Montgomery Scott in a note to investors, "We
believe the mass merchants," particularly Target Corp. "were the
incremental share gainers this year."

In response, Best Buy stepped up
discounts for 32-inch TVs in December and increased its offerings of laptops
under $400. The chain also continues to shift away from movie and music discs
and toward mobile phones while more greatly emphasizing its services. Mr. Dunn
finally told the Wall Street
Journal
that
Best Buy would benefit from the upcoming release of tablet competitors to the
iPad. "The
more choice factors into the customer’s decision, the more interesting Best
Buy becomes to consumers as a place to compare and buy," Mr.  Dunn
said.

Discussion Questions: How may Best Buy have to readjust its approach to
the consumer electronics category? Does recent softness appear to come more
from internal or external causes?

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21 Comments on "Best Buy Becomes Big Sell"


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Dick Seesel
Guest
10 years 4 months ago

The question facing Best Buy — and I’m not sure that I have the answer — is whether its key franchises in HDTVs and PCs are temporarily stalled or matured to the point of saturation. Not every home has an HDTV yet but the growth surge at high price points is at least a couple of years post-peak. Now the challenge becomes how to grow market share in this category without sacrificing margin — and frankly a key competitor like Walmart is better prepared to do both.

The hottest growth in electronics right now seems to be in small portable devices…whether it’s smartphones, e-readers or tablets like the iPad. Best Buy has not staked out the “headquarters” position in these businesses, at least not yet. I’d like to see the Best Buy Mobile rollout speed up, and I’d also like to see the concept expand to include more of the handheld electronics that are capturing share right now.

Paula Rosenblum
Guest
10 years 4 months ago
In my opinion, the emperor of customer service, Best Buy, hasn’t been wearing any clothes for a long time now, and the customer is voting with her wallet. It is incredibly hard to find someone to help you in the store. The cross-channel experience is confusing. – The web site will tout “store only” specials, and when you get to the store no one can find the items. – Entire brands are sold on the web site and not in the stores, with no way for you to tell (until you get to the store) that they don’t really stock them. For example, look on the web site at DLink routers. Then go to a store. None. Also Best Buy no longer price matches to the web. And yet the company gives you few reasons to accept its higher price. I’ve said this very quietly over the past couple of years (even before Circuit City went down). While industry observers have disbelieved, consumers just nod their heads. Best Buy is not living up to its… Read more »
Susan Rider
Guest
Susan Rider
10 years 4 months ago

Best Buy seems to have lost its tenacity and focus. Could it be with the demise of Circuit City they got overly confident? They certaily weren’t aggressive this year for Black Friday as they were in the past, either from a marketing or competitive standpoint. This is a wake-up call for Best Buy; we’ll see if they will heed the warning.

Lee Peterson
Guest
10 years 4 months ago
Best Buy is a very smart company and not afraid to try anything, so I don’t really worry about them in the long run. The biggest challenge they have is being able to step up the perception that Best Buy is THE CE expert; THE place to go to get all your questions answered, to compare and understand the myriad of offerings and oh by the way, get whatever you buy installed. In other words, they MUST become the “high touch” answer to “high tech,” or otherwise, it’s into the ‘price’ bin you go with Walmart — the worst place to be. Another way to present their challenge is like this: Best Buy needs to think more about competing with Apple retail than with Walmart…but again, I think they can do it. It may be painful, but they can do it. The ‘Blueshirts’ are an awesome force that once mobilized (and maybe re-tooled a little) can face that mighty challenge. Interesting part of the article, I thought, was how the iPad was cannibalizing other products.… Read more »
Ben Ball
Guest
10 years 4 months ago

A lot of times history doesn’t count for much in understanding the present, but it is perhaps worth remembering that “Best Buy” originated as a tent sale location of post-tornado distressed CE merchandise in a mall parking lot in MPLS. For many years its positioning was price–not CE expertise and certainly not service.

Best Buy executed the pirouette to the HQ for CE wonks quite nicely–a credit to the management others have lauded in this discussion–but they have been less deft in adapting to two current realities: 1) post-recession consumers are still prioritizing value, and 2) consumers are much more comfortable purchasing CE unassisted or with web-based advice now. Both of these things render Best Buy’s core CE positioning less compelling. Top that off with an egregious returns policy and what appears to be a cutback in store staffing and you get consumers voting with their feet.

David Livingston
Guest
10 years 4 months ago

Well I’m not about to advise Best Buy on what to do. A share price decline or earnings decline doesn’t always mean something is wrong with their sales and marketing approach. I’m not going to judge a company by one quarter of results. Before passing judgment on Best Buy, let’s give them more time.

Carol Spieckerman
Guest
10 years 4 months ago

Best Buy is caught in a damned if they do/damned if they don’t situation. When you happen to be there on a good day and service is stellar (it happens), there’s not a compelling reason to pay Best Buy’s inflexible prices or to go through its still-convoluted and cumbersome set up and delivery processes.

Best Buy’s sales methodology is heavy on add-ons but light on closing the deal and in this competitive environment, they simply can’t afford for a shopper to open up that smart phone or, heaven forbid, leave the store to “think about it.” When service is below par, well, see ya’ later…or never again.

A while back, Brian Dunn began hinting that Best Buy stores would transform into experiential and connected showcases. This has yet to happen and in the meantime, Walmart, Amazon and others have upped the multi-channel ante and price transparency has become the baseline.

Bottom line: Best Buy no longer owns the customers in its stores.

Fabien Tiburce
Guest
Fabien Tiburce
10 years 4 months ago

In fairness to them, being in a business that relies on discretionary spending at a time where there is very little of that would be tough. Yes, not pushing the right entry level products and price points was probably a mistake but at the end of the day, margins for these entry level products are non existent. When consumer spending resumes, I would expect Best Buy’s results to improve accordingly.

Doug Fleener
Guest
10 years 4 months ago

I think the short answer is Best Buy got their clocks cleaned in the third quarter by Amazon, Walmart, and everyone else using consumer electronics as a loss leader including CircuitCity.com.

I agree with Carol that they need to either improve their on-floor sales performance or differentiate with their experience, or they’re going to become a showroom for their competitors.

Gene Detroyer
Guest
10 years 4 months ago
There are too many factors impacting consumer sales to suggest that all of a sudden Best Buy got dumb. If we are seeing the same discussion a year from now, then we can assume “dumb.” But with the economic situation, the dramatic acceleration of changing consumer technology and the high growth of online retail, it is hard to pinpoint a single issue that causes a blip. The suggestions from the discussion, above, confirms that. The biggest problem they face is that the products they sell have a very short life cycle until price competition sets in. Therefore, they must structure their business to strip overhead where competitive buying will be done (read “online”) and increase experience and service where the offering can be leveraged (read “in-store”). If the consumer wants installations, training and warranties, they go in-store. If the shopper wants price, and are in-store, the salesperson walks them over to a computer and places their order online. Best Buy must think broadly in a very fast changing market.
Mark Burr
Guest
10 years 4 months ago
They don’t have a Kindle, iPad, Nook, etc. Just about everyone in the marketplace had a flat screen TV at a great price. Laptops other than Apple are available in so many channels, as well as online retailers. In the same way that supermarkets have faced ‘category killers’ throughout recent decades, Best Buy is facing the same in their marketplace. I’m not so sure that it has anything to do with an entry level offering for the initiation of the holiday–it might. What is most likely is that they don’t have a ‘unique’ offering that makes them a first choice or a first destination any longer. Differentiation is going to be necessary for them. How they do that, I don’t quite know. However, without it, they will be challenged. Is there something that they sell that I can’t buy almost anywhere else? Even better service, nerds, return policies, etc; doesn’t matter when they become lost in a wide array of choices for a ‘cheap’ TV. As retailers like Walmart, Target and Costco (the list is… Read more »
Roger Saunders
Guest
10 years 4 months ago

When you’re a decisive #1, every competitor is out to take you down, be it big box retailers, specialty electronics firms, or the online shopping world.

Best Buy holds a significant presence in the minds of consumers in terms of service, selection, quality, and value. Much of their product line is in the consumer discretionary space. That area is experiencing heavy comparative shopping. And, all the electronics toys haven’t been purchased yet (or the gift cards that permit recipients to make their own decision).

The top consumer choices for gifts this holiday season, based on the the November, 2010 Consumer Intentions & Actions (CIA) Survey are Clothing – 58.5%, Gift Cards – 55.1%, Books/CDs/DVDs – 52.8%, Toys – 41.9%, Food/Candy – 28.8%, and Consumer Electronics 28.4%. Best Buy might have misjudged the competition in the past quarter, but don’t count them out for the final couple of weeks prior to Christmas, or in the post-Christmas rush.

“It ain’t over, til it’s over.” This is a retailer that knows how to bounce back.

John Hyman
Guest
10 years 4 months ago

People move to competitors when their expectations are not met. When did anyone recently have a great experience in a Best Buy? They are a commodity house with poorly educated staff members and convoluted pricing schemes (web pricing lower than in-store pricing, for example).

Charles P. Walsh
Guest
Charles P. Walsh
10 years 4 months ago
Three issues have impacted Best Buy, the last of which also impacted other retailers, but because of Best Buy’s category specific retail focus has a larger impact on their sales. First, Best Buy may have grossly underestimated the impact of the economy on consumer spending both in timing and in product. I feel strongly that consumer spending took place early and that the majority of their holiday spending budget was focused on Black Friday deals this year. BB missed out on these sales by not promoting their OPP and value lines of TVs. These sales were captured by Target, Walmart and others. Second, Best Buy overestimated consumers’ demand for integrated products versus current technologies. Best Buy is right in leading the way to developing these product lines but in this case gets dinged for being a bit too early in the demand curve. This, combined with the timing of their marketing as outlined in my first point, took a toll on their market share. Third, Best Buy underestimated the impact to their laptop business due… Read more »
Robert Craycraft
Guest
Robert Craycraft
10 years 4 months ago

In our market, the new HH Gregg stores seem to be speaking to people who are willing to pay a little more for what they view as a markedly higher level of service in the store, especially middle-aged plus customers.

Arthur Rosenberg
Guest
Arthur Rosenberg
10 years 4 months ago
Best Buy has long been a bureaucratic dinosaur. The annual embrace of customer centricity really means, ‘How can we get the most dollars and highest margin from each customer?’ Has anybody been to a Best Buy lately? Even relatively new stores are dull and poorly lit. Displays are sloppy, even schlocky. These make Best Buy a last resort. I have submitted pieces to this space through the years on individual examples of BB’s self imposed limitations…costly return policies, giant holes in in-store stock making a visit a waste of time, displayed phones aren’t functional so customers can’t determine true value, only one associate in the camera department (the other was at lunch) trying to handle a pre-Christmas throng and bleeding customers, forcing customers to meet with an associate and two managers (for twenty minutes) to determine the price a bargain CD (after completing the test I left sans purchase out of principle and vowed not to return for six months which proved to be easy), stoic price matching policies which limit the match to stores… Read more »
Ted Hurlbut
Guest
Ted Hurlbut
10 years 4 months ago

It’s been quite a while since I’ve been in BB and not been underwhelmed. In my judgment, they are far from what they used to be. There’s little compelling about the assortments, execution or customer service. There are few categories that I would think first of BB as the retail destination.

In all fairness, they really were able to ride the curve on HDTV, and that now feels like a maturing category. But I think BB’s issues go well beyond that.

Michael Boze
Guest
Michael Boze
10 years 4 months ago
Best Buys slippage is not surprising. The article mentioned a number of merchandising and marketing issues. I think the reviewer missed the boat. Every business is a market share business and they are not getting their share of business. What needs to be examined is a perceived reservoir of bad will towards Best Buy and its customer service practices. I have seen viral emails messages promoting the boycotting of Best Buy this holiday season because of their return policy and restocking fees. That can not be good for business. Other areas worthy of mention is their Geek Squad Service. Weak on technical expertise and pricey, to boot. The experience has turned into an in-home sales visit by an inexperienced tech selling upgrades to systems they do no quite understand. A negative customer experience will warn customers off returning to Best Buy in the future. I think retailers can trip themselves up when customer service suffers and tarnishes their reputation in the marketplace. The true test of this thinking will be what happens to Best Buy… Read more »
Kai Clarke
Guest
10 years 4 months ago

Really? BB has been a dinosaur for years. Its prices are hardly competitive, and its offerings lag. Only its size gives it a competitive edge in technology offerings, and when the technology market swoons, BB crashes. BB needs to become more competitive, more aggressive and more Internet friendly. Adapt or perish are the words that BB should be living by and it is largely ignoring. Customer service needs to improve to the point that BB becomes a customer service location, when in reality it is a customer service embarrassment.

Losing market share in after a recession has already started to recover is a poor sign of BB’s future….

Ed Dennis
Guest
Ed Dennis
10 years 4 months ago

Best Buy is getting what they deserve. They charge a restocking fee. They often utilize questionable marketing practices like advertising an item at a great price, but displaying a similar item and making you ask for the advertised item which is often difficult to locate.

Best Buy has been messing with their customers for years, but really kicked it into high gear after Circuit City went under. They can blame the slide on anything they want, but I think their customer service and marketing issues finally caught up with them.

Donna Brockway
Guest
Donna Brockway
10 years 4 months ago

I’m probably piling on here, but BB’s biggest problem is their stores – –overall, poorly done and a low-end consumer experience. Until they decide what they want to be to the consumer–and there are lots of opportunities for them to reinvent themselves in this category–they will have to depend on low-price as their message, and that isn’t serving them well at this point.

This is a classic “blazing flash of the obvious”–Be something unique to your consumer! If not, someone else will.

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