Showroom Browsing at Best Buy For The Holidays

Ramesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my other post, Goliath Versus Goliath, I told you how like millions of other Americans, my family “showroom browsed” at Best Buy (NYSE: BBY) before we bought our Samsung Galaxy Note tablet from another vendor on the Internet.  Any consumer wants to touch and feel an item before purchasing and any shopkeeper such as Best Buy would want the deal to be consummated on premises. Sadly, with the advent of smartphones, tablets and netbooks with wireless connectivity, shoppers browse through items at the store and buy elsewhere such as at Amazon’s (NASDAQ: AMZN) website.  Even if one did not have a smartphone, one could do what we did – check out the product at the store and then come back home and order on the Internet.  Either way, the store loses and the Investor as well.  Best Buy is one of the last of the “Big Box” electronics retailers that is at its last throes of survival. Or is it?

The Private Equity Buyout

It is no secret now that Best Buy’s founder Richard Schulze is attempting a leveraged buyout of this company using private equity money.  On December 14, Best Buy’s board gave Mr. Schulze and his Investors additional time to evaluate and assess the deal, taking into account how Best Buy performs for the holidays.  Schulze owns 20% of the company, so he does have to motivate other Investors to get on board with this decidedly head scratching move.  This attempt to take Best Buy private has been brewing for quite some time, but the latest move by the board to give Mr. Schulze time to February 28 2013 to present a fully financed bid has some risks.  The board has a month after the bid to accept or reject it, but a lot depends on how the holiday season goes for the company.  Needless to say, poor performance will either cause the bid to get lowered or maybe even evaporate.  A great holiday season on the other hand (extremely doubtful at this point) could have some interesting developments.

From a retail investor point of view, if one has not made an exit from the stock by now, this is a good time to do so.  There is no point in banking on a meaningful pop in the stock even if things go the way the board and Mr. Schulze are hoping.  Think about it – is Best Buy really a long term holding with so many storm clouds surrounding it?  The most plausible answer is – it is doubtful.

Glorified Showroom For Internet Shoppers

It is however, no longer doubtful that Best Buy is perhaps little more than a glorified showroom. Anyone who wants to buy on the Internet is perhaps well served by going to the nearest Best Buy and getting a hands on experience before deciding to click the “Add to cart” button on Amazon’s webpage.  Amazon on the other hand has become an Über shopping portal of the Internet.  This is a site where even other well established online merchants purvey their wares, hoping to take advantage of Amazon’s massive exposure.  They do so sometimes to their own detriment.  One prime example is that of Borders, a now defunct bookseller who thought that they could go online on the cheap by hiring Amazon to provide them with an online presence, Talk about the wolf guarding the henhouse!    The only thing that Amazon does not have is a showroom and unfortunately for Best Buy, they are the unofficial showroom for Amazon and other Internet retailers!

Other Brick and Mortar stores such as Walmart (NYSE: WMT) and Target (NYSE: TGT) are catching up as well.  One can in fact buy most electronics items that Best Buy sells at either of these stores at a greater discount.  You name it – Products from Apple such as iPads, iPhones, iPods, Televisions, DVD Players, Telephones, Recorded Media and Music, Microwaves, and a host of other electronic items from manufacturers such as Samsung, LG and GE can all be found at Walmart and Target.  In fact, the heavier electronics items such as dishwashers, refrigerators and washers and dryers can be found at better discounts at Home Depot, Sears and Lowe’s. Best Buy literally is flanked on all sides by competitors who are amassed against it – on the ground and on the Internet. 

Extended Warranty Sales Pitch is a Liability

I personally dislike shopping at Best Buy for one key reason and that is the extended warranty sales pitch!  I see online reviews where they say that salespeople at Best Buy are disinterested and unresponsive and I am not surprised.  They are perhaps demotivated due to constant pushback from the customer about extended warranties.  Oftentimes, I feel overwhelmed by their desire to sell me extended warranties that are supposed to make my life easier, but rather results in unnecessary added expenditure.  They skip out on the negatives of the warranty such as the things that are not covered and aggressively market the product while I am thinking of ways to decline it (nicely) and get out of the marketing pitch.  It is incredibly stressful so much so that I rehearse my response over and over in my head while heading to Best Buy!  Who needs extended warranties when all major credit cards – MasterCard, Visa, Discover and American Express extend the Manufacturer’s warranty by at least one additional year?

Salespeople at Best Buy receive commissions on the sales of extended warranties and unfortunately, this has the opposite effect of turning off customers.  Many shoppers for this reason alone shop at warehouse clubs such as Costco Wholesale where one does not encounter this sales pitch, although to be fair, extended warranties are heavily marketed elsewhere.  Try buying any electronics item over $10 at OfficeMax or Staples and try to get away from a marketing pitch for an extended warranty!  Home Depot and Lowe’s are not much different while Walmart and Target offer muted pitches. 

The Future of Best Buy

The future of Best Buy is weak despite the apparently heroic actions of Mr. Schulze and I rate BBY as a SELL.  For all one knows, Mr. Schulze might still be able to pull it off (taking Best Buy Private), but I expect it to benefit Mr. Schulze and his Investor group, and not the Individual Investor. 

malayappan has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple,, and Best Buy. Motley Fool newsletter services recommend Apple and Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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