Best Buy Loves Showrooming

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

Best Buy (NYSE: BBY) is  in danger of going the way of Borders and Circuit City, two big box retailers that went broke due to competition from online retailers, mainly Amazon (NASDAQ: AMZN). Investors' pessimism has been reflected in the performance of the company's stock in the last few years. The share price has just hit a new 52 week low, and overall the share price has sunk 65% from its high 5 years ago.

A few days ago, Best Buy's CEO Hubert Joly, who has been on the job for around 10 weeks, sat down on an interview with Adam Johnson from Bloomberg to talk about how he plans to turn around the struggling electronics retailer.

Here are the highlights:

  • Best Buy's troubles, according to CEO Hubert Joly, were caused by a lack of focus on operations and innovation
  • Joly sees that Best Buy is a company that posses tremendous assets that it can leverage to achieve success. Over 70% of Americans live within 10 minutes of a Best Buy store. over 40% of people who walk into a Best Buy store make a purchase and 15% happen to purchase another item while they are picking up an ordered item in a store. Best Buy has over 40 million customers in its loyalty program.  The company has a good value proposition with its Blue Shirts and its 20,000 strong Geek Squad that it can leverage into reinvigorating the customer experience.
  • Best Buy is the 11th largest e-commerce retailer in the US across all categories and 70% of people who come to Best Buy stores begin their journey online on the company's website. Best Buy's website receives 1 billion visits a year compared with 600 million visits for its stores. However, its market share online is 7% compared, to 18% for physical stores. Best Buy's current online conversion rate also happens to be 1.3% and the company is aiming to increase that to 3-4% in the nest few years.
  • Best Buy doesn't want to be confined to being just a brick and and mortar retailer, rather it wants to be a multi-channel retailer that sells to customers the way they want to buy.
  • 15% of people who visit Best Buy stores, go there with the intention of using the store to buy something online, a practice called showrooming. Joly mentioned that he loved the practice of showrooming and he will make the most out of said practice to sell to customers the way they want to buy such as by having customers purchase online in the store and having it delivered to their houses. "Once they are in our store they are ours to lose," he said.
  • Best Buy is ready to match the price of Amazon to any customer and will not lose its customers to Amazon due to price. It will also use its physical presence to offer things that can't be found online, such as a knowledgeable and helpful sales staff.
  • Best Buy aims to raise its operating income margin from the current rate of 4% to 5-6% in the coming few years.
  • Joly said he was not concerned with the ownership structure of the company, public or private; instead he said he was focused on moving the company forward 

My Take

The problem with Best Buy is not that it's a big box retailer; the problem is that it is a big box retailer that specializes in consumer electronics.  Diversified big box retailers often fare better against online competition. For example, Wal-mart's (NYSE: WMT) grocery business accounts for around 50% of its revenues. Groceries and fast moving consumer goods in general are not something that a lot of people will shop for online, not to mention that certain product lines may get peoples' feet in the door allowing  them to buy other things along the way. Costco (NASDAQ: COST), another big box retailer, sells items in bulk for a very low cost, but makes money through its membership fees.  Companies like Wal-mart and Costco have more of a moat protecting them from online discount retailers like Amazon.  

Unfortunately for Best Buy, consumer electronics (along with books) are very convenient for online purchase. People buy them infrequently, they are not in a hurry to get them, and people usually look for product reviews online if they are unfamiliar with the gadget.

Best Buy is going to have a hard time competing with Amazon on price in the long term. Amazon makes razor thin margins on the products it sells and it posseses a lower cost structure to boot. Price wars with Amazon will either lead to meager profits or operating loses. So price matching might not be a long term solution, even though it might help get customers in the stores in the short run. 

The best thing for Best Buy to do is to focus on increasing its online conversion and market share, lower its cost structure by closing the worst performing stores, and leverage its brick and click status by building a great customer shopping experience. 

Concerning its stores Best Buy should look to Apple (NASDAQ: AAPL) for guidance. Apple happens to be the most successful retailer in the world, with more than $6,050 in sales per sq. foot. Apple's retail success can be partly attributed to the great customer experience it has built into its stores rather than price.

Bottom Line

I would avoid making an investment in Best Buy at this point before the company can prove it self on its financial statements and earnings releases as the current risk of being another failed turn around story such as Blockbuster is too great. The only reason I would be willing to buy at this point are the rumors and the probability of a private take over by Richard Schulze, the company founder and largest shareholder. The last offer price was at $26, representing a premium of $12.25, or 89%, over the current market price, but that's more of a speculative play.

Pirlo0o has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple,, Best Buy, and Costco Wholesale. Motley Fool newsletter services recommend Apple,, Best Buy, and Costco Wholesale. 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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