Best Buy is Dancing Around the Issues
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Best Buy’s earnings conference call on Aug. 21 did little to invigorate current and prospective shareholders. The retailer reduced its earnings guidance for fiscal 2013, citing troubling economic conditions in Europe, the US, and China, and said the demand is soft for any products in the consumer electronics sector. Essentially, Best Buy is saying that the company’s poor performance is due to factors beyond its control and they’re not the only ones suffering because of it.
During the call, interim CEO George L. “Mike” Mikan said that consumers are holding back on spending because of anticipation that new technology will be released, but he failed to elaborate on how Best Buy can remedy that problem (if it truly is a problem). Milkan declared Best Buy to be in “turnaround,” and discreetly announced the suspension of share repurchases for fiscal 2013.
Listening to the conference call was discouraging; the speakers kept dancing around the real challenges that face Best Buy (NYSE: BBY). The interim CEO and the CFO kept pointing to consumer demand, untimely product releases, and macroeconomic conditions as main concerns. But they made no mention of the most obvious problems with their business, and if they don’t address those concerns, the company is doomed.
Countless analysts point to the "showroom" theory as a major cause for Best Buy's lackluster sales. The theory states that consumers come to Best Buy to try the SuperDuper Computer, only to place their orders with Amazon for a cheaper price. Let’s pretend Abby Smith was looking to purchase a brand new LifeProof Case for her iPhone®. She could buy it from Best Buy for $79.99 or she could buy it from Amazon for $49.99 (38% less than Best Buy’s price). It’s almost impossible for a brick and mortar store like Best Buy to compete solely on price when consumers know Amazon.com (NASDAQ: AMZN) can get them almost anything for the absolute lowest price. So what can Best Buy offer the customer? If not a lower price, what incentive does Abby Smith have to buy that LifeProof Case from Best Buy?
If the Apple Store was selling the same iPhone accessory for full price at 79.99, Abby Smith might be willing to spend the money. She'd be paying a premium for Apple Store’s stellar reputation of having the most knowledgeable employees who are specialists in their field. Best Buy has no such reputation. Asking for assistance in a Best Buy can be a frustrating experience. Often, a technical question about a gadget can yield information that is unhelpful or even misleading. The employees seem to be untrained. They bluff their expertise by reading the back of the box in attempt to help. This contributes to a customer’s dissatisfaction with their purchase and increases the likelihood for a returned product. But don’t think that returning an item is easy; the process is a nightmare, requiring government issued ID and personal information to be stored in their database.
In previous years, Best Buy gave one clear enticement that online retailers could never offer: instant gratification. A customer could walk into the store and walk out with their product the same day. Purchasing online required patience, and the customer would need to wait three or four days for their items to arrive. But Best Buy’s advantage of convenience has been quickly fading away. As a part of Amazon’s Prime Membership, purchases are guaranteed to arrive within two days for free (and often arrive in only one day). Amazon’s shipping times are fast, and with Amazon's recent expansion of its distribution centers, same-day delivery will likely be the norm. It hasn't happened yet, but I'm betting it will in the next few years. Best Buy's "convenience" advantage will become inconvenient by comparison.
The Bottom Line
Best Buy is failing to make its shoppers feel confident about buying from them. The prices are high, the customer support is lacking, and the process of returning items is a negative experience. Shopping at Best Buy can feel uncomfortable, with employees that are either unhelpful or pushy. Even at the point of sale, the cashier morphs into a salesperson by recommending that you add an additional warranty onto a product that already comes with a manufacturer’s warranty. Shopping at Amazon is completely different. Amazon offers a hassle-free experience, and its customer loyalty soars because of it.
Robby Greengold owns shares of Amazon. Robby Greengold owns zero shares of Best Buy. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.