As Google Plans Stores, Best Buy’s Days are Numbered

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Apple-centric blog 9to5Mac reports that Google (NASDAQ: GOOG) will open retail stores to compete with Apple. This comes just a few months after Microsoft began establishing its own retail stores in a similar vein. With the growing trend of tech companies taking retail operations into their own hands, Best Buy’s (NYSE: BBY) days as a consumer electronics warehouse are surely numbered.

Isn’t this something we already know?
Over the last year, shares of Best Buy have been decimated. Poor sales combined with a management shakeup have sent shares trading from the mid-$20 range last spring to Friday’s closing price of $16.87.

But even with this year-over-year drop of some 30%, the electronics retailer is likely overvalued. For a business in secular decline, just 12% of the company’s outstanding shares have been sold short.

Why are the bears staying away? Fears of a possible going-private transaction may have kept many short sellers from targeting Best Buy as aggressively as they otherwise might have. For the last several months, the company’s founder Richard Schulze has indicated that he would like to take Best Buy private.

Schulze stepped down from his role as Chairman in May, and still owns about 20% of the company. But his quest to purchase the rest of the retailer is getting stale.

Originally, a bid was expected to come from Schulze in August, but that deadline was subsequently pushed back to February. Then, last week, The Wall Street Journal reported that Schulze may be getting cold feet, and rather than an outright takeover, he may attempt to purchase a second minority stake with a group of investors. Perhaps, in time, that plan will also fall through.

There’s nothing for Best Buy to sell
Hedge fund manager David Einhorn took a stake in Best Buy in May of 2011, writing in a letter to investors that there remained value in being able to “walk out of the store with your purchase.” But, perhaps admitting defeat, Einhorn shed his Best Buy stake entirely by the third quarter of 2012.

It’s true that there’s value in being able to walk out of the store with your device. Which is why Apple’s retail operations have done so well. Yet, unfortunately for Best Buy, they’ve done too well.

Microsoft has seen Apple’s success and decided to follow suit. Now Google will apparently do the same. I argued previously that Amazon should too, and perhaps it will.

With Apple’s devices sold at Apple stores, Windows devices sold at Microsoft’s stores, and now Android and Chrome devices sold at Google stores, what does that leave for Best Buy? Sure, Best Buy has more stores in more communities, but at this point that seems to be a hindrance, not a benefit.

Last year, Best Buy announced plans to close 50 stores and focus on opening new, smaller “mobile” locations. It is undeniable that Best Buy’s stores are absurdly large. Much of that space was once necessary: There was a time when consumers actually purchased physical CDs and DVDs en masse. But that is market is rapidly fading. Soon, other media will shift solely to online distribution, such as video games.

The Internet isn’t the enemy
When Einhorn first took his Best Buy stake, he wrote that the bears believe that “the Internet puts BBY on a path to Blockbuster-video obsolescence.” But Best Buy’s problems don’t stem from Internet competition.

Educated electronic consumers know what they want and can easily order it for themselves online. But there are many, many consumers who are still dumbfounded by the intricacies of modern electronic devices. For them, they need direct one-on-one help.

Best Buy’s solution to this issue has been the “Geek Squad,” but Best Buy’s Geek Squad has never been considered to be in the same caliber as Apple’s Genius Bar. And now, with Microsoft and Google offering their own stores with Windows and Android Genius equivalents, the Geek Squad faces even more competition.

RadioShack is better positioned
With its smaller stores, RadioShack (NYSE: RSH) seems to be better positioned to profitably serve those consumers who can’t make it to a dedicated Apple/Microsoft/Google store.

If Best Buy is doomed to go the way of its former rival CircuitCity, RadioShack could see a resurgence. It too has struggled in recent years, in fact RadioShack has been an even worse performer than Best Buy, but if Best Buy is out of the way, the company could stand to benefit.

To be completely fair, the market might not even be big enough for RadioShack. Small electronics departments within stores like Target and Walmart might suffice, but if there’s still a need for dedicated general electronics store, RadioShack’s smaller overhead could give it an advantage.

With the Internet search giant Google looking to sell devices right to consumers (along with Apple and Microsoft), the need to have dedicated electronic mega stores like Best Buy seems more and more doubtful. If Schulze cannot mount a takeover, the future looks increasingly bleak for shareholders.

joekurtz has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. The Motley Fool is short RadioShack. 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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