Can Best Buy Hire its Way out of this Mess?
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Best Buy (NYSE: BBY) is having an easier time attracting talent to its boardroom than bringing customers to its stores.
The company -- which has seen comparable sales fall in nine of the last 10 quarters -- was able to bring another star executive onto its already impressive tech team last week. Best Buy hired Scott Durchslag, who had been president at the uber-successful online travel company, Expedia (NASDAQ: EXPE).
The talent boost follows the electronics retailer's March coup, when it grabbed Starbucks (NASDAQ: SBUX) executive Stephen Gillett. Gillett, the CIO rock star behind many of the coffee giant's most successful digital strategies, now leads Best Buy's global digital strategies group and will be Durchslag's new boss. So Best Buy has built a strong digital team, but is it enough to turn the business around?
The task ahead for these new hires is no small one. Best Buy faces a host of problems, but there are three key ones that have sent the business reeling lately.
First, consumers are cutting spending on many of BBY's high-margin products like TVs and digital cameras. Second, electronics manufacturers are stretching the time between new product launches. All of the tech world's innovation is pouring into tablets and smartphones at the expense of more profitable retail products like gaming systems. And finally, Best Buy's oppressive cost structure -- 60 million square feet of retail space -- is putting the company at a huge pricing disadvantage relative to online retailers like Amazon.
All of that has added up to falling revenue and spiking expenses, eroding Best Buy's profitability over the past few years.
Clicks and Bricks
But the all-star digital team sees a way to reverse those awful trends. They first plan to neutralize the "showrooming" effect that's seeing customers shop at Best Buy while making purchases online. The fix for that is pricing products much more competitively. In his interview with the WSJ, Durchslag said that they next plan to revamp the company's website to "fix online fundamentals, such as making sure the site has high performance and that key shopping pages are streamlined."
After that, its all about rolling out more innovation at the store level, installing the type of digital strategies -- like wifi and mobile payments -- that enhanced the Starbucks store experience. Best Buy's huge retail footprint isn't just a cost drawback, after all. It means immediate in-store pickup options for products that customers order from bestbuy.com. That could be a strong differentiator against Amazon and its shipping lag. As Durchslag put it, the company that just hired him "is uniquely positioned to deliver an innovative digital experience that provides the 'best buy' for consumers in price, convenience and services, using both clicks and bricks."
But the trouble with the plan, as I see it, is that it's more or less exactly the value proposition that Blockbuster was preaching while in the last throes of its business. And we all know how well that worked out. Like Best Buy, Blockbuster was better positioned to deliver its product to customers directly from store locations around the country. And it boasted about the advantage that physical presence gave the company over Netflix and its two-day delivery wait. The trouble was that customers never valued in-store pickup more highly than a short wait for home delivery. If anything, they preferred the home delivery option.
Best Buy is being disrupted in the same way by the online merchant business. My view is that the company's problem is more fundamental than these new hires suggest. Industry trends are moving away from the type of consumer electronics that was the company's bread-and-butter. And most importantly, customers just aren't valuing the "experience" of purchasing electronics in person. Better digital strategies will make a difference, but even the most brilliant tech team can't change that.
SigmaSwan has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Best Buy, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Amazon.com and Starbucks. 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.