Why Best Buy is a No Buy
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few short years ago, Best Buy (NYSE: BBY) was named "Company of the Year" by Forbes magazine. By 2002, it had made Fortune magazine's List of Most Admired Companies and was forging a solid path of expansion into Canada. With its 600th store opening in 2003 and two years of explosive growth with stores opening in Mexico and the UK, it seemed the ‘Geek Squad’ was in full force and set to dominate the retail tech market.
2008 was the year Best Buy put smaller rival Circuit City out of business, and that year also brought the introduction of its mobile standalone stores and kiosks popping up in malls and shopping plazas across the country. Unfortunately, it was also the year Amazon (NASDAQ: AMZN) began taking over the e-market, releasing products such as the Kindle e-reader, as well as creating an online shopping world that began to scare even big retailers like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).
Both Wal-Mart and Target have programs in place to positively impact customer service, which is a necessity with traditional brick-and-mortar businesses. However, it is just as essential with an online experience as well – a fact Best Buy never quite seemed to grasp. It is Amazon that continues to have far better customer service than Best Buy, scoring better on convenience and ease of use. Amazon's push for same day delivery also gives it the upper hand against Best Buy, which is usually at the mercy of the overseas manufacturing companies from which it purchases.
According to ComScore, e-commerce accounts for 37% of total computer, 28% of printer, and 23% of digital portable player sales. This number can only increase with the expansion of foreign markets, as the cost of stores far outweighs that of virtual marketplaces.
Apart from Amazon, Best Buy is also seriously lagging against the competition from other retailers that sell electronics. The ‘One-stop Shopping’ experience both Wal-Mart and Target are providing (groceries et al) makes it a cost effective, widely appealing method compared to the niche stores.
However, that is not the only reason why Best Buy has faced a steady decline. Under poor leadership of previous CEO Brian Dunn, the company saw little growth in terms of product lines or services, almost zero movement in performance improvement, and seemed to be content with a ‘business as usual’ stagnation.
What’s Happening Now?
The clock has already started counting down for Black Friday. Each of the aforementioned retailers have a strategy already in place and underway – save one: Best Buy. Target, in its never-ending rivalry with Wal-Mart and Amazon, seems to be banking on customers liking three things about the brand: price, exclusivity, and the in-store experience. Three things, it must be added, Best Buy has chosen to ignore.
The biggest method it plans on using is price matching. Target will be matching the prices of select online competitors like Amazon.com, Walmart.com, and BestBuy.com. To be fair, this is a strategy that Best Buy has discussed ad nauseam but has yet to completely or effectively implement. Target is also matching in-store prices with its own website, which Best Buy has staunchly refused to do. After all, it prevents the store associates from up-selling to an unnecessary and usually quite pricey alternative to what the customer actually wants.
Both Wal-Mart and Target are offering an extended return policy for those who enroll in the store credit or debit card. Members will get an extra 30 days on the existing return policy. Best Buy is already the lowest-scored retailer in terms of their return policy. Packaging precludes anyone from being able to return any item “unopened.”
A relatively new phenomenon is that of QR codes, the square bar codes that allow customers to perform a wide range of activities on their smartphones. Target has used this app to designate 20 top toys, attach QR codes to these item, and allow customers to purchase them directly from their mobile devices, throwing in free shipping. Best Buy seems to be using QR codes simply as a way to connect customers with their advertisements. While some will allow pre-ordering of merchandise, because of precarious timelines with shipping, product roll outs, etc, there is little appealing about using the app when it would be safer for date-focused holiday shoppers to have it in their hands upon leaving the store.
These are just a few examples of how some retailers move to be competitive. Magnus Ohlsson, the founder of retail management firm MORM, has discussed in depth the future of retail in general. In a presentation, he states that adaptability is key. Ohlsson also lays out what retailers can do to survive, such as optimize stores and inventory control. According to him, being the best in a select range of products might not be as wise as being good in everything.
Summary
As Best Buy continues to struggle with competitive threats from online retailers, it also faces the growth of brand name recognition from Apple’s increasingly popular line of ‘i’ products. Other problems include an unappealing buyback protection program, and cost cutting. People see the continual closing down of stores and, though it could mean a sizable $800 million in three years, the public perception is extremely negative.
Since the depressed second quarter results, the stock price has declined by 14%. Now, Best Buy founder Richard Schulze has a choice. He has 60 days to put forward a buyout offer. Previously, Schulze had proposed a $10 billion buyout plan, which equates to about $24 per share of stake he does not own.
The proposal seems shaky at best. Should Schulze achieve the improbable tasks of raising the required financing and having the board accept the offer, the company's inability to compete with other retailers make Best Buy a ‘no-buy’ in my book.
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