Best Buy (Photo credit: Ian Muttoo)
There’s an old saying about being stuck between a rock and a hard place, and the latest company to find itself in that predicament appears to be Best Buy.
Among the things that stood out in the consumer electronics retailer’s earnings announcement Thursday were revenue that fell short of expectations and the news it will move away from the “big-box” model by closing 50 stores this year and focusing on smaller, mobile-focused locations. (See "Death Of Best Buy's Big Box Store?")
The reversal comes as many worry that Best Buy may be turning into a higher-tech version of Borders and Barnes & Noble, brick-and-mortar retailers that have seen their business hammered by Amazon.com over recent years.
The peril for Best Buy, as Forbes contributor Laura Heller points out, is that cost-cutting is a strategy for survival, but not prosperity. While smaller stores and focusing on faster-growing mobile sales may help, the retailer needs to offer merchandise that consumers want to buy in-store, instead of using Best Buy for the test drive then hunting for a better price online.
One strategy, it would seem, is to offer exclusive products or deals that aren’t available at Amazon or other online retailers. Best Buy has had some success in this avenue on the mobile side of things, which is why its pledge to cut back on “big box” stores and roll out more Best Buy Mobile locations was met could help.
RBC Capital Markets analyst Scot Ciccarelli pointed out the glaring hole in that idea in a note last week though, arguing that outside the mobile space, “there has been very little product innovation beyond Apple.”
From the March 19 note:
While some companies have tried to copy Apple’s ideas and, for example, have come up with competing Tablet products, we think it’s fair to say that Apple has completely dominated the [consumer electronics] landscape over the last few years, so customers don’t need to go to a third-party retailer such as Best Buy if they already know what they want to buy. They can go to the Internet to find the best pricing or, more than likely, they can go right to Apple, which happens to have its own retail network (and website).
So there’s the rub for Best Buy. For much of what it sells – flat-screen TVs, video games, music and movies – consumers are agnostic as to where they spend their dollars. For its most innovative offerings like the iPad, which might entice shoppers, it has no exclusivity because Apple products are sold by most of its competitors and the device-maker itself, and competing tablets have failed to spark the same level of consumer appetite.
Citi analyst Kate McShane writes in a note Thursday that the cost-cutting efforts the company announced – aimed at saving $800 million – are a step in the right direction, but not enough to stifle what just may be a secular decline of the “big box” retail model in consumer electronics that has already sent former sector leaders like Circuit City to the graveyard.
The market seems less than convinced that Best Buy’s strategy will pay off judging by Thursday’s action. With less than an hour to the close, shares were down 6.6% to $24.87.
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