Best Buy's big announcement last week that it plans to close 50 stores this year while opening 100 smaller locations sent shivers through the retail industry. The new strategy seeks $800 million in cost reductions by fiscal 2015, including approximately $250 million in fiscal 2013.
Does Best Buy's change of fortune signal the end of an era? Bloomberg Businessweek thinks so. It extrapolated from the Best Buy news in a story headlined "Best Buy Closings Signal End of Big-Box Retail."
After 50 years of putting mom and pops out of business, big-box retail is having a mid-life crisis. A slow economy has hurt same-store sales, narrowing margins at big stores. Meanwhile, consumers, armed with price-comparison technology, are visiting more stores seeking deals or exclusive merchandise rather than making one-stop, fill-the-cart excursions.
Industry watchers who monitor the country's largest electronics retailer weren't surprised. For years, they've warned about pressure from online-only retailers like Amazon.com, not to mention general-purpose discounters like Costco, Target, and Wal-Mart.
Over the last full fiscal year, Best Buy lost $1.2 billion, or $3.36 a share. That compares with a profit of $1.3 billion, or $3.08 a share, a year earlier.
But before making Best Buy the poster child for the End of Retail as We Know It, it's worth examining the marketing missteps the retailer has made, both online and off.
Online
Best Buy has seen the online shift in consumer buying patterns in its own business. On a call with analysts last week, it reported that in the most recent quarter, online sales increased about 20 percent, and same-store sales declined 2.2 percent. The company said it plans to increase online sales domestically by 15 percent this year.
Speaking of online operations, it's likely Best Buy lost customers last year after it cancelled orders days before Christmas because it received a bigger-than-expected response to seasonal promotions.
Finally, critics complain that Best Buy has not integrated its online operations tightly with its brick-and-mortar locations. Chief executive Brian Dunn, who outlined the restructuring plan last week, emphasized that the remodeled stores would do a better job of letting shoppers pick up purchases they've made online.
Offline
Whatever happens online, the key to the company's survival is whether it can revitalize its bread-and-butter brick-and-mortar business. Best Buy has about 1,100 locations in the US.
Along with the closings and staff reductions, last week's plan calls for remodeling the stores with a “connected store format” that focuses on mobile, video, and broadband connections. How this will make the stores more functional, entertaining, or educational for consumers was not spelled out.
Might there be hope in emphasizing the growing consumer electronic categories? On its analyst call last week, Best Buy revealed that tablet and e-reader sales grew by triple digits, but it reported a comparable decline in notebook, television, digital camera, and gaming product sales.
With this as context, it's easy to see why the company is betting on its Best Buy Mobile stores, which number about 305 today. The company said it will open 100 more of the smaller-format stores this year and will have 600-800 by 2016. But will these boutique stores stanch the consumer habit, enabled by smartphone apps, of treating retailers as little more than showrooms for goods that can be purchased less expensively online?
Downes also took a crack at answering the question Businessweek asked about the future of retailers:
What’s left for the retailer? Maybe not much. At best, there are still a few items -- for example, high end stereo equipment and televisions -- where the retailer may still hold the upper hand. These purchases often require seeing and hearing in-person (what economists call “experience” goods) and their technical complexity (the stuff inside) leaves most consumers needing a trusted expert to help navigate choices, options, features and functions.
But if knowledgeable and trusted salespeople are to be Best Buy's salvation for its retail stores, the prognosis is not good. Even a cursory review of consumer critiques on the Web finds a wealth of negative commentary about its retail employees, including its Geek Squad technical service department (for example). Perhaps acknowledging this problem, Dunn said the company would boost its employee training investment by 40 percent.
What's your best bet about Best Buy's future? Can it reboot?
Ryck - I can't speak for the U.S., but in Canada, I have returned items to Best Buy and without a hitch or a fee.
Ryck, I'm pretty sure it's 15% here in California. It's been a long time since I checked, but I remember asking about it and being surprised.
This discourages buying merchandise, taking it home, and trying it out. I'm sure Best Buy can describe all kinds of ways it saves them money -- but it also discourages sales and makes it more likely for the customer to say the heck with it, I'll just buy from Amazon.
Radio Shack, OTOH, lets you return anytime, no questions asked, for full refund. (Friend of mine bought an iPad 2 from them a few weeks before the iPad 3 came out -- he admits to being the only person on the planet to not know about the iPad 3. Then he returned the iPad 2. He felt guilty about it. I was, like, "Dude, as long as you intended to keep the iPad 2 when you bought it, don't feel guilty. You're using their return policy exactly as they intended you to." But some people like to feel guilty about things.)
For years retail strategies were based on price, selection or service. It would be difficult, if not impossible, for a retailer to attempt a strategy based on all three. The Internet, however, changed some of the trade-offs that retailers faced. As an example, retailers couldn't stock a wide selection and maintain the lowest prices--the inventory carrying costs traditionally made this not possible. Amazon, selling via the Internet through cetnralized distribution centers, has shown that you can carry a wide selection and maintain low costs. Even customer service can be enhanced online through online chat facilities, although it doesn't match the face-to-face experience with a retailer and the product also present. Having said that, brick-and-mortar retailers are migrating to a stronger customer service strategy, but some are no where close to perfecting this, and the Best Buy anecdotes of other commenters are a clear indication of this. The other trick that these retailers will face is to intertwine their service with the product, so customers are compelled to buy from them, rather than take their experience and recommendations and purchase elsewhere.
As for the return fee, I heard the same thing, and at that time, I researched it, and learned it was an urban legend. I can't speak for the U.S., but in Canada, I have returned items to Best Buy and without a hitch or a fee.
One of Best Buy's biggest problems is a simple thing: You can't open the boxes and play with a lot of the merchandise. Also, they charge a fee for returns.
These policies eliminate one of the few significant advantages of brick-and-mortar over online retail: Ability to go hands-on with the merchandise.
I attended our local Best Buy's grand opening, and spent a good chunk of change. I moved my CD shopping from B&N to BB, and bought new discs every week for a month. I took my tech staff in to buy two small utility servers for a database network we were testing. I suspect I spent >$1K at BB in the first month.
Along around that time, the teenagers (both staff and customers) discovered the volume knobs. On everything. The boomboxes. The TVs. The stereos. The really BIG stereos.
However, they did NOT notice that the knobs turned counterclockwise, as well.
I tried going back to the store, two times... three times... even four -- but I couldn't hear myself think! I'd actually walk around the store turning volumes down first, just so I could shop for a few minutes. But, by the time I got to shopping, everything was dialed back up to 11.
So, I haven't been in a Best Buy for over five years -- except for one very early morning when I snuck in before the amps were warmed up, to look at multi-TB drives. I didn't buy one; I just looked.
If they're moving to smaller stores because they simply can't FIND an engineer who can design effective acoustive baffles for a big box, that may help. Or, maybe a smaller store will have fewer electric outlets, and thus fewer amplifiers. But, I doubt it.
If they don't care that they're driving people OUT of the store, who cares what they do to drive them IN? They're not long for this world.
I've had similar experiences at my local Best Buy. However, I've asked generic questions about product compatibility and haven't gotten good answers. I could have used my Google-fu to find a better answer and much faster than waiting around for a staff member to acknowledge my existance. They badly need a reboot but I don't know if they can pull it off.
I don't need the Geek Squad but I've only heard bad things about them and the service on the whole. I've heard Best Buy hiring mangers would reject applicants with actual technical support experience in favor of generic workers willing to learn the Geek Squad way of providing support.
I'm at the other extreme, which means I learn exactly enough of the tech to be able to defend myself, and then stop till they develop something else I need to know about. And Best Buy clerks tend set off my "defend yourself by going to a store where someone knows something" bell. Which I suspect means they lose the middle of the bell curve more than its extremes: the people who don't need any help race through, pull out the loss leaders, and vanish; the people who know absolutely nothing take whatever the sales staff foists on them. Everyone between gets the crawly feeling that if there's anything they should know about, these won't be the people who can detect that and tell them.
Customer service is key to the survival of retail. Stores that don't offer excellent customer service are going to have a hard time surviving against the convenience of online ordering.
Sounds like Best Buy is going to have a tough time scaling that particular mountain.
I might worry that my negative evaluation of the Best Buy sales staff (I've never used the Geek Squad service) is skewed because I'm a technology god who uses multiple flavors of Linux and swaps out cell phone motherboards for fun. But, no. I've heard complaints from every quarter, for years.
On this score, compare Best Buy to Chicago's ABT. There, the sales people will walk you across the floor of the megastore to a colleague who knows the answer to a technology question. The difference is night and day. And to John's point, creating that kind of retail culture doesn't happen overnight.
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