Home ReadWriteWeb DeathWatch: Best Buy

ReadWriteWeb DeathWatch: Best Buy

While Apple Store employees are all getting raises, Best Buy workers are getting pink slips. Is it all over for the last of the big box electronics mega-chains, or will a last-minute offer from its billionaire founder help Best Buy reinvent itself?

Wobbled by the same market changes that killed off Circuit City, Best Buy has managed to hang keep fighting the good fight. Still, while the company turned a first quarter profit, not even management will pretend that can last. Mike Mikan, Best Buy’s interim CEO, was almost apologetic in the company’s first quarter results release:

“We know we have to better adapt to the new realities of the marketplace, and we are creating a long-term plan designed to make Best Buy more relevant with customers and position the company for sustained, profitable returns in the years ahead.”

The new world isn’t pretty for big-box electronics chains, but Best Buy made it look worse with years of forward expansion based on backward thinking.

The Basics

In 1983, Richard Schulze renamed his small Minnesota chain of audio stores “Best Buy” and began an expansion into video. Within two years, it was a public company, and by 1992, the firm hit $1 billion in revenues. Best Buy rode the PC, VHS, DVD and HDTV booms to massive growth, becoming the dominant electronics retailing brand in the United States and a major player overseas. In 2000, it made the leap online, ahead of many competitors. When it acquired Geek Squad, Best Buy became the first electronics retailer to offer national support services. In 2004, Forbes named Best Buy Company of the Year, and in 2008, the company opened store number 1,000 in the Mall of America.

When the market crashed in 2008, BestBuy’s massive overhead compounded the pain of consumers scaling back spending and moving purchases online. Despite an increasing amount of “showrooming” (where buyers browse goods in a brick-and-mortar store but purchase them online), though, Best Buy recovered from an all-time low in 2009 and continued its expansion. But weak growth, a massive loss in 2011, and the occasional scandal have pushed the retail giant toward the same fate that swallowed its competition.

In response, Richard Schulze has offered to take the company private with $1 billion of his own equity and a little help from the banks. Best Buy’s board is weighing the offer, but so far, the markets seem unimpressed.

The Problem

In a nutshell, Best Buy is special in only one way: it’s big. It sells commodity goods, offers commodity services and isn’t as nimble as its Internet competitors. Think Barnes & Noble, minus the Nook. Still, Best Buy is competing against companies that have managed to distinguish themselves:

Fry’s Electronics: With Circuit City gone, Fry’s may be the closest thing to Best Buy left. While it’s had its share of controversies over the years, Fry’s managed to do what Best Buy couldn’t – grow in the face of tough Internet competition (even despite a truly hideous website). Fry’s manages to match Internet prices (which Best Buy does not) on the back of strong cross-sales, warranty sales and impulse buys at the point of purchase. Fry’s also caters to hard-core gamers and PC geeks, offering system components and expertise unavailable at other physical stores.

Apple: Apple sells and services a curated ecosystem of premium-priced products to a devoted user base. Best Buy sells everything to everyone. Until Apple starts selling DVD and washing machines, the two companies will remain worlds apart.

Amazon: Amazon may be BestBuy’s biggest single competitor, but it’s a one-way fight. Amazon has little physical overhead and leans on revenues from ancillary businesses like Amazon Web Services.

Best Buy is left with a generic customer base, an undifferentiated product line and only the equally commoditized Geek Squad to supplement its core revenues. Management’s answer? Make it up in volume.

If more didn’t work, maybe more more would be better. Best Buy ignored 2008’s warning shot, building stores and broadening inventory into nonsensical categories like musical instruments. The expansion has flopped, and Best Buy will close 50 stores in 2012.

The Players

With an interim CEO still at the helm, the only person at Best Buy with a shot to turn things around isn’t even an employee. While he stepped down from the company’s board in June, Richard Schulze has been the company’s soul since he opened his first audio shop in 1966. At 71, with a net worth of $2 billion, Schulze doesn’t need the money. When he says “I care deeply about the company’s customers, employees and shareholders,” he means it, and to be fair, the company didn’t start to fall apart until Schulze stepped down as CEO.

The Prognosis

Everyone agrees that business-as-usual won’t save Best Buy, but gutting the only thing that distinguishes the company – its stores – can only hasten the fall. Best Buy won’t go out of business this year (it has more than $3 billion in cash), but the long term trends are all bad.

Can This Company Be Saved?

Probably not. Schulze’s bid, which would give Best Buy time and freedom to make drastic and experimental changes to the companies business model, is the only shot, but it’s still a very long one. Any successful business model would need to be entirely new.

The “Toys R Us” turnaround is not a valid model, since consumer electronics are not bought like cheap toys. An “Apple Store” strategy would be just as deadly. If Sony and Microsoft couldn’t recreate Apple’s retail experience with their own products, how can a generic retailer like Best Buy make it work?

The peanut gallery has some interesting ideas about how Best Buy could leverage its real estate and attract users, and perhaps some variant of these could be coupled with demographic targeting and smart joint ventures (perhaps with other business service providers like FedEx, for example).

The Deathwatch So Far

Research In Motion: Things are hurtling downhill even faster than expected. Massive losses – more than 11 times worse than expected – and new delays in its Hail Mary BlackBerry 10 operating system update have made the company’s dire situation even harder to ignore. And over the weekend, a federal jury found RIM liable for $147 million in patent damages to Mformation Technologies.

HP: No change in status

Nokia: The mobile phone giant’s quarterly revenue and earnings exceeded expectations and it has reduced its cash burn rate, but the company lost money yet again and saw its debt ratings cut to junk status. And it still hasn’t cracked the U.S. smartphone market as it halves the retail price of its flagship Lumia 900 to $49.99.

38 Studios: No change in status

Barnes & Noble: No change in status

Sony: No change in status

Groupon: Groupon’s stock price recently hit an all-time low on a downgrade from Evercore Partners, and a perceived weakness in social companies, led by Zynga.

T-Mobile USAThe company’s troubles continue to mount, reporting second quarter losses of 557,000 high-value contract customers, and a net loss of 205,000 customers. 

Netflix: No change in status

Electronic Arts: No change in status

 Best Buy photo via Wikipedia. Mall of America photo by René Sinn. Apple store photo courtesy of Apple.

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