Former Circuit City CEO Asks: Can Best Buy Beat Amazon with Service?
Traditional consumer electronics retailers are struggling. Best Buy’s quarterly earnings, released yesterday, were significantly below last year’s as a result of declining same store sales, lower gross margins and higher expenses. Radio Shack announced, in October, a quarterly loss of $47 million, compared to a slight profit the year before.
At the same time online retailers are flourishing. Amazon announced its quarterly sales were up 30% and its operating cash flow was up 8% to $3.4 billion for the trailing 12 months. While Amazon lost a small amount of money on a GAP basis, its sizeable cash flow funds continued rapid expansion.
In addition to sales and earnings, Best Buy is struggling in other ways. Its founder, Richard Schulze, quit the board to raise money to buy the company and take it private. Its CEO of a few years, Brian Dunn, resigned in a scandal and the new CEO, Hubert Joly, has reorganized the executive suite, letting some longtime employees go. “We know we have to better adapt to the new realities of the marketplace,” Joly acknowledged. “We are creating a long-term plan designed to make Best Buy more relevant with customers.”
Among the changes underway are large-scale closings of big Best Buy stores, the opening of multiple small stores and the reformatting of others. The new formats will “focus on connections, services and an enhanced multi-channel experience.”
I have watched this movie before. In the 1990s, long after I had retired as CEO, Circuit City also struggled. In that decade, Best Buy surpassed Circuit City in sales, earnings and sales per store. By 2000, management understood the company was in trouble but never stepped back to take stock of the company’s existential plight. Instead it embarked on an uncoordinated series of moves, including an expensive but partial remodeling program that never made the stores competitive. And most critically, management never asked how Circuit City could, as a public company, engage in radical surgery and still report good earnings for investors. In effect, it tried to change the tires on its car while it was still running around the track. So Shulze’s efforts to take Best Buy private make good strategic sense.
While the analogies to Circuit City are imperfect, the question remains: can Best Buy make it? In other words, how can Best Buy, or any other bricks-and-mortar consumer electronics retailer, successfully compete with Amazon, whose goal, says CEO Jeff Bezos, “is to work hard and charge less”? If you sell devices near break-even, he says, “You can pack a lot of sophisticated hardware into a very low price point.”
Many observers point out that Best Buy is, in effect, a showroom for Amazon. People can examine a product, ask questions of the salesperson and, without even leaving the store, whip out their cell phones and find lower prices for the same product. It will be delivered the next day and in many cases they will not pay sale taxes. That is an offer that is almost impossible for Best Buy to beat, especially given the higher expense structure of a bricks-and-mortar retailer.
So is there a path to success, or is Best Buy destined, like Circuit City, to evolve from “great to gone?” One path Best Buy already selected is to provide service. The Geek Squad installs complex electronics in your home and repairs or modifies computer and home entertainment systems. They have become so complex that this is a high-demand consumer service with which online retailers cannot compete. Current estimates are that Best Buy’s service revenues are $3 billion. While the profit is not known, it is a high-margin business. Other bricks-and-mortar retailers also offer this service, but they have the same expense structure as Best Buy so everyone’s competing on a level playing field.
Another possible path to success is to charge for consumer advice. I understand that this is a somewhat radical suggestion, but it is worth trying. Apple charges for classroom and one-on-one instruction in how to use their devices. Many high-end audio stores successfully attract customers with outstanding advice from knowledgeable sales consultants. These customers understand they will pay more but think the help they receive in selecting the right product is worth it.
Best Buy says it is investing in a more knowledgeable and professional sales force. Why not try an experiment: tell customers the fee for sales assistance in selecting the right product is, say, $25, but that fee will be applied to the purchase price if they buy from the store. If the advice is high quality and objective, my guess is that some customers will agree. The experiment will tell if there is enough profit in this approach to expand it chain-wide.
Absent this or some other form of service, with which Amazon cannot compete, Best Buy’s days as a major player in the consumer electronics landscape may be numbered.