By MATTHEW INDYKE and BRIAN ZEN
Best Buy (BBY) was once the darling of the electronics retail industry, having found great success selling technology products and services in stores across the world. It thrived on its technology products and superior customer service led by its self-described “geek squad.” The retailer particularly thrived when it shifted from a product-based model to a service-oriented model. Best Buy's industry dominance appeared secure when then-archrival Circuit City declared bankruptcy and liquidated in 2009. Furthermore, in its industry, Best Buy had a stronghold over the smaller corner stores like Radio Shack.

But declining movie and CD sales, along with consumers' diminishing desire for more giant televisions, caught up with Best Buy. The company now finds itself competing as a big box retailer in a business that is rapidly going online. As investors, what we want to know is: Is Best Buy the latest brick-and-mortar retailer headed for the exits or do they have what it takes to compete with online retailers selling similar products?



Best Buy no longer the best

Best Buy models its business on high-quality customer service yet many of its customers report low satisfaction ratings. It all starts with the employees and top management. Talk about the sales force they put out in stores. Salespeople are being trained to be more persuasive with customers and less informative. So, more energy is focused on using sales tactics to lure customers to the stores. And less energy is being spent on knowing what they are selling. It is the top management’s job to fix this but they’ve left this problem ignored along with many others that have plagued Best Buy recently.

Management has given little to no focus on updating Best Buy’s outdated business model. The business needs an overhaul in a day of age where brick-and-mortar stores are going the way of record players. The problem is that management itself is in the middle of an overhaul thanks to its incompetence in plotting Best Buy’s future. This is ill timed given the high level of competition from online-based businesses and all-purpose retailers that are making Best Buy a less desirable company for customers. If it doesn’t move to change fast, Best Buy will never catch up to powerful competitors like Amazon (AMZN).

Signs of hope for BBY

Despite all its problems, Best Buy still has the opportunity to survive in the long run. They carry an existing market for high-tech electronic equipment sold in specialty stores. And there are plenty of customers in the market who want to see a product firsthand and receive information directly from a professional before making a purchase. Consider yourself if you were in the market for a flat-screen TV. Wouldn’t you want to physically see the picture quality and test out its features before committing? Best Buy is one of the few places where you can do that. If the retailer ever gets its act together with better service and achieves lower prices, Best Buy makes the store experience more meaningful and customers feel better about doing business with them.

Best Buy could also improve its store experience by offering items other than electronics. It would give customers more reasons to venture out to Best Buy. The retailer has the flexibility to revamp its inventory base and turning into an all-purpose retailer is one good way to get started. Another wise move would be eliminating inventory that doesn’t sell well on a regular basis. The retailer has the technological assets on hand to reinvent itself and a competent management team can figure out how to get Best Buy back on its feet again.

Customers no longer finding best buys

“Best Buy doesn’t fully understand its customers’ point of view,” says Larry Downes, an Internet retail analyst and consultant. His prior shopping experience with a friend confirms this notion. This excerpt was taken from the Forbes article Why Best Buy Is Going out of Business... Gradually:

Quote:
“A few days ago, I visited a Best Buy store in Pinole, CA with a friend. He’s a devoted consumer electronics and media shopper, and wanted to buy the 3D blu ray of “How to Train Your Dragon,” which Best Buy sells exclusively. According to the company’s website, it’s backordered but available for pickup at the store we visited. The item wasn’t there, however, and the sales staff had no information.

But my friend decided to buy some other blu-ray discs. Or at least he tried to, until we were “assisted” by a young, poorly groomed sales clerk from the TV department, who wandered over to interrogate us. What kind of TV do you have? Do you have a cable service, or a satellite service? Do you have a triple play service plan?

He was clearly—and clumsily–trying to sell some alternative. (My guess is CinemaNow, Best Buy’s private label on-demand content service.) My friend politely but firmly told him he was not interested in switching his service from Comcast. I tried to change the subject by asking if there was a separate bin for 3D blu rays; he didn’t know.”

Downes confirms our belief that Best Buy is all about sales tactics and less about direct knowledge. Some employees will not even know where products are located in the store’s sporadic layout. And worst of all, employees are getting in the way of a customer who’s trying to self-service before asking an employee for assistance. Best Buy isn’t practicing customer service. “It’s practicing anti-service,” Downes exclaims.

BBY’s lack of strategic direction

Best Buy’s management team, once led by CEO Brian Dunn, is left to fight a losing battle on multiple fronts. Dunn announced several initiatives that he thinks will reverse the negative financial trends. And they are:

• Closing 50 big-box stores
• Shrinking other stores
• Opening more small Best Buy Mobile stores.

But these are nothing more than a reaction to Best Buy’s recent adversity. Dunn is trying to protect short-term profits without a solid plan on a long-term turnaround. Dunn’s ability to manage the challenges of retailing in the present day has been coming under fire. Board of Directors member Mike Mikan would succeed Dunn as interim CEO but not before management announced that they had not settled on a long-term CEO. It’s pretty clear that Best Buy needs fresh blood in its top ranks in order to promote its business brand again. Current and past management, unfortunately, has failed too many times to figure out how to reinvent the Best Buy business.

Competition on the internet and beyond

Online-only competitors like Amazon (AMZN) have thrived off of Best Buy’s spacious and colorful showroom, making it a destination for testing products but not for buying. The Apple (AAPL) brand has established itself as the wave of the future with its signature products and revolutionary retail stores. Both companies have many other things that Best Buy doesn’t have at the moment. Apple and Amazon operate a successful internet-based business. They provide high-quality customer service that actually leads to high customer satisfaction. They are programmed for basic inventory management.

Customers, naturally, opt for the cheaper alternative of ordering a product online. Another advantage of shopping online is that customers can compare product prices on the spot. “When the stuff you’re selling become commodities, price matters a lot more than service,” says retail consultant Howard Davidowitz. He suggests that only the most loyal customers continue to purchase directly from Best Buy, with or without better service. Not to mention that if a customer has a poor service experience at Best Buy, they seek to avoid it at all costs.

With so much user feedback, even a site like Amazon with no salesmen can be more informative than Best Buy’s salesmen altogether.

Walmart (WMT) takes away from Best Buy’s profitability since it operates a more diversified low-cost business where products, including consumer electronics, are sold at a discount. Best Buy’s business, right now, is less diversified and it charges a premium for its products. And it needs an overhaul if it wants to compete with Walmart on price.

Where can Best Buy find success again?

Vice President of Industry Analysis Stephen Baker, in his article One Analyst Sees the Better Side of Best Buy from TheStreet.com, lays out the case that Best Buy remains the dominant retailer in its category and is in the best position to succeed in the coming years: “Best Buy's share of consumer technology revenue in 2011 stood at 19 percent of hardware sales. That's exactly what it was in 2010 and what made it the leader in sales by a substantial margin.”

Through all its troubles, the retailer continues to dominate sales of high-tech equipment like computers, flat-screen TVs, and stereos. And Best Buy is the last remaining big-box consumer electronics retailer outside of discount retailers like Walmart.

Two other strategic options would help Best Buy going forward:

• Figuring out additional products that could be sold in their stores
• Offering something exclusive that customers can’t get anywhere else

Walmart went from not selling food to being the biggest grocer in the country. Best Buy should test a similar model. One suggestion is to conduct a need survey targeting consumers who shop there along with the best and brightest marketing analysts. Best Buy, after all, has the technology to forecast how it will fare under different scenarios. And the company itself has decades of experience in retail, in distribution, in forecasting and in marketing and sales. It has, one presumes, computer systems that can be upgraded to integrate with a new online front end, should they eventually decide to move a part of their business online.

What Best Buy needs is a change in corporate culture. They need a team that can properly analyze the company’s assets. And they need a team that can figure out how to use the assets to the company’s best advantage. It is not too late for Best Buy to solve its problems.

Electronics recycling will be key to their future success.

That's a very good insight. How does that work? Trade in your old electronics for new ones?