Founded in 1966, Best Buy Co. Inc. (NYSE:BBY) is the largest consumer electronics specialty retailer in the U.S. The firm also offers home office products, entertainment software, appliance and related services. It operates through various websites and a store network comprised of 1,509 locations in the U.S. and 479 international outlets. The company conducts its online and in-store retail businesses under a variety of brand names including Best Buy (BestBuy.com, BestBuy.ca, espanol.BestBuy.com and BestBuyMobile.com), Five Star, Future Shop (FutureShop.ca), Geek Squad, Magnolia Audio Video (MagnoliaAV.com), Pacific Sales (PacificSales.com), mindSHIFT Technologies (mindSHIFT) and The Phone House (PhoneHouse.com). The firm boasts a 17% share of the U.S. $203 billion market.
A Weaker Position
Best Buy’s strong brand name, high-traffic retail stores, advanced technical support and installation service offerings had historically positioned the company as a leading player in the consumer electronics specialty retailer business. However, increasing competition from mass merchants, online retailers, as well asand OEMs’ growing retail presence, changed industry dynamics, thereby stripping the firm of its long-standing sway with customers and suppliers.
As a result, Best Buy lost the economic moat it once boasted. Continuous product innovation and fast commoditization have created a competitive environment where switching costs are minimal and competition on price is intensifying. Consequently, it has become more difficult for the company to support growth and avoid market share losses.
As mass merchants and online retailers expanded their product assortments and OEMs built their own retail and direct-to-consumers sales channels, suppliers became less dependent on Best Buy. Further, a shift to digital media distribution has eroded in-store sales, while growing capabilities from online retailers like Amazon.com Inc. (NASDAQ:AMZN), which benefit from lower cost structure, are also pushing the firm to make greater investments on e-commerce infrastructure in order to remain competitive.
Moreover, since consumer electronic products tend to differentiate mainly by price, giants like Wal-Mart Stores Inc. (NYSE:WMT) and Costco Wholesale Corp. (NASDAQ:COST) also pose a significant threat to Best Buy.
In order to regain market share and enhance its long-term profitability, Best Buy has undertaken several initiatives under the “Renew Blue” program, which is aimed to produce a turnaround in the firm’s growth prospects. The program includes six main guidelines, namely accelerating online sales growth, improving multichannel customer experience, optimizing store square footage, enhancing supply chain efficiencies, optimizing its U.S. real estate portfolio and reducing SG&A costs. Thus, the firm anticipates saving $800 million by 2018 while it also expects to generate higher profits from a more efficient supply chain management and a strong focus on high margin merchandises. Further, the company plans to stock its online customers with its store inventory through its “Buy online, ship from store” initiative.
Despite whether all these measures will yield constructive results for the firm, countermeasures from large rivals, such as trapping consumers through membership programs and undercutting prices, will continue to pressure margins and threat Best Buy’s market share.
However positive, each Best Buy’s turnaround strategy involves its own execution risks, which adds to the challenges posed by competition. In this scenario, Best Buy’s discouraging holiday sales performance (sales fell 2.6% year over year to $11.45 billion in this period) led to a trimming of guidance, which made the stock price fall sharply, thereby raising concern over the firm’s restructuring plan.
Best Buy’s stocks trade at 37.60 its trailing earnings compared to the industry average of 18.40 and its return on equity showcases a dismal -32.87% against its rivals’ 9.40% average. Investment guru Mario Gabelli (Trades, Portfolio) reduced his holdings in the company by -74.63% backing my bearish feeling about Best Buy’s growth prospects.
Disclosure: Victor Selva holds no position in any stocks mentioned.