Best Buy at Crossroads: Rocky Roads or Smooth Sailing?

Best Buy has been a retail success story for several years now, using innovative technology to surpass and then outlast competitors like CompUSA and Circuit City. It has been recognized for its cross-channel expertise, winning a 2010 RISFusion Award for cross-channel innovation in September. The retailer successfully uses e-commerce to boost store traffic, with 40% of its online purchases picked up by customers in Best Buy stores.

But no winning streak lasts forever, and today it appears that Best Buy is at a significant crossroads. For the quarter that ended November 27, 2010, Best Buy's revenue was $11.9 billion, 1% lower than the $12 billion brought in during Q3 of 2009. Same-store sales declined 3.3%, led by a domestic same-store sales decrease of 5%. CEO Brian Dunn admitted that third quarter results "fell short of our expectations in some respects" during a recent conference call discussing the company's financial results.

One or even two "soft" quarters is not a sentence of doom, particularly in a volatile vertical such as consumer electronics. But Best Buy could prove particularly vulnerable to the disruptive technology that has many retailers worried: smart mobile devices that allow consumers to easily compare prices and product features. A recent survey by IDC Retail Insights indicates that among heavy smartphone users, 45% will compare prices from another store during a shopping trip.

"Best Buy needs a new business framework, i.e. how to make money from customers," says Gary Williams, CEO of retail consulting firm wRatings Corp., adding that the price transparency enabled by smartphones is accelerating what had already been a challenge for Best Buy.

"Best Buy is already a showroom for online and discount retailers. Buyers have been checking out their electronics for years and then going home to order the product online," says Williams. "The number of 'smart shoppers' (those with smartphones) will only increase over time, and enough to seriously hurt margins long-term."

Of course, the proliferation of smart mobile devices also presents opportunities for tech-savvy retailers like Best Buy. Greg Buzek, president of IHL Services, believes Best Buy is "well positioned to do price match by enabling the consumer on these devices." Buzek blames macroeconomic conditions on Best Buy's current woes rather than structural issues with its business model.

"The biggest issue is that Best Buy bet big on higher-end TVs such as 3-D models, and consumers just can't go there," he says. "Most consumers have purchased a new HDTV in the last three years and that is good enough, particularly in this job environment. Best Buy also heavily discounted smartphones for the holidays which is great for traffic, but doesn't help the bottom line. I think they will be fine long term."

Williams and Paula Rosenblum, managing partner at RSR Research, express less optimism about Best Buy's current trajectory. "Best Buy must differentiate on service, cross-channel consistency and an extremely satisfactory customer experience," says Rosenblum. "If it does not do that, it is most certainly vulnerable to all kinds of competition."

Williams believes Best Buy should move to a membership-driven business model, with pricing similar to Costco's ($50-$100 annually) but with a different purpose. "Instead of low prices, members would get access to see and try any type of electronics available on the market," he says. "It's worth it because few today have the scale and inventory diversity of a Best Buy, nor will the discounters."

This type of business model could build on a key strength of Best Buy: its services. "Management has been very astute by moving into premium services like Geek Squad and Magnolia home theaters, but that's not enough to keep the growth engine," says Williams. "If you are going to sell product today, you either need exclusivity (think AT&T/iPhone) which still costs something and is short-lived."

If exclusivity is not an attractive alternative, "you need to change the way you make money from customers," he adds. "If Best Buy implemented a tiered-membership option, they could even bundle Geek Squad or Magnolia with concierge-level services."

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