May 30, 2013

Best Buy vs.

Best Buy store facade (photo: Best Buy)
Best Buy: A brightly-painted bricks & mortar dinosaur? (photo: Best Buy)
Is Best Buy on the way up, or will prove its nemesis?
US business media and Wall Street analysts have pounced on Best Buy’s Q1 results for 2013/14.

True to form, they interpret each set of quarterly figures as proof of their own views. Some pundits believe that the world’s largest electronics retailer is failing, others that it will rise again like a phoenix from the ashes.
Best Buy, who challenged German hero MediaMarkt/Saturn on entering Europe in 2008, was certainly savaged by the bears last Christmas, sending the share price to a historic low. They regard the Richfield/Minnesota company as a natural victim of "showrooming".

But is the US giant's demise really such a slam-dunk case?

Bears in the showroom
The bears point to Best Buy's huge US network of 1,500-odd stores averaging around 4,000m². And then they see a customer service model with more than 100,000 well-trained “Blue Shirts” and 20,000 “Geek Squad Agents” in those outlets.

According to the horror scenario of the bears, customers visit Best Buy to examine the merchandise and get advice only to order it later from an online competitor at a lower price. So the traditional retailer is left with the store and staff overheads while Amazon & Co. get the custom.

Geeks lose sex appeal

Worse still, the bears believe that the Best Buy store concept is nearing the end of its life cycle and that its assortment of 16,000 to 17,000 lines has lost its former sex appeal.

Flat-screen TVs, PCs, sat navs, and digital cameras etc. are relatively mature product categories that are unlikely to experience a great deal of innovation. Even the US federation CEA sees growth of only around 3 per cent this year for the trade.

Perversely, most of Best Buy’s big sales items, such as mobile phones and tablets, have gross margins of less than 20 per cent, while Amazon is particularly strong in Best Buy’s high-margin areas, such as accessories.

Nothing can comfort the bears. They are not reassured that Best Buy has its own online offer of around 300,000 lines where 40 per cent of revenues come from Click & Collect points within the stores.

Despite low double-digit annual sales growth, is seen as a peripheral operation accounting for only around 7 per cent of group revenues. The bears maintain that the online division is late off the mark and doubt whether it can arrest the loss of market share to Amazon.

If you can't beat them, join them

Not even new CEO Hubert Joly’s decision in November to match all market prices, regardless of whether these come from classic competitors, such as HHGregg and RadioShack, or online ones such as Amazon, has soothed the nerves of the bears.

Instead, they fear that Best Buy is only sacrificing margin while failing to boost like-for-like revenues. Thus, the latest Q1 figures for the twelve weeks to May 4 were grist to their mill. US like-for-likes declined 1.1 per cent against the same period a year ago and average gross margin by 1.9 percentage points to 23.4 per cent.

Not even the 75 per cent rise in the company’s share price since December, making the company the best performer on the S&P 500, can placate the sceptics. They see this as a mere technical correction mainly attributable to an US economy in recovery mode and a bull run on the Street.

Meanwhile, the bears continue to wait for a long-term fall in the share price which, for structural reasons, they regard as inevitable.

The bulls love Joly

The bulls will have none of this. They argue that Best Buy went through a particularly bad patch last year. In April 2012, CEO Brian Dunn had to leave after alleged inappropriate relations with a female member of staff.

One month later, Chairman and founder Dick Schulze followed out the door because he allegedly didn’t report this to the board. Since then, Schulze, who has a 20 per cent stake in the company, has launched two unsuccessful takeover bids for the company causing considerable management distraction.

The bulls argue that the appointment of French turnaround expert Hubert Joly as President & CEO in June 2012 ushered in a new era at the company.

His “Renew Blue” restructuring programme announced in November is aimed at cutting costs. To date 400 head office staff have been made redundant, and a number of less profitable stores closed in Canada and the US.

At the end of last month, Joly also announced the sale of Best Buy’s 50 per cent stake in a European joint-venture with UK-based Carphone Warehouse Group for $500m. Since paying $2bn for its stake in the partnership in 2008, Best Buy has haemorrhaged money on the other side of the Pond.

Operational losses last year in Europe, Canada, Mexico and China were a hefty $880m. So the optimists are delighted that at least the bad times in Europe are over.

Shop-in-shop with Samsung

The bulls also approve Joly’s attempts to enhance the customer experience within the stores by improving layouts and increasing the number of brand shops. When he announced the conclusion of a partnership with Samsung Electronics at the end of March, Best Buy’s share price shot up 16 per cent in one day.

This will not only decrease the company’s dependence on Apple, but will also tempt other brand shops to come in.

Although the bears see it as mere tinkering, Joly is also weighting store assortments away from CDs, DVDs, and musical instruments towards higher-margin product categories, such as mobile accessories.

Above all, the bulls are confident that Joly’s decision to match online prices will stop the rot. US trade sources claim that company sales staff have already regained confidence. Apparently, the Blue Shirts had become demotivated by constantly hearing from customers that products could be bought cheaper elsewhere.

The bulls also note with satisfaction that an increasing number of US States no longer exempt online retailers from sales tax. Therefore, Amazon will soon be obliged to pass this on to customers, which could raise US prices by 6 to 9 per cent.

This new level playing field will enable Best Buy to use its superior buying power. Amazon is no flyweight, but, with annual revenues of around $50bn, Best Buy has four times more buying volume in electronics.

Gunfight at the O.K. corral

So, given all this pro and contra, who will win?

Firstly, one should recognise that Best Buy is in a turnaround situation and that it is difficult when analysing revenues and earnings to separate the effect of past problems in Europe and within the company from online competition in the US.

Admittedly, retail analysts like to compare domestic like-for-like figures on a quarterly basis, but even these are skewed by consumer sentiment, inflation rates, and other variables.

Also, it is still too early to tell whether Best Buy’s online price-matching strategy is working, especially when sales tax regulations are increasingly affecting Amazon’s own price structures.

It is impressive that Joly, despite the need to cut costs, has not only slashed prices. He is also increasing customer service and improving staff training. Like US retailer Target, he is trying to tackle showrooming by selling products exclusive to Best Buy stores.

Short of charging a store entrance fee only to be refunded if the customer actually makes a purchase, it is hard to see what else Joly could do with his substantial bricks & mortar legacy at Best Buy.

The only other option, along the lines “If you can’t beat them, join them”, would be a joint-venture with Amazon. But in most Westerns gunslingers don’t usually leave Tombstone holding hands.

Podcast microphone (photo: Gerhard Seybert-Fotolia)
(photo: Gerhard Seybert-Fotolia)

Podcast. Click arrow to listen to an audio version of the text:

Lebensmittel Zeitung print and digital (photo: LZ)
Our German B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: By international editor Mike Dawson in
 Lebensmittel Zeitung, no. 22, 31.05.2013

German Retail Blog

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