Best Buy's Turnaround Plan Sends Retailer In the Wrong Direction

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Best BuyIn a move to shave costs and regain its focus, Best Buy (BBY) is closing 50 of its stores and laying off another 400 employees at the corporate and support levels.

Sometimes investors applaud these moments of corporate self-awareness. Shares of Sears Holdings (SHLD) have been rallying since the Sears and Kmart parent announced that it would be closing dozens of stores and unloading its smaller concepts.

However, Best Buy investors know that in this case, it isn't a sign of a turnaround. It's a sign to turn around -- and run the other way.

Circuit City, the Sequel?

Shares of Best Buy opened 5% lower on Thursday -- and were trading as much as 10% lower -- after the consumer electronics retailer served up mixed quarterly results. Adjusted earnings may have clocked in ahead of Wall Street expectations during the holiday quarter, but comparable-store sales fell by a disappointing 2.4%.

Investors were warned. The store closings and layoff announcements indicate that things aren't going to get any easier, either.

Best Buy isn't working on a comeback strategy. It's simply rearranging the deck chairs aboard the S.S. Circuit City. Here's the course this ship is likely to chart.

Best Buy's Big Plan: Downsize -- Literally

"Best Buy's retail store strategy is to increase points of presence, while decreasing overall square footage," reads Thursday's press release.

In other words, it may be closing down some stores but it will open far more small Best Buy Mobile shops that specialize in selling smartphones and other mobile gadgets and accessories. It's actually looking to open 100 of its small-box mobile concepts, even as it shutters 50 of its superstores.

It's a great plan on paper. Who wouldn't want to run a concept that requires little in leased space manned by just a couple of employees doing a lot of big-ticket transactions?

Well, ask RadioShack (RSH). Best Buy's mobile store concept is really a dolled-up RadioShack, and if you saw "the Shack" get whacked over its horrendous holiday quarter earlier this year, you know that even RadioShack doesn't want to be RadioShack these days.

How it Plans to Stop Amazon's 'Showroomers'

There's a popular knock that Best Buy has really become little more than Amazon.com's (AMZN) showroom. One of the biggest complaints from shoppers is that Best Buy's prices are often out of whack with what they can get elsewhere.

Best Buy knows that Amazon is eating its lunch, and it's tired of selling folks the smartphones, tablets, and laptops that introduce them to the wider online world of cutthroat pricing.

So, the company plans to pass on some of the hundreds of millions that it expects to realize in cost reductions to customers in the form of "competitive prices."

Surely "competitive prices" will bring shoppers back -- but how competitive can Best Buy truly be?

It will never be able to match Amazon's razor-thin margins, kept so low by its lack of physical storefronts. Earlier this month, Amazon spent $775 million on the company that makes the automatons that wheel around its distribution centers to make fulfillment more efficient.

How could Best Buy compete with robots when it's already having a hard time compensating for disparities in cost structures and -- in most states -- sales tax rates?

In-Store Help Is About to Get Really Aggressive

If Best Buy is taking a hit on the product markups, how will it make back the difference?

Well, if you're one of the thinning herd of Best Buy loyalists who've been shopping at the chain lately, you can already guess: Expect employees to push even harder on the company's high-margin extended warranties, Geek Squad tech support, and buyback protection programs.

The company's already telling its khaki-donning staff to prepare for the hard sell.

"The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals," reads the release.

Now, getting paid more for "customer service" excellence would be great, but there really isn't an indisputable way to determine if the customer is satisfied. Buyers obviously won't be all that pleased if they're walking out with a competitively priced product that has been saddled with a bunch of questionable services at marked-up prices.

Do some buyers benefit from these extended warranties and obsolescence insurance add-ons? Sure. However, Best Buy wouldn't be selling them if the sum of its customers was getting more out of these plans than they're paying to receive them.

The company doesn't get that this is one of the reasons -- along with price and convenience -- that store-level sales have been falling since shortly after the Circuit City liquidation.

You can be sure that the attachment rate of these services will be a major part of these enhanced financial incentives to further Best Buy's "business goals" here.

If you thought the Best Buy experience was questionable before, you're probably not going to be happy with what it has in store for you next holiday season.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. Some retailers get it -- and are thriving despite difficult times for consumers. Click here for a free research report on two companies changing the face of retail. The Motley Fool owns shares of RadioShack, Amazon.com, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com.

Why Best Buy Is Going Out Of Business



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111 Comments

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mcgyvertx

I have a Garminn GPS right now still only 25 days since I bought at Bad Buy. The screen went bad. No I did not break it. Took it back thinking to exchange it for a good one. The store manager at Preston Rd Frisco told me it was broken and Bad Buy will not replace it. There is not a mark of damage on this Nuvi 50. From now on I will use Bad Buy as my window shopping and buy somewhere else. I have spent yes Thousands of dollars at Bad Buy.

April 06 2012 at 10:52 AM Report abuse rate up rate down Reply
mcgyvertx

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April 06 2012 at 10:45 AM Report abuse rate up rate down Reply
dmpguy

The reality is the future of Best Buy is bleak. Why should people purchase a product from Best Buy when in most cases they can buy it cheaper with Amazon. When prices are matched stores seperate themeselves with a superior customer experience and you are not always guaranteed this at Best Buy. Now they will focus on Wireless and that was a foolish foolish move. Wireless carriers now hold the fate of many retailers like Best Buy and Radioshack In the palms of their hands. As wireless goes so does their business.

April 01 2012 at 12:40 PM Report abuse rate up rate down Reply
Matt

I understand about the poor customer service that best buy has given in the past, but how many jobs would be lost with another major retailer closing it's doors. I lost my old job with Circuit City and I have seen this trend where people said the exact same thing, so I feel bad for Best Buy because I know people that work there they are great people with great work ethics. However, if Best Buy goes out of business, our economy will be in much worse condition and that would mean another couple of million people out of a job on unemployment and looking for a job. On another note, I do not trust online buying of large items, such as LED and Plasma TVs. From what I have read, a moderate portion of these TV's are battered around in warehouses and by the guys that deliver them. So, I would not invest a couple thousand dollars on a razor thin TV purchased online. These TV's are fragile and sure it can happen at a place like best buy, but at least you can swap out the TV at a store, than having to wait at least a couple of weeks for a replacement, that might be just as battered as the first TV. Lastly, I have worked in the retail industry for the last 5 years and I have seen some of the worst things happen in the retail market so I feel really knowledgeable on this topic and I have seen the best and worst out of consumers as well.

March 30 2012 at 7:00 PM Report abuse rate up rate down Reply
touchofjazz32

a few months ago was shopping for a tv and bought a sony bravia 55 inch best buy price 1949 then went to sams club and bought it for 1199

March 30 2012 at 6:40 PM Report abuse rate up rate down Reply
Lmrphoto

The following is what is really happening at the stores with storefronts. People go to these stores and compare products by watching, listening and reading labels. What better place than a store front to compare products. Then. they go to the internet and purchase the one they like for 50% less than the store front. Even with mail costs, it is remarkably cheaper. This is the way people purchase products today.

March 30 2012 at 11:23 AM Report abuse rate up rate down Reply
home

Best thing that could happen. Hate best buy, and stopped going there about 15 years ago. Will NEVER shop there again!

March 30 2012 at 12:30 AM Report abuse rate up rate down Reply
Sarah

Best Buy sucks. Terrible service and people who just don't give a dam..I get better service from Staples where they special order technology for me. Their reward points are way better, too.

March 30 2012 at 12:20 AM Report abuse +1 rate up rate down Reply
EARLE W. TALLEY

It's not only their prices causing them to lose customers, I went in Best Buy to buy a new computer, waited around for 15 min. NO ONE came to help me, so I went to Staples and bought a laptop and a desktop. Best Buy's loss was over $1,000.00.

March 30 2012 at 12:20 AM Report abuse +1 rate up rate down Reply
Del

GOOD BYE TO BAD RUBBISH..... They don't back up their warranties. Liar Liar pants on fire, name as long as a telphone wire. haha ha

March 30 2012 at 12:19 AM Report abuse +1 rate up rate down Reply