Why Best Buy Will Never Be Great Again

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Oct. 19, 2011 - U.S. - At the Best Buy store in Eagan, Brian and Rebecca Eichenberger were shopping for a new laptop when they s
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These are good times to be a Best Buy (BBY) shareholder.

Shares of the consumer electronics superstore chain have nearly tripled this year, hitting fresh two-year highs earlier this week after posting better than expected quarterly results last week.

It was a surprisingly resilient report, but there's no reason to believe that Best Buy is worth three times what it was when the year began. Things aren't going that great, and the turnaround that the market's baking into the future may not happen at all.

Blue and Khaki to the Rescue

Best Buy was in a bad place early last year. Its CEO was dismissed for having an inappropriate relationship with a subordinate. Its founder was taken to task for not divulging the information soon enough. Sales were sliding as savvy customers found lower prices online.

The Best Buy board's choice for a new CEO -- Hubert Joly, a Frenchman who previous headed travel and hospitality giant Carlson -- seemed like an odd one at first. There was even a bonus that Joly would have collected if he hadn't been able to secure the necessary visa to begin running the stateside retailer.

He arrived, and the market eventually bought into his strategy to cut overhead, reduce prices, and combat the showrooming trend by improving the brand's perception.

He's been making some welcome headway on many of those fronts, but the one thing that hasn't happened is the most important thing: Shoppers aren't back.

The market loved the unexpected increase in profitability in its latest quarter, but at the end of the day, sales actually declined. Comparable store sales slipped 0.4 percent domestically, and things are even uglier overseas.

The Best Buy brand is showing signs of life, but it's no comeback kid. We're already at the point where it can't go back to where it once used to be.

Electric Blue

Circuit City moved to liquidate its stores in 2009. At the time, many believed that Best Buy would be a major beneficiary. With its biggest rival out of the way, Best Buy would be the undisputed champ of consumer electronics.

It may have felt that way at first, but Best Buy wasn't immune to the same trends that were eating away at Circuit City. The booming popularity of Amazon.com (AMZN) was driving tech savvy customers to kick the tires of products and physical stores before ordering them online for less. But a bigger problem is what people are buying.

The major gadget rollouts in recent years have been of products that replace physical media with digital files. Best Buy may be selling a ton of e-readers, smartphones, and tablets, but that ultimately translates into fewer sales of DVDs, CDs, and video games: categories that Best Buy used to draw in repeat purchases. You may only need a new dishwasher once a decade, but new media comes out every week. Best Buy used to sell people their hardware and their media, but now it's mostly selling them hardware.

The recession at the time of Circuit City's implosion also didn't help, but it's telling that Best Buy's sales have been weak -- even when it doesn't have to compete with Circuit City for customers and the economy continues to take baby steps in the right direction.

Have a Holly, Joly Holiday

Investors who have been bidding up shares of Best Buy will argue that they're not betting on the chain's past. An investment is a wager on the company's future. And the next three months should be big ones for the consumer electronics market.

Apple (AAPL) should announce the new iPhone next month. Microsoft (MSFT) will hope to turn PC sales around in October with its anxiously anticipated Windows 8.1 update. In November, we will see gamers lining up for the PS4 and Xbox One.

Despite all of the buzz, analysts still see Best Buy posting lower sales this critical holiday shopping season. New gadgets may be nice, but we're in a changing marketplace where the manufacturers can reach out directly to the owners. The PS4 and Xbox One come with meaty hard drives and cloud-based gaming platforms because developers want to market directly to gamers. Folks streaming videos and music on their new Windows laptops or the upcoming iPhone 5S don't need to go back to Best Buy.

Investors are back. Shoppers are not. That's a problem.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, and Microsoft. Try any of our newsletter services free for 30 days.


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Tom Pilcher

When was the last time you were even IN a Best Buy, Rick? Can you tell me what color their uniforms are? If there are no customers, then where is the money coming from? How long are you going to continue to attempt to link Circuit City's demise to Best Buy?

Maybe you need to re-examine HOW you look at the business; you're out of touch, and it shows.

September 03 2013 at 2:48 PM Report abuse rate up rate down Reply
Peter Tharaldson

Rick,

Some of your observations over the years on BBY are correct. Too many are not. You have almost a dogmatic hatred of the company with a conclusion already written...for which you go find facts.

Best Buy will never be great again...true... in it's current form. I suspect any retailer in its current form will never be great again actually. What it has done, as you even admit, is largely stop the decline. Very few retailers have pulled that off (where are the JCPenney articles btw?).

Fortunately, for all its faults, it appears that Best Buy is not remaining in its current form. Check out their Canadian site, which is where they BETA big changes before they do int he United States. In the product navigation you will see they have added four new rich margin categories which push deeper into other retailers space and outside of Best Buys's classical space. Will it work? Maybe not...but it is a solid try.

Best Buy was absolutely flat-footed on many things...including it's online space. In fact, however, most brick and mortars were caught that way and are working to catch up. One thing that impressed me with Best Buy, however, is a very systematic way to iterate from a conservative position. They don't do what JCP did...the shore up the foundation and then move into the new space.

It may work..it may not. You are definitely quite correct in saying they (as they are now), will never be great again.

September 02 2013 at 10:18 AM Report abuse +1 rate up rate down Reply