This morning Best Buy released its fourth quarter statement, reporting a $1.7 billion loss, the closing of 50 big-box stores, the opening of 100 smaller format mobile stores, and the culling of 400 employees. The company also made a point to emphasize gains — 3.4 percent in revenue — and a weak industry, in their earnings call.
It’s fairly clear that Best Buy is not the next Circuit City, which had debt, and a terrible real-estate problem. Best Buy doesn’t have either of these headaches right now. Shuttering 50 stores out of 1,100 is pruning, at worst.
There appear to be a few problems, however. First, the earnings report didn’t mention there was a problem with online competition. Sure, in all of retail, only 20 percent of consumers are buying everything online, but that number is growing every year as mobile turns shopping into the ultimate idle POS pastime.
According to Wedbush Securities’ Michael Pachter, Best Buy is also whistling past the fact that $6 billion in spending against their $50 billion in revenue is in real estate and salary. “That’s 12 percent. If they sell you the same product online, you’re still paying 12 percent more at Best Buy. There isn’t any way around that other than to get rid of stores and people.”
One can judge from this morning’s release that Best Buy is hoping to use their new Knowledge Desk (the Best Buy answer to the Apple Stores’ Genius Bar), as well as the Geek Squad and Connected Home products, to create a customer service reputation that is worth that 12 percent. But for many young people, or just smartphone-owning people who know how to plug in a TV and can easily compare prices, do these services really justify that?
Apple’s advantage is that nobody else really services their products. Best Buy is just a middleman, selling things other companies make. They run the risk of becoming a showroom for shoppers who’ll scan in the barcode and get it delivered in a couple of days instead.
By putting a Knowledge Desk in the middle of the big store, or an Apple-themed mini store (that Tim Carmody aptly described as“an oasis in the giant and often disorienting desert of warehouse-style big-box retail”), they are zagging at the right time. Blockbuster tried this out with barista stations, but their real estate problem was insurmountable.
“The first step in a 12-step program is admitting you have a problem,” Pachter said.
Another potential problem, or potential missed opportunity, are the 100 new mobile stores planned. While downsizing store square-footage is probably one of the only ways to reduce the 12 percent gap, these new small-format stores carry mobile-devices only. In theory, Pachter said, this concept is good. “But why are Apple stores successful? They sell more than phones. People only shop for cell phones every two years, and they shop for tablets and laptops whenever.”
Mini-stores within stores, mobile stores, and closing even five percent of the big stores is a way of adapting to a new model. Question is, how much can exist between Wal-Mart and Amazon Prime?
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