How to Save Best Buy From Extinction?
Best Buy’s (BBY) stock received a shot of adrenaline today following news that founder Richard Schulze offered to take the struggling big-box retailer private in a deal that values the company at about $8.5 billion. In a letter to the company’s board, Schulze writes that “bold and extensive changes are needed for Best Buy to return to market leadership.” He goes on to say that he’s performed “an extensive amount of work to develop a plan to address the company’s challenges,” but does not divulge specifics.
Once a retail superstar, Minnesota-based Best Buy is suffering a slow decline, as consumers increasingly make their purchases online from sites like Amazon (AMZN)and EBay (EBAY). As of May 5, the consumer electronics chain had $1.7 billion in long-term debt, report my colleagues at Bloomberg News. Meanwhile, the company’s stock, which in 2006 hit a peak of $58.72, has plummeted to under $20.
So, what can Best Buy do to reverse its fortunes?
According to Alex Goldfayn, chief executive officer of the marketing strategy consultancy Evangelist Marketing Institute and author of the book Evangelist Marketing, Best Buy needs to focus on improving its in-store shopping experience, rather than competing online. “They need to understand that if they make their business about competing with Amazon, they’re going to lose,” he says. “In fact, they’ve already lost, and they’ve lost painfully and publicly in a very sad and ugly way. Their one advantage in the world is their physical stores.”
Goldfayn, who outlined his Best Buy improvement plan for Mashable in February, suggests a quick and dramatic overhaul. “Rather than thousands of boxes on shelves, which are ugly and don’t do anybody any favors, they need to set up tables for people to interact with the technology,” he says. “There isn’t really a [store] that you can go to now to literally interact with technologies from multiple manufacturers, and Best Buy is in the unique position to let people walk into a store and experience not only the iPad but also the Samsung Galaxy and also another Android tablet.”
Best Buy’s customer service could also use an overhaul, Goldfayn says. “Right now, [employees] just stand and read the back of the box with you. These people need to be conversant in what it is they’re talking about, and right now they’re not,” he says. “The other thing they need to do is make it easy for people to return stuff, because what happens now is you stand in line and then beg for help from an angry 23-year-old at the customer service desk who’s been trained how to say no, and only no.”
R.J. Hottovy, a senior retail analyst for Morningstar (MORN), agrees that improving the Best Buy shopping experience would certainly help, but points out that product pricing, not service, is the key to success. “We’ve seen a number of instances where companies try and differentiate themselves on service,” he says. “At the end of the day, consumers always tend to find the lowest-price outlet, and in this case it generally is Amazon—and until [Best Buy] can narrow the gap, or at least the perception of the gap, the company does face a pretty big uphill battle.”
Hottovy suggests that Best Buy should streamline its brick-and-mortar presence and use the money to invest in better prices and products. “The only exit strategy for this company, and the only way to make them more competitive, I think, is for the company to take a hard look at its real estate portfolio and make a commitment to a dramatic reduction in the amount of square footage they have, probably to the tune of at least 30 or 40 percent, either through outright store closings or rotating to smaller-format stores,” he says. “From there, I think they need to take the cost savings and reinvest that into becoming more competitive from a pricing standpoint, as well as procuring some more exclusive products that will help to drive traffic.”
Hottovy says, no matter what, Schulze’s hope of turning around Best Buy is a long shot. “We’re maintaining our negative long-term outlook on the stock,” he says.