Electronics retailer Best Buy is headed for the exits. I can’t say when exactly, but my guess is that it’s only a matter of time, maybe a few more years.
Consider a few key metrics. Despite the disappearance of competitors including Circuit City, the company is losing market share. Its last earnings announcement disappointed investors. In 2011, the company’s stock has lost 40% of its value. Forward P/E is a mere 6.23 (industry average is 10.20). Its market cap down to less than $9 billion. Its average analyst rating, according to The Street.com, is a B-.
Those are just some of the numbers, and they don’t look good. They bear out a prediction in March from the Wall Street Journal’s Heard on the Street column, which forecast “the worst is yet to come” for Best Buy investors. With the flop of 3D televisions and the expansion of Apple’s own retail locations, there was no killer product on the horizon that would lift it from the doldrums. Though the company accounts for almost a third of all U.S. consumer electronics purchases, analysts noted, the company remains a ripe target for more nimble competitors.
But the numbers only scratch the surface. To discover the real reasons behind the company’s decline, just take this simple test. Walk into one of the company’s retail locations or shop online. And try, really try, not to lose your temper.
I admit. I can’t do it. A few days ago, I visited a Best Buy store in Pinole, CA with a friend. He’s a devoted consumer electronics and media shopper, and wanted to buy the 3D blu ray of “How to Train Your Dragon,” which Best Buy sells exclusively. According to the company’s website, it’s backordered but available for pickup at the store we visited. The item wasn’t there, however, and the sales staff had no information.
But my friend decided to buy some other blu-ray discs. Or at least he tried to, until we were “assisted” by a young, poorly groomed sales clerk from the TV department, who wandered over to interrogate us. What kind of TV do you have? Do you have a cable service, or a satellite service? Do you have a triple play service plan?
He was clearly—and clumsily–trying to sell some alternative. (My guess is CinemaNow, Best Buy’s private label on-demand content service.) My friend politely but firmly told him he was not interested in switching his service from Comcast. I tried to change the subject by asking if there was a separate bin for 3D blu rays; he didn’t know.
The used car style questions continued. “I have just one last question for you,” he finally said to my friend. “How much do you pay Comcast every month?”
My friend is too polite. “How is that any of your business?” I asked him. “All right then,” he said, the fake smile unaffected, “You folks have a nice day.” He slinked back to his pit.
As a sometime business school professor, I could just imagine the conversation with the TV department manager the day before. “Corporate says we have to work on what’s called up-selling and cross-selling,” the clerk was informed in lieu of actual training on either the products or effective sales. “Whenever you aren’t with a customer, you need to be roaming the floor pushing our deal with CinemaNow. At the end of the day, I want to know how many people you’ve approached.”
But this is hardly customer service. It’s actually getting in the way of a customer who’s trying to self-service because there’s no one around who can answer a basic question about the store’s confusing layout. It’s anti-service.
Going Bankrupt Gradually, then Suddenly
We left the store, my friend having made his purchase but both of us fuming. I was reminded of a line from Ernest Hemingway’s “The Sun Also Rises.” One character asks another how he went bankrupt. “Two ways. Gradually, then suddenly.” Best Buy, I thought, is doing the same, just as many big box retailers have done in the last decade.
First comes the strategic bankruptcy, well in progress at Best Buy, where management’s sole focus is improving some arbitrary metric from last quarter, even when doing so actually interferes with customers trying to buy something else. The financial collapse comes later. But if history is any guide, the second part, once it starts, will be quick.
As with many large retailers unable to cope with new channels and new consumer expectations, the company will continue to sputter on fumes, slowing down bit by bit until one day it just stops moving. Think of Elek-Tek, Virgin Megastores, or KB Toys.
The new conventional wisdom says that big box retailers like Best Buy are going the way of the dinosaur. Online giants, notably Amazon, are the future. Online retailers are more efficient, because they lack physical locations, and so can offer better prices. Shopping online is also more convenient. On the web, consumers can shop anywhere they are, day or night. (Amazon has a market cap of $80 billion and a P/E of 91.)
Best Buy and other traditional retailers complain that Amazon can undercut them in prices because the site doesn’t charge sales tax, and that Amazon customers use Best Buy as their showroom, taking advantage of the extensive, well-stocked locations and knowledgeable staff to research products they actually buy from someone else online.
Online competitors are certainly part of Best Buy’s problem, but not for the reasons it thinks. What’s really going on is more basic. Best Buy just doesn’t understand its customers’ point of view.
More than a decade ago, in “Unleashing the Killer App,” I wrote that while transitioning to the Internet was revolutionary for retailers, it was merely evolutionary for customers. “Ensure continuity for the customer,” I said as one of my twelve rules for building killer apps, “not yourself.”
What I meant was that consumers easily adapt to alternative retail channels. Before the Internet, there was catalog shopping and home shopping from television. For consumers, buying online was just the next step in an obvious progression of more convenient ways to buy.
For brick-and-mortar retailers, however, the shift was jarring. Moving online required new thinking, new management structures, and new strategies. It would also require integrated front and back-end information systems. Customers would expect inventory to be transparent between the web and the stores, and that specials and “exclusives” would be consistent across all channels. Whatever attributes they associated with a retailer’s brand—whether price, quality, convenience, expertise, service—would need to be translated to the online experience and enhanced.
To compete successfully against new online retailers, traditional retailers would also need to find ways to transform the expensive liabilities of physical locations with limited hours and high labor and inventory costs into assets that complemented rather than competed with the online experience.
Best Buy’s Wounds are Mostly Self-Inflicted
Many retailers have struggled to make the transition; some have fallen on their swords along the way. So far, Best Buy fails on every measure. The company has its own website, of course, and offers customers the opportunity to order online and pickup and return in-store. (At the Pinole store, there is a separate line for pickups at the customer service desk, though it is staffed by the same people who handle returns and other service problems. Lines are longer and slower than for in-store checkout.)
But the website doesn’t seem to be programmed for even basic inventory management. An article in the Minneapolis Star Tribune, the company’s hometown newspaper, reported a few days before Christmas that the company had only just informed some customers that online orders, some placed the day after Thanksgiving, couldn’t be filled and were being cancelled. The out of stock items included the most popular items, including TVs and iPads, “as well as other tablets, cameras, laptops, PS3 games and the Nintendo Wii.”
The company issued a statement that read: “Due to overwhelming demand of hot product offerings on BestBuy.com during the November and December time period, we have encountered a situation that has affected redemption of some of our customers’ online orders.”
Let’s parse that sentence for a moment. The company “encountered a situation”—that is, it was a passive victim of an external problem it couldn’t control, in this case, customers daring to order products it acknowledges were “hot” buys. This happened, inconveniently for Best Buy, during “the November and December period,” that is, the only months that matter to a retailer. For obvious reasons, the statement ties itself in knots trying to avoid mentioning that the “situation” occurred during the holidays.
The situation that Best Buy “encountered” has “affected redemption” of some orders. Best Buy doesn’t fill online orders, it seems. Rather, customers “redeem” them. So it’s the customers, not Best Buy, who have the problem. And those customers haven’t been left hanging; they’ve only been “affected” in efforts to “redeem” their orders. It’s not as if the company did anything wrong, or, indeed, anything at all.
It’s all so passive. It’s also a transparent and truly feeble pack of lies. Here’s what the honest and appropriate release would have said: “Due to poor inventory management and sales forecasting of the most popular products during our key sales season, we can’t fill orders we promised to fill weeks ago in time for Christmas.”
There’s a little more to the Best Buy’s press release: “We are very sorry for the inconvenience this has caused, and we have notified the affected customers.”
Again, note the use of the passive voice—”this” refers to the “situation” that Best Buy “encountered.” The “situation,” not Best Buy’s poor operations, “has caused” inconvenience to customers. It’s not something Best Buy did wrong. It’s like they’re reporting the weather; something utterly out of their control about which the company is a mere observer. They’ve “notified the affected customers” despite, it seems, no sense of obligation to do so, let alone to find a solution to a problem entirely of the company’s own creation. How sorry are they, do you think?
Again, here’s my rewrite: “Three days before Christmas, too late for the customers to make alternative arrangements, we are just now letting our would-be customers know. We have no excuse for such amateur behavior.”
According to the article, the company refused to answer any questions beyond the release. Here are a few: How many customers were affected? What specific products were involved? How has the company failed so badly to perform to even the lowest standards imaginable for a retailer at Christmas? Did the company expect anyone would be fooled by the ridiculously obtuse statement of non-apology?
It’s Not Amazon that’s Killing Best Buy—But Best Buy Could Certainly Learn How it’s Done Right
It’s not competition from Amazon that’s killing Best Buy here; Best Buy is doing most of the damage to itself. But let’s compare the two to see how retailing–online or otherwise–is done correctly.
First, it’s hard to imagine anything so pathetic happening at Amazon, and even harder to imagine the company failing to own up to its errors. Amazon does not take orders it cannot fill, and it does not wait until the last minute to cancel them without offering any kind of solution.
Amazon lives and breathes the customer’s point-of-view. It completely engineers its business practices, its systems, and its people to support it. When they make a mistake, they admit it and they fix it. Immediately. Once, when I had a problem with a new TV that turned out to be a manufacturing flaw, the company begged me to let them pick up the unit, send something else, and install it for me. That was more solution than I needed, let alone asked for.
It’s not just Amazon’s prices that are better, in other words. Its customer service is superior in every way. And unlike traditional retailers, it recognizes its own potential disadvantages and innovates ways to overcome them. The company has no retail locations to pick up merchandise, but it ships instantly, often for free. It has no on-site sales experts to answer questions, but the pages of its products are filled with videos, FAQs, and customer reviews and answers.
The company keeps track of all previous orders, and uses its database to make helpful recommendations of other purchases. Phone support is instant, responsive, and knowledgeable. Returns are simple and unburdened by restocking fees and other gotchas. Inventory is precisely managed in a single system that spans all distribution points and third party partners.
Best Buy could have done all of this years ago, and done it better. It had decades of experience in retail, in customer service, in distribution, in forecasting, in marketing and sales. It had, one presumes, computer systems that could have been upgraded to integrate with a new online front end. It had expertise in the electronic products it sells, and potent leverage over key manufacturers to ensure favorable terms and access.
(Years ago, the CEO of a leading appliance manufacturer told me he felt obliged to keep a low profile on the Web or face the wrath of his main retail partner. Not many years later, the partner, Circuit City, was out of business. Oops.)
But Best Buy squandered all of those assets. And now, along with many of its big box peers, the company is caught in a death spiral. Not because of new competitors who, fairly or unfairly, are eating its lunch. These wounds are self-inflicted.
What is management so busy with that it can’t fill orders for the most popular products during the most important weeks of the year? Since 2009, CEO Brian Dunn has been busy pursuing a strategy of protecting market share over profit. In the quarter ending November 30, 2011, store sales increased 1%, the first increase in two years. Margins, however, sank–net income dropped by 29%.
The annual report is largely silent on initiatives; the company’s website says only that “To meet the unique product and service needs of our customers, our stores and operating models are being transformed to shift our focus from product-centric to customer-centric.” If only.
The company doesn’t report, of course, on customer satisfaction. But there’s a postscript to my personal story. In part because he was distracted by the “expert” sales staff prying into his personal finances instead of actually providing assistance, my friend mistakenly purchased the wrong DVD of a NASA documentary—he accidentally got one he already had. We returned the next day to exchange it for the correct one. Sorry, said the customer service staff, DVDs are “software” and can’t be returned or exchanged once sold. No exceptions.
True enough, the return “policy”—several hundred words printed on the back of the sales receipt—says that software cannot be returned. Why not? It’s our policy.
But I already have this one, my friend said. “We can’t help you.”
Not to beat a nearly-dead retailer, but does Best Buy know that Amazon not only allows easy return or exchange for DVDs without restrictions, the company will even buy back ones you’re finished with? And even if the customer is outside the return window or is otherwise technically not entitled to do what she’s asking to do, the company bends over backwards to bend its policies in the interest of happy customers and the on-going customer relationship.
Whistling in the Dark
I’m not shilling for Amazon or any other successful online retailer here. My point is much more basic. Amazon neither invented nor appropriated its basic strategies from Best Buy or anyone else. It simply does what consumers want. Best Buy does what would be most convenient for the company for consumers to want but don’t, then crosses its fingers and prays. That’s not a strategy–or not a winning strategy, in any case, now that retail consumers aren’t stuck with the store closest to home.
There’s no magic to retailing “hot” products and doing so at a profit. Efficient inventory and distribution, managing customer relationships for the long term, competitive pricing, pre and post-sales support for technically complex items: these are the most basic elements of competitive advantage for a retailer that actually wants to stay in business, now but in the past as well. Most of what Amazon does right has nothing to do with technology or the Internet at all.
Instead, Best Buy is futilely focused on the mathematics of market share. It’s groping with questionable expansion in Europe and China, and with services such as its recently-acquired Geek Squad subsidiary. (It also bought Napster in 2008, then sold it to Rhapsody this year for an undisclosed amount.)
What else has the company got? Management, at least, still believes it has competitive advantages–advantages that even make it attractive to shareholders. According to the company’s most recent annual report,
We believe our dedicated and knowledgeable people, store and online experience, broad product assortment, distinct store formats and brand marketing strategies differentiate us from our competitors by positioning our stores and Web sites as the preferred destination for new technology and entertainment products in a fun and informative shopping environment.”
There’s just one problem. Not one word of that, at least in my experience, is true. Their “people” are not knowledgeable; they are annoying. The store “format” is entirely generic; perhaps a little confusing. The stores and Websites are not “preferred destinations”—they are destinations, at best, of inertia, or in the case of exclusives, destinations of the only resort. The “shopping environment” is the opposite of fun and informative. It’s depressing and humiliating, as in “I can’t believe I had to go to Best Buy to get this.”
What you’re hearing is the sound of a once-leading retailer whistling in the dark. The only question is whether Best Buy management and investors actually know that, or whether it’s obvious only to consumers. My guess is that they don’t “believe” a word of this, but don’t want to admit it to themselves. (It’s clear from the Christmas debacle that they wouldn’t feel obliged to admit it to anyone else.)
Best Buy is living in the corporate equivalent of what psychologists call a state of denial. In business, that’s usually the first step in a failure that ends with a spectacular collapse.
Gradually, then suddenly.