Is Best Buy’s turnaround a roadmap for competing with Amazon?
Just a few years ago, Best Buy looked like a dead duck. Investors and customers alike were ready to dig its grave in the retail cemetery right next to the tombstones of once-soaring electronics and appliance chains Circuit City and CompUSA, and the bier being readied for RadioShack.
The company was walking around with a bull’s-eye on its back, painted by the juggernaut known as Amazon.com, but it had other problems.Top management was in chaos. Its huge stores had gotten dingy, populated by a shrinking sales force seemingly interested more in selling customers overpriced extended warranties than in steering them to the most suitable merchandise. The locations seemed destined to serve as “showrooms” where customers would sample their wares hands-on before going home to order from Amazon.
The company’s choice of a new CEO, the French-born Hubert Joly, hired in 2012 from the company that owned the Radisson Hotel chain and TGIFriday’s, drew brickbats from analysts, who pointed to Joly’s absence of retail experience.
Surprise, surprise. In the last three years Joly has staged a recovery at the Richfield, Minn., company that has people talking. “The turnaround at Best Buy is one of the most impressive in the history of retail,” gushed Timothy Green of the Motley Fool recently. (Green’s an owner of Best Buy shares.)
For the second quarter of 2015 ended May 2, Best Buy reported a gain in comparable sales (including stores and online) of 2.8%, with an increase in online alone of 17% over a year earlier. On an annual basis, Best Buy swung from a $1.23-billion loss on $43.4 billion in sales for the year ended March 2, 2012, to a $1.23-billion profit on $40.3 billion in sales for the year ended last Jan. 31, following a change in its fiscal year.
That hints at the elements of Joly’s turnaround strategy. It starts with an upgrade of the brick-and-mortar stores. When I visited my neighborhood store recently, I found it completely redesigned--roomier, airier, well-organized and -stocked, and staffed with attentive, knowledgeable salespeople.
But Joly took deliberate aim at Amazon. In 2013, he broadened Best Buy’s price-match policy to cover the online retailing giant and 18 other retailing websites. (In the old days it would match local but not online prices). It ships some products directly from its stores to online customers, which narrows if not eliminates Amazon’s advantage in having strategically situated warehouses from which to ship its vast inventory. These steps encourage store shoppers to actually buy on the spot, knowing that they won’t get a better price from Amazon, and online shoppers to hit the checkout button on Bestbuy.com.
The new policies have squeezed Best Buy’s profit margins, but the company has tried to make up for it by ruthlessly paring costs--cutting staff more at the middle-management level rather than in the stores.
Not all the improvement is due to Joly’s efforts. One difference is the end of the price advantage Amazon enjoyed by not collecting sales taxes from its customers in many states. In 2012, Joly told Wall Street analysts last week, as few as 40% lived in states where Amazon collected sales tax; today it’s 89%. “So that’s a very material change over a period of three years,” he said.
And some reflects the upswing in the economy and in some big-ticket categories, especially home appliances, which Best Buy has emphasized with a dedicated sales force. (Appliance comparable sales gained 12.3% in the last quarter over a year ago.)
But the chain is still a prisoner of sales trends. In the last quarter, consumer electronics comparables gained 7.6% thanks to healthy sales of big-screen TVs. But computer and mobile phones fell 2.2% because of “continued significant industry declines in tablets” and computers.
Service revenues fell sharply as the warranty repair business shrank, but Joly says Best Buy is investing more in non-warranty service, including Apple Store-like classes and customer advice, and by selling customers on long-term contracts that offer hardware and software support and coverage for accidental damage, similar to the AppleCare plans offered on iPhones and other Apple products.
Whether this is a formula for long-term success won’t be known for some time, but it’s an approach to the Amazon challenge that Best Buy’s departed rivals never tried. Among the few differences between brick-and-mortar retailers and the sit-at-home convenience of Amazon is the hands-on experience and the opportunity for personal contact with the consumer.
If the front line of the retail sales force is a gang of bored know-nothings, then it’s advantage, Amazon. If it’s attentive and knowledgeable staffers backed up with price guarantees and long-term customer support, there may be hope for stores even in the eCommerce world.
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