The WSJ reports that Best Buy [NASDAQ:BBY] issued a guidance to their investors in a conference call, warning them that their earnings for the quarter that just closed would not be as good as many had expected. Best Buy’s fiscal quarters do not line up with the calendar quarters of the year as their fourth quarter of fiscal 2014 (calendar 4Q of 2013) starts in November and ends in February. However, they do have a holiday sales briefing, which was scheduled for today (January 16th) where they broke the bad news.
Basically, it comes down to the fact that everyone has been taking different pieces of Best Buy’s cake and Best Buy hasn’t really improved their business model to adjust to that. Sure, they’ve adopted more consumer friendly policies like price matching Amazon and 30-day returns, but they still fail in other key segments that we’ll address after we go over Best Buy’s explanation.
One of their key reasons for the decline in revenue and profitability was their discounting of items. They claimed to discount products in order to preserve market share, even though it didn’t help to boost demand. This clearly indicates that perhaps price isn’t necessarily as much of a factor as Best Buy believes it to be. Part of this is the idea that many consumers nowadays refuse to buy things unless they are marked as a sale item, which is partially true, but at the same time is a byproduct of the recession. Best Buy needs to adjust their marketing and branding to properly reflect this change in some consumers’ perspectives.
The biggest competition that Best Buy faced this holiday season undoubtedly came from online sales. The company reported that their online sales accounted for 11.5% of the company’s November/December revenue, an increase from 9% a year ago. However, their CFO still stated, ?We were out-competed from an online marketing standpoint because of our systems? capabilities related to personalization.? Part of their problem was noted by me firsthand during our Cyber Monday deals article, which pretty much noted a complete lacking assortment of deals that were attractive compared to their competitors online. This, combined with an arguably dated online store and lack of online promotion resulted in a clearly weak online presence for the company. Part of the problem with having a competitive online presence for Best Buy is that they inevitably put their entire business model in jeopardy by being competitive online. With a highly competitive online store, they simply make their brick and mortar stores less relevant.
They also talked about their goals to cut costs by around $700 million and had already achieved cuts of over $500 million, but due to margin losses from the above moves, they are forced to cut even deeper. Which, I believe, may be the wrong move for a company that is clearly still in turmoil. However, the management does not believe that they are shaken by these December results (their biggest month of the fiscal year). They are still going to maintain course and their "opportunities have not changed."
Best Buy’s management also had difficulty selling in mobile with smartphone and tablet sales disappointing, even though Best Buy still has one of the best handset warranty policy among all the carriers and device manufacturers. Sure, programs like JUMP negatively affected Best Buy’s sales, which simply keep people within the carrier’s own sales structure, but another thing is that T-Mobile is one of the hottest carriers right now. Part of the problem with this is that from my recollection, a lot of the deals that T-Mobile offers may be in-store only and not applicable at 3rd party places like Best Buy.
Additionally, from my past experience, T-Mobile doesn’t pay Best Buy as much to sign a contract as AT&T and Verizon do, which partly could affect Best Buy’s willingness to sell T-Mobile and their profitability even when they do. They also mentioned a shortage of high-end devices from Samsung and Apple, however, I am not entirely convinced of this argument because from my recollection even the iPhones were readily available around Christmas. Another factor could also be the success of Google’s Play Store in selling devices direct to consumers who would normally go to Best Buy or a carrier, my experience with Best Buy’s pricing of the Nexus 5 was that they charged $499 for a phone that Google Charges $349, that’s almost 50% more. Of course nobody is going to buy that.
Another thing that sort-of makes me happy about Best Buy’s failure to perform during the holiday season is that it may be that some consumers were simply turned off by Best Buy’s willingness to ruing their employee’s Thanksgiving Day. While I don’t know how much the negative perception has affected the company, clearly it wasn’t a factor in their success, since they didn’t have any.
From my own personal experiences at Best Buy over the years, the problem with Best Buy is their constant battle with the concept of being a physical retailer. They need to decide what makes them the most money and what they believe they can be profitable in. They’ve already gotten rid of physical media and pivoted towards a more broad consumer electronics offering. The company itself needs to get rid of stores that they simply don’t need, for example, in the greater San Diego Area alone there are 10 stores with two groups of three within close proximity of each other. Sure, I like the convenience of having 3 stores within 5 minutes of me, but I only really need one. Yes, this will mean layoffs, but by doing so, Best Buy will improve the efficiency and effectiveness of their stores. San Diego could easily be served by 5 or 6 stores, not 10.
In addition to reducing the amount of stores and addressing their online presence problem, Best Buy also needs to figure out whether or not they are going to be a retailer or a marketplace. Because right now, if you walk into Best Buy’s flagship stores, they look like different marketplaces for different manufacturers. Google has a section, Apple has a section, Samsung has a section, Microsoft has a section and so on and so forth. If Best Buy wants to make money they need to either find a way to service this ‘marketplace’ idea or they need to do away with it. Best Buy continually fails to leverage their most valuable asset, Geek Squad, and make it a part of every sale. Sure, they make all of their employees go through a checklist when selling things to customers, but that isn’t the way that you sell your brand and your services. It needs to be a part of the product, not an option or a menu. Best Buy needs to make itself Geek Squad and improve the knowledge and quality of their sales staff in order to be able to sell more Geek Squad services. Geek Squad services should sell themselves through the salespeople’s knowledge and and understanding and ability to weave this into their sales pitch rather than using a physical checklist.
I could muse on and on about the problems that Best Buy has, but this holiday season really made them more evident than ever. And so did that 28% drop in BBY’s price.