There might be no easy fixes for the challenge Best Buy faces in battling competition from online-only retailers, but industry consultants seem to agree that the measures the chain has announced so far won’t address the core of the problem. Closing 50 underperforming stores is a move in the right direction for operational efficiency, but Best Buy shouldn’t be competing with Amazon.com on price, they say—it should be competing on superior customer experience.
Best Buy, once the category leader in the consumer electronics sector, has seen some challenging times of late, including a bad holiday sales season (same-store sales during the company’s fourth quarter fell 1.7 percent) and the sudden resignation of its CEO Brian Dunn on Apr. 10. The chain’s executives blame increasing competition from online sellers like Amazon.com for much of Best Buy’s poor performance, noting that customers have taken to reviewing products inside Best Buy physical stores and then purchasing them from online competitors at lower prices in a practice called “showrooming.”
However, many retail consultants aren’t buying it.
“If the only difference between you and Amazon.com is the 10 or 15 percent difference in price, you are dead anyway,” says Doug Stephens, head of Retail Prophet Consulting, a specialty consultancy.
“‘Showrooming’ is a symptom, not a cause,” agrees Paula Rosenblum, managing partner with RSR Retail Systems Research. “‘Showrooming’ happens when all else falls apart and the customer is frustrated and bored inside the stores.”
In fact, while the portfolio pruning Best Buy has concentrated on so far makes plenty of sense, in the absence of other measures it has all the markings of a retail chain winding down, notes Stephens. What Best Buy executives should be thinking about instead is how to make customers’ experience inside its stores and on its website so exciting they won’t even think about price differences between Best Buy products and products sold elsewhere, he says.
What went wrong?
To begin with, the chain has too much dead space inside its full-line stores, according to David Slavick, vice president of retailing consulting with Customer Communications Group, a Lakewood, Colo.-based customer relationship marketing agency. There is little traffic in the music section of the stores, and the camera area is “uninspiring.” Plus, there are problems with the signage and a lack of knowledgeable customer service representatives.
“You walk in and you don’t necessarily feel excited, or feel an emotional connection,” Slavick says.
Meanwhile, the products available and prices listed on Best Buy’s website seem to be at odds with its in-store offerings, adds Rosenblum. And while its customer loyalty program, the Reward Zone, gives the retailer in-depth insight into its best customers’ shopping habits, it’s not leveraging the information efficiently. For instance, even though Slavick has bought multiple boxed CD sets from Best Buy in the past, he doesn’t get notifications when newly released CDs arrive in nearby stores.
This lack of strategic thinking puts Best Buy in the worst place in the consumer electronics marketplace—the middle, notes Stephens. It can’t beat its online rivals on convenience and pricing and falls behind smaller bricks-and-mortar electronics retailers when it comes to service.
“I think part of the problem, frankly, is that their whole business model is predicated on a world without the Internet, and, unfortunately, post-Internet, Best Buy just didn’t react fast enough to the number of options available to them,” Stephens says.
Brand value
All that being said, Best Buy does have some advantages over its competitors. Its brand name still has significant value, according to Slavick. Plus, it has developed strong relationships with major electronics manufacturers, which means it could potentially work out deals on exclusive product offerings that could give it a pricing edge over Amazon on certain items.
That means that the company can still save itself if it finds the right replacement for Dunn, says Stephens.
“My hope would be that they go out on a limb and try to find someone who is truly innovative and creative and willing to break some rules,” he says. “I get worried when in a crisis the retailers call the operators and the accountants to the table instead of the marketers.”
Some ideas to make Best Buy stores more appealing would involve offering classes for shoppers on how to use the digital cameras and computers they buy there, and staging special events when new video games are released, the consultants offer. Another important step would be expanding and training new customer service representatives, so Best Buy will offer the chance for human interaction and on-the-spot technical support that Amazon doesn’t, notes Rosenblum.
When it comes to store closings, Best Buy might have to raise the number from 50 to 100, given the new market realities, according to Bob Phibbs, who runs consulting firm The Retail Doctor.
“Maybe that would be unpopular to do, but they have too much real estate and their stores are way too big for their traffic,” he says. “It’s not like people in local communities are clamoring for large big-box stores.”
The chain will likely announce more closings as its leases come up for renewal, says Rosenblum.
Unfortunately, Best Buy won’t have the same opportunity to capitalize on its vacant locations as Sears does. At the end of the first quarter, the national vacancy rate for big-box stores nationwide stood at 8.2 percent, according to Marcus & Millichap Real Estate Investment Services,—only 10 basis points lower than a year ago and double the rate at the peak of the market in the first quarter of 2007. Rents averaged $10.43 per sq. ft., down from $10.55 per sq. ft. in the first quarter of 2011.