Despite earnings report, Best Buy not a lost cause -- yet

commentary The sharks are circling as the retailer reveals disappointing results and a weak defense against Amazon and Walmart. Can it turn itself around?

"It's like rearranging the deck chairs on a sinking ship." So goes the oft-used simile that references the legendary 1912 sinking of the RMS Titanic. The phrase has been used to describe everything from government disfunction to professional sports disappointment. (Andy Reid, I'm looking at you.) But today, I will apply it to the business of big box, brick-and-mortar consumer technology retail. And there's no bigger ship in this shrinking sea than Best Buy, the American electronics retailer.

Best Buy sign

First, the facts: Best Buy posted disappointing third-quarter results this morning. The company recorded a loss, fed by slumping sales and the burden of an ongoing restructuring that aims to address the growing trend that Best Buy has become a physical showroom for rivals Amazon and Walmart. (Customers stop into the blue-and-yellow, play with a gadget of interest, then return home and buy it for a lower price on Amazon. This isn't some strange boardroom perception; I myself have done the same.)

"Disappointing" quarterly results, I'll remind you, are only disappointing to investors and their expectations -- even Apple can disappoint while posting record sales and profits. For Best Buy, however, something far more dire is present: average store revenue is slipping; sales of laptops, cameras, video games, and televisions are down (and not fully offset by growth in sales of phones, tablets, e-readers and appliances); and the company's latest savior -- turnaround specialist Hubert Joly, installed in mid-August -- has yet to make a dent, though he has only held the company's top position for two months' time.

"Our overall performance was unsatisfactory," Joly said, bluntly, during the investors' call that followed the release of the company's quarterly earnings.

Let's assess Best Buy's chances, shall we?

The good
Best Buy's brand remains extremely well-known.

Best Buy has plenty of cash on hand to buy (no pun intended) it time to turn itself around. It can afford to reinvest.

Microsoft's Windows 8 has been officially released to the world. Thanks to enormous support from partners, a PC resurgence could insulate Best Buy from Apple's grip. (Slightly worrisome: executives refused to speculate on the upside.)

Best Buy's "Holiday Price Match" strategy, which promises to match rivals' online prices. The move could attract shoppers to its stores during the crucial Q4 push, but could just as easily backfire if individual store managers make it difficult for shoppers to obtain reduced prices.

The bad
Best Buy is racing against the clock. A private-equity group led by founder Richard Schulze is angling for a possible buyout; the weaker the company, the easier this is to accomplish.

International margins are "challenged." With domestic sales under fire, that means Best Buy has no growth area to buoy its losses in other geographies.

It's still the hardware business. Margins are thinner than ever, thanks to shrinking screens and devices (even smaller TVs are doing better than their larger counterparts). Best Buy's services business should be a good hedge to this, but it's directly attached to hardware sales, and is therefore seeing corresponding declines.

The ugly
Best Buy, like American rivals hhgregg and Fry's, is still coasting on its turn-of-the-millennium successes. The electronics marketplace is rapidly changing, and retailers -- ever the middlemen -- are finding themselves squeezed from both sides. Today, Apple dominates on sales of its own popular products and Amazon and Walmart undercut Best Buy at every turn, without the burden of square footage. Where can -- and should -- Best Buy compete in this new world order? Should it launch a competitive online division under a different brand name to address the price-sensitive, supply chain-squeezing area of the market? Should it invest heavily in customer service and its stores to differentiate based on experience? (Can it preserve its massive stores and store network with this strategy?) Should it consider pitching Google to run, like a white label service, a network of Google Stores to compete with Apple and Microsoft?

Forget where Best Buy has been. If the company were launching its first store next year, what would it look like? How big would it be? What would it sell? For how much?

Twelve years ago, Clayton Christensen and Michael Overdorf wrote in the Harvard Business Review that large companies faced with market disruption often move to make drastic changes -- to their own peril. "In trying to transform an enterprise, managers can destroy the very capabilities that sustain it," they wrote. Instead, established companies should create capabilities within the organization that can succeed in the new market environment.

What we can see above, in the case of Best Buy, is that the company is still carefully managing an old business in an increasingly new market. Its executives are doing as best a job they can in minimizing the declines rendered by shifting customer preferences, but it's clear that Best Buy is no longer the best buy, for consumers or investors. This is irreversible with the current structure.

The deciding factor: whether Best Buy can obtain -- by home-growing or acquiring -- a business that can take it beyond its big-box retail roots. It has the time, resources, and cash to do it. The question is whether its executives are bold enough to go beyond the blue.

This story originally appeared at ZDNet's Between the Lines under the headline "Is Best Buy a lost cause? Not yet."

 

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