Black Friday Can’t Save Best Buy

Best Buy can’t catch a break. By every quantitative and qualitative measure, the company is in a long period of gradually accelerating decline. Its stock price is down to about $11 a share from a 52 week high of $28.53. Price pressures from web based rivals, most notably Amazon, threaten the company’s already razor thin margins — and since Best Buy can’t get away with the same loss-leading strategies as Amazon can, it has limited flexibility to discount its inventory in response to Amazon’s constantly downward trending prices.

Best Buy tried an all in gamble a week or so ago, when it announced it would price-match Amazon this holiday season. Here’s the problem — this seems like a gutsy move initially, but closer inspection reveals that it is essentially doomed to failure from the beginning. First, it guarantees Best Buy will lose money. Independent analysts have pegged the predicted cost of this maneuver at about $400 million — quite pricey for a company with only about $680 million in cash on hand. The second problem is this does nothing to solve Best Buy’s core cost problem.

Best Buy is doomed by its massively expensive but brand defining brick and mortar presence. It absolutely must charge higher prices as a result of the costs of operating its stores; if it’s buying the same goods, in similar quantities, as Amazon, but has significant additional expenditures in real estate, labor, maintenance, etc. that Amazon doesn’t (while still needing to duplicate much of the infrastructure of Amazon’s online offerings — so both need distribution warehouses, order fulfillment, etc.), the money must come from somewhere. Previously, it came from higher prices, with customers continuing to cough up due to a combination of ignorance to the availability of online options and the trust in Best Buy’s customer service and experience. However, as consumers become more competent and confident in their technological prowess, they feel less and less need for a Geek Squad employee to suggest their next cell phone, digital camera, or HDTV.

So it’s a Catch 22 for Best Buy — they need deep discounting to get customers in the door, but then they’re locked into losses that they can’t sustain, lacking the reach and dominance of Amazon (or its position as a market darling). Other companies have managed to create a compelling retail experience (see Apple, and other examples we will highlight in future posts) that differentiate them from the cutthroat competition. However, Best Buy hasn’t properly exploited its brick and mortar presence to create a customer connection and foster loyalty to its brand — people still dread going to its stores, which are poorly laid out, with badly trained staff.

A substantially lacking customer experience, an inability to compete sustainably on price due to cost constraints, and slowness to innovate in a rapidly changing retail sector have doomed this longtime success story. Treetops investors, beware — and look out for similar tales in the future, as consumers continue to shift more of their time and money online.