You're Making Things Worse, Best Buy

Best Buy (NYSE: BBY  ) CEO Brian Dunn had his heart in the right place.

Hoping to combat the viral popularity of Forbes contributor Larry Downes' scorching "Why Best Buy is Going out of Business...Gradually" article, Dunn decided to use the struggling retailer's corporate blog to defend his company on Friday afternoon.

Downes had gone for the jugular in ripping into the consumer electronics behemoth, as many of us have lately after catching the scent of Best Buy as a wounded animal. He singled out the company's cascading margins, aggressive up-selling tactics of its employees, and archaic return policies. Downes obviously ate into Best Buy's inefficiencies relative to Amazon.com (Nasdaq: AMZN  ) and the cost efficiencies of smaller dedicated e-tailers. There's a reason why even BestBuy.com isn't growing half as quickly as Amazon, folks.

Dunn saw it, didn't like it, and decided rallying the troops was in order.

"Best Buy has been taking some criticism lately," he begins.

Dunn concedes that Best Buy isn't perfect. He admits that the retailer blew it with the last-minute cancellation of several holiday orders placed weeks earlier. He also agrees with the criticism that Best Buy has been slow to transform its model.

However, it's at that point where Dunn decides to sing the praises of Best Buy and its 180,000 employees.

Big mistake.

Dunn and dumber
Hoping to back up his cheerleading with data, Dunn points to a recent NPD Group study where the market research provider points out that nearly 80% of consumer electronics purchases still go through physical stores. He also offers up that 40% of the orders through the BestBuy.com website are placed for in-store pickup.

The problem with snapshots is that they don't tell us where we are or where we're going. Was it more than 80% five years ago? Will it be less than 80% five years from now? We know the answers.

Here are some nuggets from a different NPD Group report that came out last year.

  • 81% of consumers either shop or research for consumer electronics online.
  • Online-only retailers are more effective than retailer websites in converting traffic into sales.
  • Lower prices are why 83% of in-store shoppers ultimately walk away and buy online instead, and 19% of them are already whipping out smartphones to do comparison shopping.

Dunn points out how Best Buy generated more than $2.6 billion in cash flows from operating activities during the first three quarters of the fiscal year. He also claims that Best Buy gained market share during the fiscal third quarter (which seems to be a pretty dubious bragging point when sales rose by a mere 2% -- unless the world inexplicably bought less than 2% more worth of consumer electronics than it did a year earlier).

Best Buy is holding up these days, but that's never been the point.

No one says that Best Buy is dead. Folks just realize that Best Buy is dying.

"Best Buy is living in the corporate equivalent of what psychologists call a state of denial," Downes concludes in his sharp critique. "In business, that's usually the first step in a failure that ends with a spectacular collapse."

Open mic night is a disaster
Best Buy has guts for letting folks post public comments on Dunn's blog entry. Maybe it didn't foresee the damaging reader opinions that would follow. Most of the more than 100 comments that have piled in during the weekend are brutal.

The first batch came from employees who are tired of having to hard sell product warranties, Best Buy card applications, Geek Squad tech support memberships, and the ridiculous buyback protection program whenever someone is ready to buy. This was followed by consumers -- and former shoppers -- who have grown frustrated in seeing the arguably knowledgeable staff transformed into an army of shills for up-sell programs that they don't need.

Didn't Best Buy realize that one of the reasons Circuit City folded three years ago was because of its overly aggressive sales floor? Folks hated it when RadioShack (NYSE: RSH  ) used to ask for their phone numbers, and that was solely for marketing purposes. These add-on services may be incremental offerings carrying chunky margins for Best Buy, but consumers are also smart enough to realize that the flipside of that equation is that they are out more money ordering losing propositions.

The Internet is cheap, always open, and it's just not as creepy as Best Buy has become.

Closing on a positive note
Best Buy is doing a few things right. Following GameStop (NYSE: GME  ) into buying back and eventually reselling used media and gadgetry is smart, at least until digital distribution renders both GameStop and Best Buy moot. Opening up smaller Best Buy Mobile kiosks -- ripping a page out of the RadioShack playbook -- is a strategy that will at least buy it some time.

However, there will come a point where the costs involved in running a brick-and-mortar operation can never match the dot-coms that do it for less. This isn't just about the state sales tax issue, which will also become irrelevant in the coming years. As time goes by -- and connectivity grows -- the number of people paying a premium for instant gratification (i.e., Best Buy shoppers) will diminish.

There are ways around this. Conn's (Nasdaq: CONN  ) was one of the few stocks to more than double last year, emphasizing furniture, appliances, and even lawncare gear that are tough sells in cyberspace. However, even that model will one day grow obsolete.

Dunn, your employees aren't happy. Your customers aren't happy.

You better not be happy.

If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

The Motley Fool owns shares of RadioShack, GameStop, Best Buy, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com. Motley Fool newsletter services have also recommended writing covered calls in GameStop and Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 09, 2012, at 7:02 PM, neamakri wrote:

    Thanks Rick. This article makes for good, thoughtful reading. You pointed to the one thing (besides price) that customers want most; a pleasant shopping experience.

    You also touched on extended warranties etc. When a clerk offers extended warranty I say this inside my head;"they aren't offering this because they are your friend, they are offering it to grab more money from your wallet".

  • Report this Comment On January 09, 2012, at 8:55 PM, TMFTypeoh wrote:

    Rick,

    Great article.

    I for one will not be crying when best buy finally goes the way of circuit city. Best buy "sold" me some monster cables a few years back, and I've hated them ever since. Throw in the return policy from hell, and you see what I mean.

    Amazon has a great shopping experience, is far cheaper, and excellent customer service. Why bother with best buy?

    Good riddance.

  • Report this Comment On March 26, 2012, at 4:01 PM, graywolfman wrote:

    I used to work for Best Buy. They have done some shady things to employees lately, too. They recently decided to "enforce" availability on their part timer staff and if you don't meet it, you're fired; this was policy straight from corporate. They also cut benefits on full timers and all but destroyed the employee discount. They claimed "it's not about money, it's about staying competitive".

    On top of everything being about money (if you get a credit card app, they are more likely to spend X amount of dollars! Why didn't you get one??), plans that I wouldn't buy, and more training on how to sell than product knowledge... I don't miss working there. I got out and I'm working an ACTUAL IT position now. Good riddance, I have only gone there to pick up friends that are unfortunate enough to work there now, and for no other purpose.

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