What's Really Killing Best Buy?

Everybody knows Best Buy's (NYSE: BBY  ) seen better days. Many commentators have been attributing Best Buy's current ill health to Amazon.com's (Nasdaq: AMZN  ) formidable competition in electronics. It's easy to buy that theory because it makes perfect logical sense, but wait: It's only one part of Best Buy's problem.

Think about it. Amazon.com has been around for a long, long while; it didn't suddenly achieve uber-greatness in the last year or so. Until January 2009, Circuit City was kicking around out there, too. In other words, other factors have changed, and they're all killing Best Buy.

Changing of the guard
Forbes contributor Larry Downes doesn't buy the "killer Amazonian" excuse for Best Buy's troubles, either. He recently published a piece pointing out that Best Buy's customer service (and customer comprehension) has gone down the tubes since CEO Brian Dunn took over the helm. That's a huge deal; for years, Best Buy's goal to build its competitive strength and differentiation was specifically anchored on providing a customer-centric shopping experience.

That's no small ding against Best Buy. Former CEO Brad Anderson, who retired in mid-2009, tried out innovative approaches (such as the Results-Only Work Environment experiment) that it's now tempting to believe Dunn has either abandoned or botched.

Dunn has attempted to defend Best Buy's honor against the Downes commentary on the Web; my Foolish colleague Rick Munarriz covered the controversy, pointing out Dunn's move was a big mistake. Stuff's going wrong, and needs to be fixed.

Meanwhile, you've got to wonder if Best Buy's brewing problems on Dunn's watch have been camouflaged by the fact that Circuit City disappeared from the retail landscape. Market share flowed to its one major big-box alternative, regardless of whether customers were really excited or happy to be at Best Buy or not.

The ease of gaining that market share might have fooled management (and, unfortunately, investors) into thinking Best Buy was executing just fine. I know I thought Best Buy was still a contender for quite a while, and even suspected it was a bargain -- until I started noticing shocking stumbles and began to suspect its better days probably were behind it.

When times are tough, retailers still need to deliver "wow"
If you look at Best Buy's annual results for the last several years, you'll see that sales dropped off badly in the fiscal year ended February 2011. I'd contend that another facet of Best Buy's toxic cocktail of problems is the lackluster U.S. economy. High unemployment and limited incomes simply can't support scads of stand-alone electronics retailers anymore.

A major piece of the puzzle is that the retail landscape remains oversaturated with big-box retailers that feasted on the bubbly economy (and consumers' feeding frenzies). The ugliness is still slowly playing out. I'd avoid shares of RadioShack (NYSE: RSH  ) , Conn's (Nasdaq: CONN  ) , and hhgregg (NYSE: HGG  ) , too. With the exception of RadioShack, they're all trading at low PEG ratios, but hey: They're also all shopping for a finite number of bargain-hunting customers.

To add some anecdotal color here, I recently went looking for some items at Best Buy and hhgregg, and was extremely underwhelmed by both experiences. The often-repeated theory that electronics retailers like these are simply "showrooms" for online retailers like Amazon sounds about right -- and only if you want to look at gadgets every other store has. There was absolutely no "wow" factor in my browsing experiences.

Beware Best Buy stock
Best Buy's trading at just seven times forward earnings and sports a PEG ratio of 0.87. That might sound like a beaten-down value stock if there was good reason to believe a growth-oriented turnaround was in the works. Right now, that looks exceedingly unlikely. Investors should beware of Best Buy shares; some stocks are "cheap" for a reason.

What do you think is really killing Best Buy? Sound off in the comments box below. And if you're looking for more retail-related reading, download our report "The Real Cash Kings Changing the Face of Retail," absolutely free.

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Amazon.com, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of hhgregg and Amazon.com. Motley Fool newsletter services have recommended writing covered calls in 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.


Read/Post Comments (5) | Recommend This Article (9)

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 10, 2012, at 3:44 PM, AvianFlu wrote:

    A soundtrack album that I have two songs on just scored a distribution deal with Best Buy. That is probably what is killing Best Buy!

  • Report this Comment On January 10, 2012, at 11:34 PM, iamnik77 wrote:

    I like stores that stock a variety of quality merchandise at competitive prices arranged in such a way that my shopping experience is positive and memorable. I also want a staff that is both knowledgeable and that is looking out for my best interests. Best Buy needs to get into the minds of its customers and start giving them what they want rather than “what would be convenient for Best Buy for its customers to want”. Best Buy doesn’t have to beat Amazon in price because it has an advantage Amazon doesn’t: instant gratification. I am willing to pay a little more to have something now rather than wait for a week if the process of going to the store to buy it is enjoyable. Going to Best Buy to buy something isn’t just a business transaction. I want to be dazzled by what a store has to offer. I had that feeling when I walked into Best Buy back in the mid 90’s. I’m hoping Best Buy can turn things around but experience has taught me turnarounds are rare and what is more likely is a smaller nimbler competitor rises up to fill the void.

  • Report this Comment On January 11, 2012, at 1:14 PM, will1987 wrote:

    I have never had a problem with any Best Buy because I guees I go there every day and know the layout of the stores by heart because they are all the same in Louisiana! Hell here in Hammond we have greeters like at Wal Mart that ask if we need help with anything. and another thing is that they never have many customers because there is a Wal Mart and a target right next to them in the area so they have time to deal with customers and build a great relationship with them.

    Another thing if people are having problems with there Cellphones, Ipads, tablets, etc. way would they take that to Best Buy when the Cellphone stores like Sprint has way more knowledge on that subject than Best Buy will ever have. And they can fix the issues within a day unlike Best Buy so take those to the cellphone stores idiots not Best Buy and that will get rite of some problem with Best Buy that you have.

  • Report this Comment On January 13, 2012, at 1:33 PM, Mdabercoe wrote:

    Whats killing Best Buy?

    A friend of mine went in to buy a $200.oo television - the salesman attempted to sell him an HDMI cable that cost more than the TV - pure greed is what is killing Best Buy.

  • Report this Comment On January 13, 2012, at 3:04 PM, Popnfresh100 wrote:

    will1987 touches on the big picture problem: the new business model for tablets, and cellphones, and I would also add ereaders.

    It has become common for cell phone companies to use tablets and cellphones as a "loss leader". And now the problem is getting worse with Amazon and Barnes and Noble joining in as well to use that strategy with content.

    When the product you sell becomes a "loss leader" for someone else. You are in serious trouble. You cannot compete with retailers who aren't even trying to make money in the first place.

    And for Best Buy, the problem is worse because Apple, Amazon and BKS are combined retailer-manufacturers. So BBY is not only losing customers, but they are losing suppliers as well as pure manufacturers like Dell and HP are squeezed out of the business.

    This puts BBY in a "death spiral" situation.

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