Best Buy Is Junk, and It's Not Amazon or Apple's Fault

Best Buy (NYSE: BBY  ) has been losing its luster for about a year now, and the big-box retailer has been unable to pull itself out of the dumps. Customers have been avoiding the store, if its Q4 results are any indication, and investors are not keen, either, as the stock has lost nearly 20% of its value over the past year. As the retailer suffers a downgrade from Standard &Poor's placing it perilously close to junk status, and as it also firms up plans to lay off hundreds more employees and revamp their retail store model, the question persists: What went wrong?

One theory: Amazon and Apple are to blame
A market analysis released last summer found that Amazon.com (Nasdaq: AMZN  ) enjoyed a leg up on retailers such as Best Buy, Target, and even PetMed Express because of its large pricing advantage relative to other vendors. This certainly seems true. CNET even alleges that Best Buy has been reduced to showcasing electronic products for customers to then purchase on Amazon.

As it turns out, though, Amazon is considered only one of the problems. Another is Apple (Nasdaq: AAPL  ) .

A recent article from Reuters opines that Best Buy and fellow sad sack Radio Shack (NYSE: RSH  ) are made to suffer by hosting Apple's products within their stores. Margins for Apple devices are tighter than for other brands, of course, but those items bring in foot traffic that might not have entered the store under other circumstances -- hence, the reason to carry Apple products in the first place. It's a low margin Catch-22 that hurts these retailers. However, the stores do make more profit on Macs than on PCs and almost always sell an accessory or two with that iPad or iPhone.

And the real story is ...
Is Best Buy really being bullied by the big boys? Certainly, the competitive threats are real, but to lay all of the company's problems at that doorstep seems overdone to me. After all, competition is the name of the game, and other retailers going up against Amazon are not suffering the same fate as Best Buy. As it turns out, the real problem is how Best Buy treats its customers.

The company suffered two huge public-relations embarrassments late last year, during the run-up to the all-important Christmas buying season. The first, whereby customers who had rung up big purchases within the year were unable to take advantage of the store's online targeted specials, was bad enough. The second problem was a customer-service nightmare: The company notified many shoppers within days of the big holiday that the orders they had placed weeks previously would go unfulfilled. Doubtless, these incidents contributed greatly to Best Buy's less-than-stellar Q4 numbers.

Then there was the Forbes.com article, which pointed out the hard-sell tactics -- usually unrelated to the customer's actual shopping mission -- being employed by Best Buy staff. Forbes noted that the piece received almost 2.5 million views and nearly 1,000 comments in a week's time. Even Best Buy's CEO responded to the piece, albeit on the company's own turf.

The post by CEO Brian Dunn on Best Buy's blog defending the store isn't half as interesting as the many comments by employees and customers -- 292 comments at last glance, in fact. Quite a few stories describe employees being forced to hard-sell expensive services that customers don't want, while customers complain about being pressured to buy things they aren't interested in. I didn't read all the comments, of course, but it seems obvious that this issue is something that the company needs to address soon if it to survive.

All in all, the Best Buy method of doing business is broken and needs to be fixed. Even S&P has taken note. Instead of viewing the drastic changes the company has planned as moving in the right direction, the agency sees a shakeup borne of problems inherent in the company's business model.  And blaming Apple and Amazon isn't going to help the company in the least.

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Fool contributor Amanda Alix owns no shares in the companies mentioned above.

The Motley Fool owns shares of Amazon.com, Apple, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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