Why Best Buy Sales Are Struggling

While the company has said that the lack of innovation has led to a drop in sales, waiting for the next big thing is not where the chain's future lies.

May 27, 2014 at 12:55PM

With Best Buy (NYSE:BBY) continuing the struggle to revive its ailing retail business, the company has blamed some of its problems on the lack of cool new electronic items to sell.

Discussing its problems during an earnings call, the company cited an external "lack of innovation" as a reason for the sales declines.

That might sound like blaming musicians for the massive drop in the number of record stores, but analysts agree that the lack of a next big thing has contributed to the chain's struggles.

"It is very believable. There really hasn't been that 'wow' product within the consumer electronics industry within the last six or eight months," Brian Sozzi, CEO of Belus Capital Advisors, told CNN Money.

No help is coming

Best Buy made more money in the first quarter than it did in the same period a year ago despite having smaller sales. The company did that by improving its pricing in relation to competitors and online retailers while improving its customer service, CEO Hubert Joly said.

Most importantly the electronics retailer lowered its expenses as part of its ongoing Renew Blue savings plan. The company plans to continue refining its operations, something it needs as it forecasts that sales will continue to fall. The company also blames its expected future sales struggles on the lack of new tech items coming from its vendors.

"We are also expecting ongoing softness in the mobile phone category as consumers eagerly await highly anticipated new product launches," Sharon McCollam, Best Buy CFO, said in a press release. "Consequently, absent any major product launches, we are expecting comparable sales to be negative in the low-single digits in both the second and third quarters."

Best Buy is doing the right thing

While its overall business model may be flawed, Best Buy under Joly has taken strong steps to cut expenses in order to buy time. Making a higher profit on lower sales may not be as desirable as seeing both sales and profit increase, but it's better than losing money. Joly has taken a company that had lost its way and re-engineered into one that executes a dying business model really well.

That is not a recipe for long-term success, but it stops the bleeding. Best Buy was on a slow (or maybe not so slow) death march. Joly might not have saved the company yet, but he made the march a whole lot longer. 

Where does Best Buy go next?

Depending on technological advancement to drive sales seems like a very risky game for Best Buy to play. There is certainly no guarantee that the next smart phone is around the corner or that whatever technological advance will happen next will be one that people shop for in stores.

The biggest challenge to the Best Buy model and the biggest threat to its recovery may be the rapid move to digital sales. Remember when every Best Buy had a large section selling CDs? Now the chain's two locations nearest to my Connecticut home sell just a smattering of CDs and the section devoted to DVDs has shrunk dramatically too. The video game section still has the same amount of space but the days of people buying physical discs for games may be coming to a close.

Games sold via download have already surpassed sales of games on a physical disc, according to research company NPD. "Full game downloads, add-on content, subscriptions, mobile and social network games generated the most cash last year, accounting for $7.22 billion," according to NPD, while physical games earned only $6.34 billion.

Best Buy has already been cut out of the loop when it comes to selling games on mobile phones and tablets and it's slowly getting choked out of the supply chain for consoles. Both Sony (NYSE:SNE)  and Microsoft (NASDAQ:MSFT) have stores on their next generation consoles that make it possible to download new titles without waiting in line at a store. The console makers don't need Best Buy so it's in their best interest to steer sales away from the retailer. Why share profit with a store when you can sell direct and make more (while possibly even charging less).

It's not just content sales (music, movies, TV, and video games) that Best Buy has to worry about losing. The Internet makes it easier for companies to sell their own products without needing a retail partner. That means that even if a tech company creates the next big thing tomorrow there is no guarantee that thing will be on the shelves at a Best Buy.

Joly has done a good job

Fixing Best Buy was never going to happen quickly and by lowering expenses and raising profits Joly has given his company time to figure out a model that works. The focus on the Geek Squad makes sense because there is no way to digitally download someone mounting a flat screen in your living room. But that model needs to be tweaked as services are often so expensive that figuring it out yourself often is a better choice.

Joly has also smartly made deals with Samsung and Microsoft for stores-within-a-store locations at select locations. This model could be the key to chain's salvation as the retailer could morph into a kind of bazaar of brand shops. If Best Buy has anything in excess it is space and that space can be used to create brand experiences. In that model Best Buy becomes a sort of mini-mall for electronics. That arrangement makes it easier for vendors to create a branded retail presence while Best Buy gets to spread out its significant overhead expenses. These stores-within-a-store could be a mix of permanent partners and shops set up around product launches or for seasonal items.

Whatever Best Buy's future holds it's clear that waiting for technology companies to create the next big thing is not the answer. And the company knows that ... even if it has chided those companies for not helping enough.

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Daniel Kline is long Microsoft. He likes browsing at Best Buy but rarely buys anything there. The Motley Fool owns shares of Microsoft. 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.

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