Best Buy Needs to Rethink Its Retail Model

Best Buy can dominate electronics retail, but it has to focus on services, not commodity products consumers can get online.

Jun 12, 2014 at 6:05PM

Best Buy's (NYSE:BBY) revenue and stock have halted a free fall this year, but the business is far from being in good condition. Last year's revenue fell 3.4% to $42.4 billion, and fiscal first-quarter revenue was down 3.3% as electronics sales continued to decline.

The most visible problem is online retail, where companies like Amazon.com (NASDAQ:AMZN) have lower operating costs and sell for a lower margin than those operating brick-and-mortar stores. And that problem isn't going away any time soon. Best Buy has to adapt just to survive.

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Amazon can offer customers lower prices and fast delivery, eliminating Best Buy's advantage for many electronics products. 

Electronics as a product is dying for Best Buy
The Best Buy of my youth was a wonderland of electronics, media content, and games. It was the best place to go to find everything from the latest TVs and boomboxes to movies and CDs.

That's probably still the case today, but it's far from a monopoly, because those same electronic items are at our fingertips online. And you can gather a lot of useful information from user or expert reviews without leaving the comfort of your home.

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Streaming content has eliminated the need for DVDs and CDs, which were once a big part of Best Buy's sales.

Amazon has perfected the online sales pitch, offering quick shipping, user reviews, and an algorithm that matches you with suggested products. When combined with lower prices than Best Buy and a larger selection, it's easy to see why sales are slowly flowing Amazon's way.

Best Buy can't compete with online retailers or streaming content providers for commodity electronics sales. It has to find another way to add value to consumers, or risk going out of business. 

Electronics as a service
What Best Buy needs to see is that Amazon can't compete for every retail product. In particular, services are where the company falls short of a company like Best Buy.

The shift to services is already taking place, and Geek Squad is a growing part of Best Buy's service offerings. Geek Squad is an easy place to get your computer looked at, and it's expanded offerings to devices from iPods to car audio.  

Magnolia, which isn't featured in every Best Buy store, is also one of the best places to go if you're looking to spend $10,000 or more on building a home entertainment system. High-end speakers can be tested, you can touch and feel the products you're looking at, and they offer custom home design and installation. 

These products work because they're electronics purchases that people want to use but don't want to have to be experts at installing. It's analogous to Home Depot in home improvement. I want to have a nice kitchen, but I have no idea how to put one in, so I go to Home Depot, where they can line up products and installations to suit my needs.

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Geek Squad has given Best Buy a footing in the services business. 

Where Best Buy can grow
I think there are a number of ways Best Buy can expand its electronics services model and dominate some emerging industries in the process.

The first is solar energy. Best Buy has begun to test the waters in solar by allowing SolarCity (NASDAQ:SCTY) to set up sales posts in some stores, but this is far from an aggressive move into solar. What the solar industry needs, and what Best Buy could provide, is customer education and the ability for people to touch and feel the products being installed.  

Like buying a high-end home theater system from Magnolia, Best Buy could offer the ability for consumers to touch and test solar products from a variety of manufacturers and then walk them though the buying process and financing options. In a highly fragmented industry, Best Buy could come to dominate the retail of solar power systems that cost $15,000 to $40,000 for the average home. SolarCity is looking to install 1 million solar power systems by 2018, so the opportunity is huge if Best Buy can garner a significant share of the market. 

The other industry where customers need education and service is electric vehicles. Outside of Tesla Motors, most innovative electric vehicles come from small companies like Brammo, Zero Motorcycles, Duffy Electric Boats, and others, with little distribution muscle. Those who want to go electric have to install a charging station, so it's an intimidating purchase for consumers. Best Buy could offer some vehicles, but also the charging solutions people will need in their home. 

Wrap all of this together, and you get a need for home electronics management. More and more devices are now connected remotely, but buying and setting them up to work the way you want is often more difficult than people would like. Best Buy could be the one to make sure your streaming device, lighting, sound system, television, air conditioning, solar power system, and electric vehicle all operate from a single connected device. 

How Best Buy can survive
Online retail isn't going anywhere, and Best Buy won't be able to compete long term with more nimble sellers of commodity electronics items.

Where the company can add value is in making intimidating and complex electronics purchases easier for consumers. The need for services in electronics is high, and it's a high-margin business if Best Buy decides to make a fundamental shift in its business. But it's easier said than done, and few retailers in history have made the kind of business model change that Best Buy needs just to survive. 

Wearable smart devices are here
Wearables add to the complexity of electronics these days. Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them and see Apple's newest smart gizmo, just click here!

Travis Hoium is short shares of Amazon.com. The Motley Fool recommends Amazon.com, Home Depot, SolarCity, and Tesla Motors. The Motley Fool owns shares of Amazon.com, SolarCity, and Tesla Motors. 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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