Is Best Buy Channeling Circuit City?

Best Buy (NYSE: BBY  ) may be making a massive blunder in a supposed move that many are comparing to one of the major strategic mistakes that helped kill former rival Circuit City.

Best Buy only owned up to "staffing changes," but according to a Wall Street Journal article, an analyst at brokerage firm Sanford Bernstein contends that Best Buy's reorganization means up to 8,000 senior sales people are basically being demoted to positions that could slash their paychecks in half. According to Sanford Bernstein, the company may also reduce the number of assistant store managers, which could result in cutting about 1,000 salaried workers.

A spokeswoman for Best Buy refuted the idea that it was going down the same path as Circuit City, according to the WSJ article. However, demotions, slashed pay, and layoffs do sound eerily similar, don't they?

Cutting costs is common in today's ugly economic climate, and Best Buy's no stranger to it; last December, the company said it was offering voluntary severance packages to employees, which struck me as a kinder method than most retailers would use to handle such a necessity. However, it did say at that time that involuntary layoffs could still occur in the future.

One of the things I've always liked about Best Buy was its innovative strategy, which included valuing rank-and-file employees, illustrated by innovations like its TagTrade idea. Meanwhile, Circuit City's now-infamous decision to lay off experienced employees and hire cheaper workers without a doubt helped sound the death knell for its struggling business.

It might be cynical, but I can't help but worry that now that a major rival's dead, Best Buy might respond as if it has a bit more leeway to make moves employees won't like, customers won't like (if it means getting poor service), and shareholders certainly shouldn't like. Let's hope not -- the innovative spirit I mentioned above helps differentiate Best Buy both from electronics specialist RadioShack (NYSE: RSH  ) as well as megastores such as Wal-Mart (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , and Target (NYSE: TGT  ) .

So, if Best Buy's cost-cutting results in employee-unfriendly moves that destroy morale, I'd be a lot more leery of the stock. Circuit City's demise includes a strong lesson for businesses on how there's a difference between cutting fat and cutting bone. I've been bullish on Best Buy in the past, based on my belief that it will survive our major economic downturn. But part of my rationale was that it wasn't like everybody else in the retail space -- especially not its dead rival. Best Buy shareholders should watch this development very carefully, since losing competitive advantage could make them losers as well

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Best Buy, Costco, and Wal-Mart are Motley Fool Inside Value recommendations. Best Buy and Costco are Motley Fool Stock Advisor recommendations. The Fool owns shares of Best Buy and Costco. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On April 16, 2009, at 3:40 PM, catoismymotor wrote:

    This is a major faux pas on the part of Best Buy. I don't like this at all. Assistant Managers are the go to people, the clutch players, the ones hungry for advancement. AMs are the buffer between the sales staff and the store managers. Without them store managers are going to be swamped with extra drama from customers and employees. A distracted store manager means an increase in losses from decreased sales, stolen merchandise and incorrecly priced items. Without HiFi Buys and Circuit City around to fall back on I'll have to get on Crutchfield's mailing list, again. Crap!

  • Report this Comment On April 16, 2009, at 6:03 PM, Columbo1 wrote:

    REMINDS ME OF DELTA AIRLINES WITH THEIR DOWN SIZIEING YEARS AGO WITH THEIR EARLY RETIREMENTS WHICH I TOOK AND WATCHED THEM GO FROM THE NUMBER ONE AIRLINE IN CUSTOMER SERVICE AND A VERY PROFITABLE AIRLINE TO BANKRUPTCY AND NOW TRYING TO REBUILD AND STILL LACKING THE CUSTOMER SERVICE THAT THEY ONCE HAD.

  • Report this Comment On April 16, 2009, at 6:53 PM, chopchop0 wrote:

    Why overpay for stuff at BBY if you aren't going to get helpful service. You may as well just go online and get it cheaper.

  • Report this Comment On April 16, 2009, at 7:23 PM, stan8331 wrote:

    I agree that this is very bad news for Best Buy, and I would not want to be long on the stock. Thinking that they're free to make this sort of move because Circuit City went under is stunningly short-sighted. Their take-away from Circuit City's demise should have been that the business model they share is under attack on multiple fronts and they need to do everything possible to differentiate themselves from the Wal-Marts and Amazons of the world, not become a weak imitator. Actually, the company that Best Buy is starting to remind me of is Blockbuster...

  • Report this Comment On April 16, 2009, at 7:47 PM, misterhill wrote:

    Everyone has it all wrong. First of all, AMs are store managers, the only one higher than them in the store is the GM, so chances are they are ones you work with when dealing with issues. Secondly, Best Buy has been working on this operating model change for almost 2 years, so the current state of the business isn't the direct reason for the change, it's because it's what both customers and associates have told Best Buy they want - currently supervisors don't supervise, they sell, so there is little training and coaching taking place. Secondly, no senior sales associates are losing their job or being effected - the reorganization only effects leadership, and the main benefit is not to cut cost, but to allow the leaders selected for the new roles to do just that, lead. Also, what Circuit City did was say "Hey, you get paid too much, so I am going to cut you and hire someone to do the same job as you for less." That is in no way what is happening at Best Buy. Some of the people in the leadership position may get stepped down, and they are being taken care of in terms of pay for awhile (I can't discuss specifics)...most of the people effected by the change see it as a positive thing (in my store anyways). I am one of the assistant managers that may lose my job, but that is why we have been on a hiring freeze for managers since September so I can apply for open positions. The company is also planning on moving up new store openings and putting displaced leadership in these new stores. This is the right move for Best Buy, and they did it with class that I have not seen any other business display. My last comment is to voice my frustration with the WSJ and also speculators who do not know what exactly is going on - position moves and exactly how many people will effected won't be known until later, as the company is doing everything to take care of displaced workers while still delivering on what customers want (more associates and better assistance), employees want (more training and better leadership), and what shareholders want (a better return on a great investment).

  • Report this Comment On April 16, 2009, at 11:00 PM, stockhound67 wrote:

    misterhill,

    You sound just like the letters that BBY is sending out with their message to the employees.

    This is a MAJOR change for BBY that is just not sound.

    Just about everyone within the stores leadership is going to have an extreme impact.

    Stores that have up to 12 Supervisors will now have 4 with only 2 to run the sales floor and most stores will have only 1 AM ( assistant manager ) to run the entire sales floor.

    If you think they are short handed now, just wait.

    Sure BBY offered to "make up" the difference in some of the people that are having their pay cut in half but thats only for 11 months! Then what?

    Dont you think that most are already looking for other jobs? YUP, just like Circuit City!

    Go into any store and ask around, you will find very upset, scared valuable employees that have no idea whats coming, they are not being told much of anything.

    The line that they are finding jobs for everyone just is not true, its an attempt to keep these employees thinking that everything is going to be OK so they do not lose sales and also so that the news does not come out all at once to negatively reflect on BBY.

    The employees wont even know if they have a job or if they do, how much of their pay is going to be cut until the end of the month.

    You obviously are NOT one of the ones waiting to find out.

  • Report this Comment On April 17, 2009, at 3:27 AM, happilyemployed wrote:

    We just got the news on lowering supervisor roles, as a company the biggest complaint is that we do not have enough help on the floor. We are losing customers because of it. One person coverage on our sales floor means a much lower close rate. Employees pay rates are not put into effect until the end of June. They will also get their pay every quarter in a lump sum for about 9 months, Best Buy is not leaving their employees hanging. Severance package that was offered was not good, just proving that they are smart enough to keep their most knowledgeable people on board. For almost one year you will still get your same pay. They know that they have to change with the times, the only way to grow is to make tough business decisions sometimes, but no one on the sales floor is terminated. I went on a competitive shop today. Went to Walmart, Sears and costco. I had to ask for help at every store. Merchandising was dirty and atrocious. As a customer I would not give any one of the above my money. I told associates at walmart i wanted to buy a tv w/ a service plan. They asked me no questions about my lifestyle or a tv, just offered me a credit card that would get me a twenty dollar gift card off of the tv. Pathetic in all places, I have been in this business for 25 yrs, and I was appalled by the competition. I wonder why we shouldn't be the best. Our employees are well trained. So much so that i spend vacations to go to CES in Vegas and CEDIA in Denver just so my employees know everything first. If our shareholders doubt us in any way, that means that they are not shopping at walmart, sears, costco, and target, I am proud to work at best buy, no matter the changes, thank god you have a job w great benefits, stock discount, 401k, tuition reimbursement no matter what you go to school for, great vacation, personal, sick and personal time. Short story on how great our company is: A hurricane came through SW florida a couple of years ago. So many light poles were knocked down, that the replacements were put on back order. No poles for two weeks. Best Buy was not open, but let employees come in and work just cleaning by daylight and high powered flashlights. We were only able to put in about 25 hrs each week for two weeks because darkness set in. Guess what Best Buy did. If you showed up at the end they surprised us and paid us a full 40 hr pay for each of the two weeks that we showed up. We had armed security outside to keep us safe. They also rented large suvs and drove to New Orleans just to help after katrina and make sure that there employees were safe. They located all employees and flew them wherever they needed to be through tough times, and gave them a job wherever they were relocated to at a Best Buy. If you are angry or are a share holder doubting our business decision, you are wrong, we are keeping our great people, helping them through a short term pay cut, in order to grow our business and create more opportunities for our associates. They will be successful with Best Buy, but with the economic status right now we need to change, but we absolutely appreciate our associates, we are not a circuit city and our employees, customers, and sharholders are first. We will win.

  • Report this Comment On April 17, 2009, at 5:02 AM, misterhill wrote:

    Stockhound, just because you are going to less people in a supervisor title, doesn't mean you will have less people running, or on, the sales floor - like I mentioned, as it is just because you hold the title supervisor doesn't mean you do any of that, and as a company on the majority our sups don't, they are sales associates. Also, there are no staffing cuts, so I am not sure what you mean when you say "If you think they are short handed now, just wait". The point of the reorg was to put more of our labor dollars into employees that are directly customer facing - the pay decrease supervisors take, as is appropriate since not as much is expected of them, even though I would argue they aren't meeting those expectations now due to the poor design of the current structure, hence the reorg, would go into hiring more employees. Also, those supervisors who are good at running the business, even if they do not get selected to take one of the sup spots open now, Best Buy is keeping sups at their current pay for awhile so they can keep those valued employees. Most people being displaced now who should be in a supervisors role, I would think in a year should be able to secure another supervisor role in the next year what with new store openings, turnover, etc. And I most certainly AM one of the ones waiting to find out, I just know that I am good enough that if I don't get chosen now (we have really high caliber leadership in all roles) given time I will be able to get an NSO or future open positions, and guess what, Best Buy is going to support me as that happens (as they have done with the hiring freeze, bumping up NSOs, etc.).

  • Report this Comment On April 17, 2009, at 11:57 AM, bigcat1969 wrote:

    You know I didn't really believe this bit of news until the Best Buy folks dropped by to deny it. The rhetoric sounds exactly like what I heard talking to CC managers before the truth became slightly obvious even to them. It also reminds me of working at Sears as the competent sales staff and management slowly retired or left as they saw commissions plummet and young (cheep) blood being push up the management ranks.

    News flash BB doesn't give a rat's pattootie about your future or that of any other employee anymore than Sears, CC or Walmart does or did. They are cutting staff and cutting pay just like every other company is doing to weather this storm while still turning something resembling a profit. If you make $15 an hour and can be replaced by some high school kid making $7.50, how much loyalty do you think you'll see from your company?

  • Report this Comment On April 17, 2009, at 10:00 PM, 10sgurl wrote:

    All of the above comments are true. There are peoples jobs at stake, the company is helping through fiscal year. Everyone has the opportunity to apply for any job within the company.

    What I can say that I don't see is...training. Rather than sitting back and cutting or moving people Best Buy is spending ridiculous money retraining ALL employees. Including staff that has been in place for years. Supervisors can train their employees and we have new training systems. I have never once had a hard dead line on training before at Best Buy. But, if you aren't certified you aren't qualified to help a customer. I think that customers will love this new model because we will be more knowledgable, and have more hours, and more flexible staffing options to help.

    It isn't just people getting demoted.

  • Report this Comment On April 17, 2009, at 10:22 PM, elitistjerk wrote:

    One of the biggest problems they are facing right now is the retention of former supervisors and soon most full-time employees. Generally, the best salespeople are the supervisors they will be moving to full time. We will say that on average they make $16. This depends on the area you live and your experience. By dropping to full time status they would normally be making maybe $14 for the experience and knowledge they'd be bringing to the table. A loss of $160 a paycheck is doable for some but still quite a loss. You would lose some, but not many of your best salespeople.

    Here comes the kicker. Most stores will be placing the salary cap for full time employees at $12 an hour. The bread and butter at your store will, on average, be losing $2-3 an hour and not know about it until it's too late. This is a deadly mistake on Best Buy's part. Why would any person dream of staying on at Best Buy with no hope for advancement or pay increase? This really starts to hurt when people realize that the new concept Wal-Marts are hiring non-experience part timers at $11 an hour.

    Long story short, Best Buy is really looking to go the way Circuit City. My sincerest apologies to those who are being hurt by this move.

  • Report this Comment On April 18, 2009, at 1:30 AM, crazychicken32 wrote:

    Well as a supervisor (currently anyways) one problem I have is how BBY is deciding to choose who gets the positions. In our store, we're going from 5 sales supervisors down to 2. I firmly believe that I am the hardest working, most active supervisor in the store. In my 3 years, i've NEVER had a customer leave angry. The customer is always right, and i firmly believe that. I feel if anyone walks into our store, you should listen to them, ask them questions about their lifestyle, and make recommendations to them.

    The company is taking action to decide who gets to keep their position based on:

    1. Last two years reviews

    2. Behaviors

    3. Tenure with the company (20% weighted)

    Now, I understand that this will defeat favoritism... but I've been with the company for about 3 years now, whereas many of the other supervisors have been there for over 8 years! I was recruited from Costco to come to a company with opportunity to move up... I've enjoyed my time there and still love to teach and coach my team. I feel terrible for all my full timers and seniors that have wanted to move up the company, because now not only are they going to be demoted, but they also will be competing with the supervisors who DIDNT get the positions in the near future.

    I can understand the move to save money and have more Indians, and less Chiefs if you will... for the customers sake. I also feel they are taking care of the employees by compensating the difference in loss of pay till march 2010, but ultimately we don't know how much money BBY is making or losing for that fact on the bottom line.... only the big wiggs do.

  • Report this Comment On April 18, 2009, at 8:09 PM, stockhound67 wrote:

    For those still thinking that this is a good idea and promoting it they way you do...

    Keep on drinkin the Kool-Aid.

    More HUGE news on the 27th

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