National electronics retailer Best Buy
The $88 billion elephant in the room
Amazon CEO Jeff Bezos is known for playing the long-term growth game and playing it well. Bezos has been called out as the next business tech leader, stepping in to fill the void left by Steve Jobs. Clearly, investors have been impressed with his vision, and that confidence is reflected in the stock's P/E ratio of 144.
Try unplugging it and plugging it back in again
Amazon has been making moves for a while, and Best Buy is finally reacting. First and foremost, it's getting costs under control, closing 50 stores in the U.S. Last year, same-store sales fell 1.7%, and Best Buy has taken this to mean that it's in the wrong markets. The focused closings will allow it to get out of unprofitable areas. To refocus, the company is going to build 100 Best Buy Mobile stores. Its domestic mobile sales segment grew 13% in 2011, and it's counting on that growth to continue.
In order to stay competitive, Best Buy has said that it will use the cost savings from store closures to offer lower prices. In 2011, Best Buy reported an increase in market share, attributed to an improvement in customers' impressions of product pricing. Much of its ongoing work will focus on Reward Zone loyalty customers. In 2012, Best Buy will offer these customers free shipping, to compete with Amazon Prime.
Internationally, Best Buy is going to close its own branded stores in China, focusing instead on growing its Five Star Appliance brand, which was purchased in 2006. The brand increased same-store sales by 8% last year, and Best Buy is going to integrate a mobile offering in stores next year to spur more growth.
Avoiding the Circuit City model
Best Buy needs to take an increasingly offensive stance if it's going to keep Amazon at bay. While these recent announcements point in the right direction, Amazon is not just another competitor. By offering lower prices and free shipping, Best Buy is going to have margins squeezed, just like Amazon.
Even though difficult times are ahead, based on recent purchases, changes, and announcements, I think Best Buy will continue to be a strong traditional retailer. It may never dominate the online space, but it doesn't need to. Just because a company isn't winning on every front at every time does not make it a bad investment. All a good retailer needs to do is to win consistently on one important front.
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