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5 Reasons Best Buy's 5-Point Plan Will Fail

By Rick Munarriz - Nov 14, 2012 at 6:30PM

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Best Buy was hoping to impress analysts yesterday. It failed there, too.

You know that things are bad when you host an investor day -- with your stock already near multiyear lows -- and the stock goes on to close lower after the presentation.

Best Buy (BBY 2.36%) can't catch a break these days, but what were analysts and investors expecting? There is no magical elixir that will make the struggling consumer electronics chain popular again.

The Minneapolis/St. Paul Business Journal  outlined CEO Hubert Joly's five-point turnaround plan that was presented to unimpressed analysts in New York yesterday.

Let's pick it apart, stratagem by stratagem.

1. Reinvigorate the customer experience
The first step in the "Renew Blue" plan involves offering shoppers unique benefits and exclusive membership programs.

It's already doing a lot of that now, and folks generally don't like it.

If Best Buy employees were helpful for the sake of being helpful, that would be great. However, they often approach customers as if they're the last warm barfly during a bartender's last call.

How about an extended warranty? You just have to get obsolescence insurance! Have you heard about our Geek Squad services? If I tell you that you have a beautiful billfold, will you promise to hold it against me?

Shopping at Best Buy isn't fun, and the staff's already in your face.

It's easy to see why Best Buy is pushing all of these services. This is where the chunky margins go to party. However, it's annoying, and it's not as if beefing up its Reward Zone loyalty shopping plan is ever going to make it compete with the digital goodies that (AMZN 3.66%) offers its Prime members.

2. Attract and grow "transformational leaders" and energize employees to deliver "extraordinary results"
You've heard this before, and it predates Joly.

"The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals," read a press release in March.

Best Buy has closed stores this year. It's evaluating smaller models. Joly points to broader cost-cutting to improve margins. This isn't the kind of climate that would seem to encourage "transformational leaders." A cynic would be right to argue whether Best Buy's top brass is qualified to do the training!

However, if "extraordinary results" means pushing employees to sell more of its overpriced services -- and not just increase sales volume -- Best Buy will continue to lose its smarter shoppers.

3. Work with vendors to innovate and "drive value"
There's no amount of handholding that can overcome the pricing gap at Best Buy.

A study earlier this year conducted by KeyBanc Capital Markets showed that Amazon's prices were 8% below Best Buy's price tags even after tacking on sales tax.

It's not Best Buy's fault. A chain of physical stores has overhead that a large Amazon warehouse simply does not.

Now, the call here suggests that exclusive merchandise is the solution. It's a strategy that has worked brilliantly at Target (TGT 2.41%) over the years. The discount department store chain teams up with marquee designers for apparel and furnishings that one can only buy at Target. Toys R Us has done the same thing with playthings only found at its giraffe-centric superstores.

Unfortunately, Target isn't Best Buy. A consumer electronics company can't offer a superior product exclusively at Best Buy, especially as the chain continues to account for a smaller and smaller piece of the market. If that were possible, don't you think that Best Buy could've done this itself with its own Insignia brand?

4. Increase the company's return on invested capital by growing revenue and efficiency
Best Buy believes that it can triple its operating margins. It also feels it can push its return on invested capital to 15%. That's big talk for a company that's been going the other way in recent years, with no reason to believe that the trends won't continue to deteriorate.

For Best Buy, this means shaving "unproductive" costs.

In the end, it may ultimately mean moving to smaller stores the way it has been doing with its tiny Best Buy Mobile stores. If it wasn't for RadioShack (RSHCQ), this approach would make perfect sense. Unfortunately, we all know about RadioShack. The small-box retailer throwing all of its eggs in the mobile basket has been disastrous. The margins are too thin, and wireless carriers eventually cut out the middlemen to market directly to mobile customers.

5. Making the world a better place through recycling effort and providing teenagers with access to technology
Oh, so "Renew Blue" has a little green in it. We may as well just call Best Buy the teal deal!

Best Buy isn't going to start relating to teens. For starters, they know that the ultimate solution to recycling media is to go digital, and digital distribution of CDs, DVDs, books, and video games will continue to leave Best Buy out as an unnecessary middleman.

Oh, and there are plenty of places online that will provide real cash for old smartphones, tablets, and PCs.

Providing teenagers -- or anyone, really -- with technology in the form of connectivity is giving them the means to avoid Best Buy in the future.

Then again, isn't that what folks are already doing to Best Buy?

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. The call is beating the market so far -- because Best Buy is not. It's a gutsy call now, but I'll stick with it on paper. I wouldn't short Best Buy with real money.

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