Nonfoods Talk: Flight of the Phoenix
By Seth Mendelson
Almost miraculously, Best Buy managed to turn its financial situation around in a year. Can the consumer electronics chain keep it going? There was an interesting article in The New York Times in mid-December about the extremely surprising rebirth of Best Buy over the last year, after many people—myself included—wrote the company off for dead, another victim of the Amazon.com revolution. As the Times stated, the opposite happened in 2013. Best Buy managed to resume same-store growth and returned to some level of financial health thanks to a vigorous marketing program that combined more competitive pricing with better service and, generally speaking, better salesmanship in-store. This turned Best Buy into the darling of Wall Street and the good news fueled a 250% increase in the stock’s price over the last 12 months. At first, I started thinking that Best Buy had beat the odds—that the Minneapolis-based company managed to do what countless other retailers failed to do, that is to merely survive in a day and age where consumer electronics have become a commodity where the best price often clinches the deal. Of course, saving yourself to financial redemption does not usually work. I remember the fateful decision by Circuit City, another consumer electronics retailer, to cut commissions and pay for its sales people so it could cut prices for its customers or put more money in company coffers. Circuit City soon went out of business, proving the point that corporate boardroom strategies are a bit of a crapshoot, especially when desperate executives are involved. (I did receive a terse note from a Circuit City PR guy asking for a retraction and saying that I was dead wrong when I wrote that their new strategy would fail. I wonder where he is working these days). Best Buy’s approach is the direct opposite of Circuit City’s. It went after the competition head-on and appears determined to show the world that Amazon.com can be conquered, or at least neutralized, in what promises to be a long battle for consumers hearts, minds and especially, wallets. The key here is that Best Buy is cutting prices where it can without cutting services. Yet, I am not so certain how long this is going to last. Is Best Buy winning the battle, but on it’s way to losing this war? The chain is getting shoppers to purchase more high profile—but low-margin—TVs by beating Amazon on price and offering in-store help. Still, savvy consumers will see that Best Buy cannot compete on price on many other products—like batteries, cell phone covers, computer chargers and cleaning supplies—that often offer better margins for retailers. For example, the Times noted that Amazon.com offered a pack of 20 Sony lithium batteries for $8.99, while Best Buy sold one—yes, just one—for $4.99. In the end, I do not think Best Buy officials care about the small stuff. The company, under its new leadership, has made it a point to try to draw consumers back to its store by stressing competitive pricing on the visible, expensive items. The theory, they hope, is that once there they will stick around and buy something and may not look at price points on lower-priced accessories, et al. So what do we take away from Best Buy’s new strategies? First, be as competitive as possible on the products that catch consumers’ attention. Second is that no matter what, get consumers to view you as a legitimate alternative—one that they will make an effort to visit. Third, low price points are great, but do not forget customer service. And remember, this battle for the consumers’ attention, is just heating up.