The management of Best Buy Co. Inc. (NYSE: BBY) finally has come to its senses — at least in part. The retailer will close 15 of its large stores in Canada. Best Buy already has closed some U.S. stores, but based on the damage done to its revenue by rivals including Amazon.com Inc. (NASDAQ: AMZN) and Wal-Mart Stores Inc. (NYSE: WMT), the decision in Canada is hardly broad enough.
In Best Buy’s comments about Canada, management said:
The move was based on an extensive review of Best Buy’s retail footprint in Canada in an effort to reduce unnecessary costs, eliminate redundant operating systems and optimize its real estate strategy to reflect a changing retail landscape.
It is hard to understand why battered retailers keep underperforming locations open. Perhaps management believes it is adroit enough to turn these locations around. A look back at the fortunes of other troubled retailers indicates that the odds against resurrection of dead stores are long — too long to fight a fight with locations that almost certainly will yield no better than they do now.
Part of the analysis of store closings has to do with store openings. Sane and successful retailers, both department stores and fast-food chains, expand through an analysis that is clearly done location by location after careful study. Starbucks (NASDAQ: SBUX) has been able to open scores of profitable stores recently. Walmart has done so as well. Some analysts at these companies have used the science of determining which geographic areas are underserved, and they take what are probably fairly small risks to serve them.
On the other side of the science of expansion must be a science of contraction — strategic retreat. Until Best Buy decides to use this sort of science to rid itself of locations that are failures and probably always will be, its earnings will not turn higher.
Douglas A. McIntyre