Best Buy's Future: Smaller, Differentiated, More Specialized

As brick-and-mortar retail electronics chains continue to bleed in the face of growing competition from Inc. (NASDAQ: AMZN) and now Alibaba Group Holding Ltd. (NYSE: BABA) internationally, the future of Best Buy Co Inc. (NYSE: BBY) continues to look uncertain. While the retailer is in no immediate existential danger and has had a moderate turnaround since the end of 2012, more changes are needed if it is going to stay profitable.

Competing directly with Amazon head-to-head is a fool’s errand. The phenomenon of shoppers using stores like Best Buy as Amazon window-shopping centers is all too common, and there is no way for Best Buy to stop it without differentiating itself from the Internet giant. People walking into a Best Buy, spotting a product and buying it on Amazon cheaper is all too common, and Best Buy needs to offer more to keep sales within its stores rather than leaking out onto the Internet.

Some of the steps Best Buy already has taken in this direction have been somewhat helpful. Best Buy’s Geek Squad does give the chain gain some added value over a website, as well as repeat business, and expanding that team has helped it keep some of its customers from defecting. Teaming up with Apple Inc. (NASDAQ: AAPL) on an Apple store within a store was also a wise decision, piggybacking off the popularity of Apple retail stores and redirecting some of that traffic to Best Buy.

These efforts have been a good display of originality and will, but they are not enough in and of themselves. A bigger online presence could help, but investing heavy resources in that direction may be an unwise decision, because a specialized retailer going up against an everything retailer is a David and Goliath set up. Unfortunately, the modern business world does not follow Biblical protocol. Yes, comparable domestic online sales rose 12.6% for the nine-week holiday season this year, but total sales were still down, and the question remains how much did that 12.6% online boost cost the company if it couldn’t even bring total sales up in the first place?

Unfortunately for Best Buy, what may be needed over and above these efforts is simply for the company to shrink down. Best Buy has over 1,000 stores, and the retail electronics industry as it is now may not have enough demand to support that many brick-and-mortar locations. Closing the underperformers, while hurting its top line, will allow the company to refocus on its best stores, figure out exactly what it’s doing right, regroup and expand from there.

Best Buy can survive a slow bleed for some time yet, but if it wants to stop the bleeding and start growing again, it is going to need some radical and perhaps risky surgery.

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