With recent reports indicating Best Buy Founder and former Chairman Richard Schulze is not expected to present a buyout option to the board in the immediate future, some of the buzz about the iconic electronics retailer has died down. But the handwringing and public speculation about Best Buy’s future has me thinking about what will—or perhaps, should—come next for the brand.
Without question, Best Buy is facing some significant challenges. But, that’s been the case for some time now. Not much has changed today from three months ago. Yet, a spotlight is on them now, with talks about this possible buyout. The whole issue of downsizing has been out there since they announced earlier this year their plans to close 50 stores by the end of 2012. The resignation of CEO Brian Dunn and a $1.7 billion loss last quarter have only added to the impression that the electronics giant is on shaky ground. Best Buy has been repositioning to the extent that they can with the rollout of 100 Best Buy Mobile locations, but I’m not the only one who thinks that repositioning and downsizing to that extent isn’t going to be easy. The changes in executive personnel and a still fragile economic landscape only add to the difficulties. So, maybe it’s the realization that the brand will be harder to reposition—both from a merchandise standpoint and a real estate standpoint—than they originally anticipated that really has people taking note.
I don’t think they’re done exploring a potential private buyout. That move might reduce the public scrutiny and give Best Buy a little bit more flexibility, but would it make the chain more viable? That’s a tougher question. Another good question is whether there is anyone willing to bankroll the move and take them private. It seems to me to be a risky step for any financial institution, particularly to take on a brand that has posted declines in same-store sales in 7 of the last 8 quarters. The criticism I’ve heard from some that Best Buy has been slow to adapt and react is a fair one: I agree that they have been a little sluggish and may have been resting on their laurels to some extent.
It’s difficult to avoid drawing comparisons between what is happening to Best Buy in the wake of Circuit City’s demise and similar dynamics that transpired with other market-leading duos like Borders and Barnes & Noble, and Linens ‘n Things and Bed Bath & Beyond. Did Circuit City’s bankruptcy just delay the inevitable for Best Buy, or will they successfully adapt and thrive as Bed Bath & Beyond has done? What makes these comparisons difficult is that electronics is so price sensitive, which means that the margins just aren’t there. What used to be a high-margin business has actually become a low-margin business: these days, electronics have changed from special, high-profile signature items, to everyday must-have commodities, and the industry is going to have to evolve accordingly. All of which leads to an even bigger question: Do we really need an all-in-one store anymore?
I don’t have all the answers, but I do think one key ingredient to any recipe for a successful turnaround is that there must be less brick-and-mortar square footage. And while there are lots of complex considerations involved regarding leases and locations, the biggest question to be answered is, “What is the optimal store size?” To answer the last one, Best Buy will need to look carefully at price points in every department. At a time when consumer electronics continue to get smaller, appliances, which take up a ton of space and are not particularly profitable, might have to go. I’ve mentioned in the past that I like the new 1,200-square-foot Best Buy Mobile stores. But, the rollout for those will need to be fast to have any kind of real impact, and that concept faces significant competition from familiar names like Apple and Radio Shack.
Ultimately, the only truly sustainable long-term solution is that Best Buy is going to have to be best-in-class: best products, lowest price, best service. That’s a tall order, especially when you basically can’t beat the pricing of online vendors who are paying no overhead. Whether or not Best Buy becomes a “best buyout” will be fascinating to watch.
What do you think? Will there be a buyout for Best Buy? Can they turn things around or is it too late? Please make a public comment below or feel free to e-mail me privately at email@example.com.
Click here for past columns by Jeff Green.