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Best Buy Crisis Is An Opportunity, Say Industry Observers

4/23/2012 12:01:00 AM Eastern

NEW YORK – Analysts have hammered Best Buy of
late, writing off the $50 billion retail behemoth as an
anachronism in the age of e-tail and mobile commerce.

Best Buy’s own interim CEO Mike Mikan acknowledged
“underlying challenges in our business” in an
open letter to employees, including the need to grow its
e-commerce operations,
re-energize its
stores and improve
the customer experience.

But is it too late
to turn the company’s
ship of state
around? Has CE’s
retail future already
sailed, with Amazon
and Apple charting
the course?

Industry members
and contrarian analysts
think not. Indeed,
some see the
company’s current crisis as another opportunity to innovate
and reinvent itself, as it had after previous missteps
like the $700 million Musicland debacle, and an ill-timed
long bet on soon-to-be obsolete PC inventory that nearly
crippled Best Buy in 1997.

As Credit Suisse retail analyst Gary Balter observed
in a research note, “We believe the CEO opening creates
an opportunity for Best Buy to once again seize the
moment, to change the direction of the company, to redefine
its relationship with the customer, its store experience,
and how it comes to market,” much as it did with
Geek Squad and customer centricity.

“For those who say that it is too late or that Best Buy is
too stuck in their ways, one should look at the history of
this chain,” he argued, pointing to the 1997 PC miscalculation
that left its stock at $1.31 a share.

“Yet it redefined itself,” he said, “improving service
along with selection in the stores and relationships with
vendors. Will it be harder this time? Absolutely, but this is
a chain generating close to $2 billion in free cash flow, a
chain that vendors need in order to display and sell products,
a chain that customers prefer five to one versus
the online leader when buying a television, and a chain
that has a connection into the home through the Geek
Squad, which is unmatched by anyone.”

Balter’s advice? “It has to build on its strengths, but
more importantly address the weaknesses. Deal with too
many and too large stores, deal with poor service at many
locations, deal with a weak online presence, and deal
with a disjointed online and in-store experience.”

Bob Hana, managing director of Home Technology Specialists of America (HTSA), agreed
that reports of Best Buy’s death are
greatly exaggerated. “Meteorologists said
Chicago was going to have the worst winter
this year and it was mild,” he noted.
“A couple of years ago Florida was supposed
to have a terrible hurricane season
and nothing happened. Wall Street experts
never saw the economic downturn
coming … so I don’t go in for predictions.
But if Best Buy can realign its business
model to become more competitive in
today’s market I don’t see why they can’t
rebound and grow.”

Bob Weissburg, global executive VP at
Gibson Guitar, is also confident in Best
Buy’s ability to turn its business around,
and said it needs to for the good of
the CE industry. “An economy without
Best Buy is bad for the industry, bad for
America and bad for the American consumer.
They have capable people like
Dick Schulze, Brad Anderson and Mike
Vitelli who can move quickly and turn
the ship around and make CE a great
experience for Americans just like they
did a few short years ago.”

Franklin Karp, former president of Harvey
Electronics and current COO of Audio
Video Systems, said Best Buy can
change course, “but not without an army
of qualified, caring blue shirts … If people
want a warehouse experience, they go to
Costco or Sam’s. Where do they go for a
good retail experience? Best Buy needs
to be a great retail experience.”

Gary Shapiro, president/CEO of the
Consumer Electronics Association,
agreed. “It has locations, revenue and
trained staff. It needs customer loyalty,
passionate staff and interesting product
mixes to bring people back to its stores.”

Starpower chairman Daniel Pidgeon
said Best Buy’s free cash flow gives
it the wherewithal to turn its fortunes
around, but “They need a plan and they
need it quick … It really isn’t that hard to
understand how to fix this. No one has
stopped watching TV or buying electronics.
What is hard are the hurdles
and massive amount of stomach they
will need to get to through it.”

To Citi analyst Kate McShane, the
change at the top could make Best Buy
an attractive target for a private equity
firm. “The fact is that taking a company
private would allow for more flexibility
with closing doors and radically changing
the strategy,” she said.

As to Dunn’s successor, Credit Suisse’s
Balter said Best Buy needs to hire
a retail visionary, akin to Home Depot’s
Frank Blake, JCPenney’s Ron Johnson
or Dick’s Sporting Goods’ Ed Stack,
“who is willing to rewrite the playbook
to compete in a clearly changed retail
environment.”

Steve Baker, industry analysis VP for
The NPD Group, wondered if Best Buy
will follow that course, or “look toward
another technology company, whether
a vendor or a partner or someone who
isn’t steeped in retail but is steeped in
technology. Or do they go away totally
from both of those and look for someone
who has a different type of experience?”

Bill Matthies, CEO of CE consultancy
Coyote Insight, said the best candidate
would be someone from outside Best
Buy. “While ‘promote from within’ has its
place, Best Buy’s leadership has been
and likely still is too incestuous,” he said.
“As with too much else in CE, both for
retailers and manufacturers, 2012 looks
way too much like 30 years ago. The
time for change is long overdue.”

The ideal candidate would be someone
who is “extremely grounded in Internet
retail who also has vision for marrying
the strength of that with brick and
mortar,” Matthies argued.

But Janney Capital analyst David
Strasser downplayed the significance
of a successor. “Brian was never the big
problem and the person who comes in
will not be the big solution,” he wrote in
a research note. “It’s going to take some
time to turn this company around. It’s
not going to happen overnight.”

In the meantime, he said, expect
founder and chairman Dick Schulze to
take a more active role. “From what we
hear, he has been more active recently
in company operations.”

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