Best Buy Crisis Is An Opportunity, Say Industry Observers

Publish date:


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.”


Related Articles