Best Buy released its first-quarter 2012 earnings this week, and though the numbers beat Wall Street expectations, net income took a tumble — falling 25%, compared with last year. And more than just poor earnings have plagued the nation’s largest retailer of late. Six weeks ago, former CEO Brian Dunn left the company amid allegations of an inappropriate relationship with a female staffer.
Though sex scandals make for good headlines, Dunn’s departure is a sideshow compared with the real issues Best Buy faces. And another quarter of declining revenues has pundits wondering if these latest results are just another step on the road to the end of the big-box store phenomenon.
This may seem a bit counterintuitive for those of us who don’t follow the retail industry closely. After all, didn’t large big-box retailers just finish putting smaller mom-and-pops out of business with their giant selection and amazing supply chain efficiency? The answer to that question is yes, they did — but the marketplace evolves quickly these days, and the narratives that defined the 2000s will not necessarily hold in the 2010s.
So what’s behind a store like Best Buy’s headlong decline? One word: Amazon. Specialty big-box stores like Best Buy have made a killing the past 20 years by offering a huge selection of products at low prices. But there is no way the firm can compete with an Internet retailer like Amazon on those measures. Even worse for Best Buy is the phenomenon of “showrooming,” whereby shoppers check out an item in a store and then buy it through an online competitor for a lower price. This is particularly frustrating for brick-and-mortar stores because it takes their one tangible advantage to online retailers — the in-store experience — and turns it into a way for their competitors to steal market share.
So what’s Best Buy’s turnaround plan? In a call with analysts on Tuesday, interim CEO Mike Mikan acknowledged that the current marketplace is “not one we were prepared for” and said he would lay out a concrete plan in the coming months. But he did give some rough guidelines as to the direction he hopes to take the firm. He wants to beef up Best Buy’s online operation, dramatically reduce the square footage of existing stores and open newer, smaller stores that focus on one product segment, like mobile phones.
This plan is roughly in line with what pundits have been calling for in the past several months. Farhad Manjoo argued last month in Slate that Best Buy needs to radically downsize its stores and selection, focusing instead on providing expertise in what it does offer. He writes:
Maintaining a big selection costs big money and offers a perverse advantage to Best Buy’s online rivals. By keeping so many TVs on its sale floor, Best Buy is offering itself up as a showroom for Amazon: Potential customers can walk into a store, check out the stock, and go home and buy the product they like best online. Then there’s the “paradox of choice” — the idea that giving consumers lots of retail choices tends to paralyze and confuse them, and sometimes pushes them to leave your store empty-handed. Though this theory is controversial, the runaway success of Apple’s retail stores proves that a small, curated product line doesn’t necessarily hurt sales. Why wade through 30 laptops when you only want to buy one?
But even following this Apple-like business model may not be enough to save Best Buy. It’s possible that the forces of e-commerce and advancing technology are too great to effectively combat and that specialized superstores are no longer efficient. John Backus, a venture capitalist and managing partner of New Atlantic Ventures, seems to think this is the case. He wrote in a blog post earlier this year that we are entering “the death of retail 2.0.” The first permutation of the death of retail, Backus writes, included the failure of large media retailers like Borders, Blockbuster and Tower Records. The Internet proved to be a much more efficient medium for purveying media. The second wave of retail death will include sellers of electronics and other small specialty goods. According to Backus, stores from Radio Shack to Staples will find themselves in a severely diminished position, if not completely gone, in the next decade. As for Best Buy, forces beyond Amazon are making its core product lines unprofitable. Backus writes:
“Appliances are here to stay, but are not a frequent purchase. Video games are moving into the cloud. Home theatre is stagnant … we may continue to upgrade our main television screen at home every 3-5 years, but more and more we will consume movies and television on our desktops, tablets, and phones. So sales of second and third TVs are dying quickly. In-car electronics, standalone GPS, satellite radio, seatback DVD players and HD radio will quickly disappear, replaced only by the smartphone powering a dumb screen on the dashboard.”
This integration of devices is another force that will hit electronics retailers the hardest. If one device is completing many of our tasks, electronics retailers can’t move the volume of goods needed to justify huge overhead costs like sales forces and brick-and-mortar stores.
But not all big-box retail will go the way of the dodo. Retailers that offer a broad spectrum of goods will be able to fend off e-commerce by providing staple products like groceries and other items that aren’t easily shipped. For that reason, Backus sees Walmart and Target surviving the latest wave of retail death.
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So perhaps it’s early to predict the total elimination of the superstore that has come to define America’s suburban landscape. But forces in the marketplace are clearly aligning to do away with many of them. And oddly enough, the sort of stores that pundits are predicting will replace them — smaller outfits that focus on customer service and product expertise — look strangely like the mom-and-pop companies of yore, the extinction of which many bemoaned not a decade ago.