Three Areas Where Best Buy Screwed Up

Slow customer traffic in its brick-and-mortars, decreased demand for product across Europe, and overall lower-than-expected holiday earnings means a lot of ink has been spilled in the past few weeks about the inevitable demise of Best Buy. 

Let’s look at the facts:

  • Using a key statistic that traditionally addresses whether-or-not a company’s had a successful sales season, “The largest U.S. electronics retailer said Friday that revenue in stores open at least two years fell 1.2 per cent” during the holidays.
  • More importantly, “Revenue fell nearly 2 per cent to $1.9 billion. Revenue in stores open at least two years fell in Canada and Europe.”
  • Furthermore, “Last year, Best Buy(‘s stock) fell 32 per cent, more than all but three retailers in the S&P 500, the benchmark gauge of American common equity,” while “in the third quarter, Best Buy’s diluted earnings per share dropped 22% to 42 cents a share and its operating income fell 54% to $178 million.”
  • Finally, “shares of retailer Best Buy ticked lower in trading Thursday on the same day the stock was downgraded by TheStreet Ratings. The stock’s rating was lowered to a hold from a buy. TheStreet Ratings cited “deteriorating net income, poor profit margins and a generally disappointing performance in the stock itself.”

 Given all this bad-news and financial-handwringing, then, it seems the right moment to sift through the back-of-the-envelope analysis and see a few central operational areas in which Best Buy went wrong: 

  • Inefficient Web-Strategy: While “online revenue rose 26 per cent” in December, Best Buy has, like many of its inventory-rich brethren, come slowly and ineffectively to its online sales strategy.  In short, “Before the Internet, there was catalogue shopping and home shopping from television.  For consumers, buying online was just the next step in an obvious progression of more convenient ways to buy.  For brick-and-mortar retailers, however, the shift was jarring.  Moving online required new thinking, new management structures, and new strategies.  It would also require integrated front and back-end information systems. ”  Consequently, Best Buy’s slow-on-the-uptake web strategy has put the retailer behind its competitor’s inventory movement curve.
  • Substandard Inventory Management: Best Buy received its fair share of negative press when, during this past holiday rush season, when “ canceled Christmas orders that had been made weeks earlier because of botched inventory management.”  A consequence, in part, of its inefficient web stategy, Best Buy has, essentially, become’s testing warehouse, where consumers go to try out the latest gadgets before ordering them through Amazon.  Best Buy has dropped the inventory-management ball by failing to capture customers on-site, instead building massive reserves only seemingly there only for the testing – a profit death-knell in the constantly evolving tech market.
  • Poor Customer Service: Without overstating the obvious or throwing fuel on the rumour mill fire, Best Buy has, in recent years, alienated a significant percentage of “first-adopters” and savvy tech-users through its inferior customer service practices.  Long in-person and on-the-phone wait times, combined with relatively generalist help staff ill-informed on the latest-and-greatest, has made Best Buy an also-ran for those looking to upgrade through new purchases and upsells.

So what’s in the future for Best Buy?  Interestingly, much like smaller retailers ACM Partners works with, Best Buy looks in the works for an operational and financial turnaround and sometime soon.  Ergo, given the above-listed issues, it’s no surprise a private equity move is rumoured to be in the works for the fledgling retailer.  It seems now to be only a question of who, how, and when.

Margaret Bogenrief is a partner with ACM Partners, a boutique crisis  management and distressed investing firm serving companies and municipalities in  financial distress.  She can be reached at [email protected]

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