Electronics retailer Best
Buy said Thursday it's closing 50
stores and cutting 400 employees as it wrangles with how best to proceed in an
evolving market for its products.
Best Buy’s decision came as a surprise to NBG Productions analyst Brian Sozzi. But it could lead to “all sorts of buckets from which to extract cost savings, structural cost savings,” he writes.
Big Box Stores
Cost-cutting will likely be a key part of Best Buy’s reinvention as it gropes for direction and tries to distinguish its future from the past peril of its former competitors CompUSA, which liquidated and changed ownership in 2007, and Circuit City, which met its end in 2009.
The last-man-standing success aside, there’s ever-growing speculation that Best Buy now is serving too much as a showroom for its possibly toughest competitor yet, online retailer Amazon.com. The thought is that customers are perusing the aisles at Best Buy, trying out or considering games, cameras and phones, then buying them cheaper online, and sometimes with less sales tax, through Amazon or some other online merchant.
Amazon Takes a Bite
That Amazon could be eating Best Buy’s lunch, so to speak, is somewhat ironic, considering Best Buy helped to push Circuit City and CompUSA out of the market. However, it’s not an unfamiliar story. Consider Barnes & Noble, which so confidently squeezed out Borders and mom-and-pop book shops only to cede hard-won ground to Amazon. Pressure on the book titan’s traditional bookstore made its digital ventures, think about the Nook, even more important. The Justice Department is now poking around in an antitrust case against Apple and five big book publishers for allegedly colluding to raise prices on electronic books. (Apple's iPad line competes with Amazon's Kindle family).
Best Buy said late Wednesday that it lost $4.89 a share in the fourth quarter but that it turned a profit of $2.47 a share, on an adjusted basis, when certain one-time charges are factored out. That would represent 25% growth, but Best Buy’s efforts to restructure indicate the current plan isn’t working or that the company fears it won’t be working for long. As a result, it's aiming for $800 million in cost reductions by 2015.
Best Buy's Next Move
Best Buy is pinning its hopes on a new model. It plans to open 100 U.S. Best Buy Mobile small format stores in fiscal 2013 and expects to have a total of 600 to 800 such stores by fiscal 2016. It’s testing what it refers to as Connected Stores, “remodeled big box stores that focus on connections, services and multi-channel experience through a total transformation of both the store and the operating environment.“
Will the new model paired with growth overseas help Best Buy escape the same fate it inflicted on its former competitors? Or has Amazon outdated the old model of selling just about everything?
Best Buy shares were trading more than 7% lower in heavy volume on Thursday.