I’m in Minneapolis this week and the top story here concerns the future of Best Buy (BBY), the large electronics retailer headquartered here. After being downgraded to junk status, with shares priced near a nine-year low and with weaker-than-expected quarterly earnings announced today, Best Buy suspended profit forecasts and share buybacks for the rest of the year in order to give its newly named chief executive time to try to construct a turnaround plan. The company reported profit of $33 million in the second quarter as compared with $260 million a year ago for the same period, a drop of nearly 90 percent.
Critics have complained that Best Buy is merely a showroom for Amazon.com (AMZN) and other online retailers as shoppers go to its stores to check out electronics, only to buy them for less from online retailers who have much lower overhead and which need not charge sales tax. The company is also fending off takeover interest from founder and largest shareholder Richard Schulze, who was forced out as chairman after an internal probe found that he did not inform the board of allegations that its former CEO was having an inappropriate relationship with a female employee. Not surprisingly, analysts are skeptical about the company’s future.
Although I recognize that I run the risk of overemphasizing anecdotal evidence by using it and relying upon it, I have an experience to relate that is indicative of why I think that Best Buy is doomed (DISCLOSURE: I have no long or short interest nor the intent to obtain any such interest in BBY and advise no clients with any interest in the company).
A 20-something close family member went to Best Buy recently (because he wanted to watch the Olympics on actual live television right away) and bought an over-the-air television antenna. The salesman — one of the alleged experts who are said to offer “value” that online retailers cannot — in response to a direct question, insisted that no digital converter box was necessary. After driving back home and installing the antenna, it became clear that a converter box was indeed necessary.
So our would-be Best Buy customer returned to the store to buy a converter box. He decided to buy a previously opened box for half price; it was presumably a customer return that had been taped back up and put back on the shelf. But he only made the purchase after being assured that the box had been carefully inspected to make sure that it contained everything it was supposed to and that the purchase was fully guaranteed — as if the box had never been opened. After driving home again (to complete round-trip #2), our poor soul discovered that the cable that connected the converter box to the TV was missing.
Back to Best Buy yet again for trip #3. After waiting 30 minutes for service, our unfortunate consumer was told to go get another box to swap out. He returned to the service counter in less than a minute but someone else was being served. A 10 minute wait ensued this time.
When our reluctant warrior finally got to the register for the second time that trip he was told that since the swapped out box was a new one, he had to pay full price for it — not the discounted price he had received for the “guaranteed” pre-opened box. When advised that that didn’t seem quite right since the error was Best Buy’s and since he was on his third trip to the store on account of Best Buy’s poor service, the cashier agreed and radioed her manager for help. After (another) 5-10 minute wait, the manager showed up. He offered no apology and claimed that the box purchased didn’t include the cable needed to complete the job. After being shown in the product manual that the cable was indeed part of the package, the manager claimed that the full price still needed to be paid.
After being reminded that the purchased product was fully guaranteed and that it had been a major inconvenience to keep coming back to the store, the manager offered an ever-so-gracious 10 percent discount on the purchase — still an additional 25 dollars (without counting wasted time and travel expense).
Our frustrated but dogged would-be purchaser asked the manager if he couldn’t honor the discounted price on the replacement box, could he at least do the common sense thing and provide the missing cable (sold separately as well) for free. The manager replied that he wouldn’t do that, but he would deign to offer a discount on the cable.
That’s when our protagonist finally got angry and asked the following. “Just so we’re clear, you want me either to pay 25 dollars more for a product I already bought because I had to return it due to Best Buy’s inability to package and sell a quality product OR you want me to buy a cable that I already paid for with the original purchase, essentially making me pay for it twice, right?”
The manager remained silent, perhaps thinking he ought to invoke his Fifth Amendment right.
So the question was reiterated: “You realize what you’re asking me to do, yes?”
He didn’t answer.
So our fine (and well-informed) young man asked a follow-up question: “Don’t you know that Best Buy is really struggling and even with Circuit City out of the market your market share is decreasing?”
He didn’t say anything.
Yet another question: “Don’t you realize that the only thing you offer me is immediacy? People like me who want to watch the Olympics might be willing to pay more and go through the hassle of getting here to get something right away, especially if it’s not too big a purchase. But for bigger purchases like cameras, TVs, and appliances? People generally plan for those and can buy them online. Only things like this box will keep bringing people into your store.”
The silence was deafening.
Our hero then asked if it made sense to remind one of the few customers the company had left that the one thing their failing business had to offer wasn’t in fact being offered.
Not surprisingly, there was no response.
Next came a reminder and a warning: “I’m in my 20s and use a lot of technology. I’m your target consumer and I will be making large electronics purchases for the foreseeable future. But on account of this horrible service and my dreadful experience here I will never return to a Best Buy even if it manages to beat the odds and stay open unless you do the right thing here.”
One final reprise: “Are you going to replace the box, give me a free cable or make me walk out of your store forever?”
The manager finally spoke, but only to offer a refund.
So our Amazon customer took the refund and thanked the manager for making his life simpler and saving him money. He bought a better-reviewed product from Amazon at a price lower than the discounted, pre-opened item he returned and it was shipped free to his door in two days. He didn’t even have to pay sales tax on it.
Perhaps the best detail? Everyone in the then large Best Buy service line applauded him as he left.
And besides, the Olympics were being shown at his local pub. He bought his beer with some of the savings and pocketed the rest.
I don’t think it’s hard to figure out that Best Buy is in real trouble.