Best Buy Gets Yellow Tagged

Best Buy shares have gone on a yellow tag sale, as their price has fallen 32% year-to-date.  There is some good news for shareholders, namely in the current maturity cycle for their stores and without any significant plans to expand retail footage, the stores are throwing off cash.  Sales growth, however, is another story.

I've followed this stock from its early days when it was forecast by Wall Street to expire under pressure from the now defunct Circuit City.  I made money for my customers several times during the stock's short cycles.  However, in recent years, it has me scratching my head.

I can't answer one basic question: "Why would I get in a car and drive into a Best Buy?"  Music, which was a great traffic draw and a source of impulse purchases, has come and gone because of the revolution in how music is sold and enjoyed.  The appliance section, despite all the corporate best intentions, still seems out of place in the store and uninviting.  Sears is still the top of mind destination store for the top brands and Kenmore.

The service experience, which has had its ups and downs, is on a down cycle.  In some stores, the only person who ever says anything to the customer is the security person at the door who says, "Goodbye."

Televisions have been commoditized and subject to everyday discounts and sales by players from Target and Costco to Office Depot and Kmart/Sears.  The Magnolia store-within-the store usually looks like tumbleweeds are going through it.  Computers are about as exciting as toasters.

Some retailer used to have an interesting tag line, "What do you want to do?"  Maybe that's the pitch for Best Buy.  Solve the customer's problem by packaging the best-in-class product and service options for, say a mid size flat screen TV with good sound that can double as a computer screen for my son's Xbox and streaming NetFlix.  Perhaps the store could even guarantee the "lowest price" on the bundle, which of course will never be put to the test.  Throw in some freebies from smaller vendor-partners looking for exposure.

The problem is two-fold: no compelling reason to go the store, and an unmemorable customer experience when you go.  Lots of stores are struggling with the first aspect, and Apple's retail stores have mastered the customer experience part.  Until these problems are worked out, the same-store sales decline, absent significant new technology introductions, will continue.