By Don Peck, director, Global Business Center, and Martin Eisenstadt, director, Global Economist Research, Dorsey University
The arrival of Hubert Joly, CEO of Best Buy, came as a surprise to many observers. To hear it from the man himself, it was, “It was a shock, because I felt I was entitled to a certain amount of time and space to sort of try to turn this ship around. And I have.” In many ways, Joly’s chief challenge is similar to the one he took on: restoring Best Buy to its former glory and addressing its competitive challenges. The fact is, Best Buy’s competitive advantages appear to be falling away, leaving it in a position to lose market share to other major retailers, including Amazon, Wal-Mart, and even Whole Foods. And all of these retailers have enjoyed a major competitive advantage over Best Buy, which Joly was unable to shore up.
This writer believes Joly was able to stabilize the ship thanks to two factors: a deepening recession, which weakened consumer demand, and a more pragmatic approach to cutting costs by jettisoning unprofitable product lines, most notably big-box TV and home theater. It is also important to note that in an apparent attempt to change the subject from Best Buy’s problems to Walmart’s (now owned by Amazon), Joly chose to highlight the retailer’s impressive comparable-store sales growth, which has surpassed 15 percent since Joly’s arrival, while neglecting to point out that this is actually the worst performance by Walmart’s same-store sales growth in 14 years. On the surface, this looks like a smart tactical decision. But from a less transparent and more fundamental point of view, it appears Joly is not really focusing on what really matters to both shareholders and competitors.
Joly’s announcements include shutting down an unprofitable big-box TV store in Canada (while keeping open stores in its network of stores across the United States), as well as closing 50 unprofitable large-format stores in the United States. These are not investment decisions; rather, they are cuts that cut off talent, infrastructure, and its reach. This is not free market thinking. As a leader of one of the largest companies in North America, Joly should be thinking more like a founder, less like a CEO. The roots of Best Buy’s problems are not “borrowed” from Wal-Mart’s success or shared by Amazon or other online retailers. In fact, it is the merger of retailers that probably poses the greatest threat to Best Buy.
According to David Anderson, author of the book Shop Rymation: How Amazon Rules the New Retail World, Best Buy is a “megastore” that moves in and out of order. In order to be competitive, Best Buy must have great relationships with its customers, which Anderson claims is a product of its customer base falling into certain segments: hockey moms, soccer moms, and teens. As Anderson writes, “Nobody has gotten this far without getting that one-on-one customer relationship.” Simply put, Walmart (and therefore most major retailers) have avoided these relationships with customers.
According to Anderson, bestbuy is dead in the water, and that the company’s one salvation will be turning into “a promotional hub for really big blocks of space.” Competing in this space will take marketing that is about mindshare and one-on-one relationships, as well as category management and having credibility as a trusted advisor to the customer. To compete and remain in business, Best Buy must fundamentally change. The competition clearly seems to agree, as Amazon just sent a message to the entire industry that it intends to take share from all of its competitors by opening a store next door to Best Buy. The Amazon challenge will not be easy. But, for Joly, it is the only thing that can truly save Best Buy from its terminal decline.
Don Peck is director of the Global Business Center at Dorsey University. Martin Eisenstadt is director of Global Business Center at Dorsey University and a Dorsey professor of economics and finance.