First a little disclosure… I previously worked for Best Buy for 8 years and in early 2011 sold the small amount of stock I had in BBY.
When I started working at Best Buy in 2003 it seemed like people couldn’t buy stuff there fast enough. The main competition at the time was Circuit City and they had pretty bad service by comparison. I remember people coming in and literally buying everything the sales force recommended. Credit was easy and so was taking equity out of your house. Just when you thought they couldn’t find more ways to make money they started pushing the sales force to sell “D-Sub” or digital subscriptions to customers. These were subscriptions to things like magazines, a new service called “Netflix“, and other subscriptions which were close to 100% profit. Sure, it pissed some people off being solicited in a retail store… but it makes a ton of cash with virtually no COGS.
And then there was the “Internet”.
Over the last five years Best Buy’s stock has slipped from over $57 a share (Oct. 2006) to under $25 (Sept. 2011). If you lined that decrease up on a timeline over the rate of adoption of high speed Internet you’ll see a correlation. Internet retailers like Amazon, Overstock and literally thousands of micro-retailers focus on drop shipping rather than profit margin. Even more detrimental to Best Buy is that today’s consumers are shopshifting more everyday. Oh yeah… and then there’s the recession. Word on the inside is that they also recently changed their employee purchase policy. They used to allow employee purchases at 5% above cost, in mid 2011 they no longer offer anything close. I have heard that they now cap the employee discount to 50%. That sounds like a lot but some products, like accessories, have over 500% profit margin.
I’m not a Best Buy hater… I actually like going to Best Buy. I’ve found that if I talk to the right sales person I have a great experience. Over the last 5 years they have expanded their installation services as the complexity of consumer technology has grown exponentially. They also needed to do something to offset the decreasing profit margins on the actual products that they sell. I’ve also found that their “Product Service Plans” have worked out well for me and had several items replaced within 2 years due to malfunction. However, even that profit generator is being eroded by online solutions like SquareTrade.
In my opinion there is no replacement for actually shopping in a store. There’s a feeling I get when looking at, seeing and touching products in a retail environment that I just don’t get online… yet. However, the need and want to save money often trumps any “warm and fuzzy” I get when holding the latest gadget.
Jan 2012 Update: Larry Downes at Forbes really lays out a great article about this situation and how it is progressive… they are at the beginning of the “Out of Business” process if they don’t change immediately.
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