Best Buy — the Shrinking Big Box

In 2009, things were looking up for electronics retailer Best Buy when its largest competitor, Circuit City, went under. Both had been known for their “big box” format — huge stores with a wide selection of products at competitive prices.

But last week, Best Buy announced a quarterly loss of $1.7 billion, compared with a $651 million profit for the same period last year. As a result, the retailer said it plans to close 50 of its stores by the end of this year, in addition to laying off 400 workers and shrinking its store sizes.

What changed? According to Wharton marketing professor David Reibstein, Best Buy’s troubles are, in part, a sign of the weak economy. “Most [of the products] Best Buy sells are not necessities,” he notes. However, he points out that competition from other large retailers, such as Staples, Costco, Walmart and Target, has also been fierce. “It is hard for Best Buy to beat them on price. This is by far the biggest issue.”

Wharton marketing professor Stephen Hoch agrees that in general, the economy has not been kind to retailers like Best Buy, noting that “several big chains are trimming back their number of stores. Sears and Kmart are doing it out of complete desperation. Gap and Abercrombie & Fitch are also cutting stores by over 10% and focusing on the international markets.” He adds that although online sales represent less than 10% of total retail, “it is a much bigger chunk of the categories that Best Buy carries” compared with other stores. “So in fact, they do not need as many stores as they have currently, and so they have bitten the painful bullet.”

“I believe that Best Buy’s struggle is just beginning,” says Wharton marketing professor John Zhang. CDs and DVDs, once a staple for the retailer, are now disappearing from bricks-and-mortar channels, he notes. Moreover, consumers looking to buy more expensive electronics are no longer subject to sales tactics at individual stores, because they are armed with mobile phones and can compare products and prices at will. “In the end, smart customers trick Best Buy into providing them free consulting services” on electronics they may ultimately purchase elsewhere.

Along with announcing its cost cutting measures, Best Buy said it will open several new, smaller stores focusing only on mobile phone sales, along with altering some of its existing store formats so that they are centered more on technical assistance and services. That could be the ticket to the company’s survival, Reibstein notes. “Whenever there is a downturn, it is a perfect time to shed the less productive assets, in this case, stores…. To deal with the competition, Best Buy needs to differentiate itself and on a dimension that cannot easily be matched by the competition. [The company] is in a great position to offer tech support and has already developed a reputation around the Geek Squad [its on-site support team that also makes house calls]. This will be hard for competitors to replicate and is a true point of differentiation.”

Hoch isn’t certain that the moves will improve the outlook for Best Buy, “but they have to keep trying new things…. I have admired the way that they have survived when others have failed [such as Circuit City] and that they have adapted to an unpredictable high tech market better than anyone else. They just don’t need as many stores right now and don’t need as much space in the stores that they keep — probably at least as difficult a problem as completely closing 50 stores.”

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