Where Best Buy went wrong

May 10, 2012

Long gone are the days when Best Buy ruled as the No. 1 retailer for all things electronic. The retail giant has not only lost its tight grasp on the market — in March, it reported a fiscal fourth-quarter net loss of $1.7 billion — but after reports of 50 store closings and the CEO's recent resignation it seems the company is hanging on by mere thread.

But what went wrong? Narrowing down Best Buy's biggest failure wasn't easy; it seems the company has not only missed the mark with its customer service but also with lack of innovation and its overall business strategy — the big-box store.

Customer service failures

Customers all over the country have taken to the blogosphere to rant about bad experiences with pushy or unhelpful employees, not to mention how the company failed to ship thousands of pre-ordered items that consumers planed to give as Christmas presents. (They also failed to give timely warnings, making it the Grinch of the season.)

Forbes blogger Larry Downes wrote recently about his recent frustrating experience at a Best Buy in Pinole, Calif.

"We were 'assisted' by a young, poorly groomed sales clerk from the TV department, who wandered over to interrogate us," Downes wrote. "'What kind of TV do you have? Do you have a cable service, or a satellite service? Do you have a triple play service plan?' He was clearly—and clumsily—trying to sell some alternative. I tried to change the subject by asking if there was a separate bin for 3D blu rays; he didn't know."

That type of bad customer service drives customers to shop online, which wouldn't be terrible for Best Buy if its website were more helpful. Although the company, along with many other many brick-and-mortar retailers, often complain that e-tailers like Amazon easily undercut them in pricing since they don't have to charge sales tax, Amazon can't win on price alone. Its customer service is also much better. It offers instant and sometimes free shipping, has pages dedicated to product demonstrations and FAQs and customer reviews. It also tracks all previous orders, offers phone support, and returns are easy. Inventory is precisely managed in a single system that spans all distribution points and third party partners, Downes said.

Best Buy, on the other hand, has stringent return polices and is getting a reputation for hiring unhelpful sales staff.

Lack of innovation

Best Buy was king when DVDS and CDs were all the rage, but it remained stagnant as that market dried up, according to Eric Chen, associate professor of business administration at Saint Joseph College in West Hartford, Conn.

"Consumer electronics prospers when there is innovation that drives consumers into the stores," said the former banker, who has held several senior-level positions in the financial services industry. "There is no innovation in buying the latest CD or a DVD player at Best Buy. The innovation cycle drives these products into commodity-like behavior very quickly."

Enter Walmart. The competitors nipping at Best Buy's flanks aren't other consumer electronics outfits, for there aren't many of those left standing.

"The guys eating Best Buy's lunch are folks like Walmart, Costco, and BJs. In the face of competitors who have strong supply chains and great market power, Best Buy got outflanked," Chen said.

Historically, consumer electronics purveyors did well with the advent of the CD players, the transition into DVDs, flat screen televisions and, most recently, iPhones and smartphones. Consumers, however, are already looking for the next big thing, and Best Buy isn't selling it.

"It's a mistake to think of a company as being innovative when in fact they have been superb at execution," said Bruce Kasanoff, co-author of "Smart Customers, Stupid Companies." "Innovation and execution are at opposite ends of the spectrum. Innovation requires the ability to ignore convention. Execution requires the ability to ignore distractions. Best Buy focused brilliantly on its business model, but has not spent enough time thinking outside of the 'box.'"

The big box gone bad

Best Buy expanded rapidly in the '90s by buying up smaller chains and transforming them into its big-box format, a strategy that worked well — until it didn't.

"The problem with the creation of the big stores is that Best Buy is now saddled with the costs of that vast square footage," Chen said.

And Best Buy failed to look far enough down the road. "They did not realize how fast disruptive forces would turn their stores into liabilities instead of assets," Kasanoff said.

Best Buy also failed to segment its retail customers.

"The big-box retail sales model will increasingly only work for the customer segment that could be called 'premium for now,'" Kasanoff said. "That is, they are people who will pay a premium to get an item now. But all the other customer segments — and there are many potential segments — are now using Best Buy as a showroom for Amazon and other merchants."

Chen said he is not sure if Best Buy can make a comeback, but is looking forward to watching it try.

"Best Buy now faces a path much like Linens and Things took a few years ago. Retrench. Reorganize. Get out of leases. Shutter stores. Go online. Rebuild. It's a long road back."

Clawing back to the top

In order to come back strong, Best Buy must segment its customer base, and develop value added services. For example, Kasanoff said, it could convert some failing stores into membership clubs for the premium-for-now customers, who will pay more for instant access to products.

He also suggested offering "instant replacement" of any product that breaks or transforming some locations into learning centers, where customers could learn programming, edit videos, or even play games against each one another.

"This would require a massive cultural shift from that of mass market retailer to a nimble and highly responsive customer experience provider," Kasanoff said. "It's not at all clear Best Buy can accomplish this change. But cursed — or blessed — with their real estate holdings, this is what Best Buy has to do to thrive. In other words, they have to start acting a lot more intelligently about the needs of their customers."

Topics: Customer Experience , Customer Service , Marketing , Online Retailing , Specialty Stores

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