Published On: June 20, 2011

Five Reasons Why Best Buy Could End Up Like Circuit City

Published On: June 20, 2011

Five Reasons Why Best Buy Could End Up Like Circuit City

Jerry Del Colliano takes on the big boys in the blue shirts to tell them what they need to do if they want to remain dominate, because their grip on the market is slipping and could be lost forever if they don't wise up.

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If you are a consumer electronics manufacturer or brand and you are in Best Buy or Magnolia - you brag to anyone and everyone who will listen about how great it is. They are the last giant standing in the world of big box retail specific to home theater, AV software and audio with the ability to make one purchase order that can change an AV company forever.

With players ranging from Circuit City to The Good Guys to Ultimate Electronics to Tweeter to regional chains like Myer Emco to AV software players like Tower Records - all are dead meat in this lean and mean new economy. Best Buy has aggressively grown to eat up the remaining specialty AV or big box AV retail market share but now all of a sudden they are on the rocks. Analysts are losing confidence. Revenue and profit reports are being tempered downward in tough economic times. And more than ever the chirps from well known AV industry executives are starting to suggest that if Best Buy doesn't straighten up and fly right, that they too could be added to the list of new economy fallout which would be a game changing outcome in the AV and consumer electronics industry.

Additional Resources
• Read more editorial content like this in our Feature News section.
• Explore more industry trade news from HomeTheaterReview.com.

The simple reality is that Best Buy isn't really that good at their core business any more. They do five key things wrong that need to be addressed if they want to survive and thrive.

Problem No. 1: Best Buy Doesn't Have Commissioned Sales People
The number one reason why Circuit City went out of business was some suits and bean counters decided that they could make more quarterly profits if they forced their top producing salespeople to take a puny fixed salary over commissions. For some of their best salespeople - this was a pay cut of over $50,000 per year. Sometimes, it was even higher. For all of their salespeople, this was a demotivating influence that turned their salespeople into the same kind of clerks that Best Buy has in their "blue shirts." Why should a clerk learn all about selling speakers when he/she likely will be selling cell phones, appliances or doing check-out work, all in a week? Theoretically, she makes pretty much the same amount of money if she is fantastic at her job or she just sleepwalks through the workday as many low paid clerks do in retail stores all around the country. If Best Buy wants to convert more of the people who pack their stores on any weekend day - give the salespeople a reason to share in the store's power and success. Reward people who become top salespeople and make $100,000 per year because that is only going to make the stock go higher - a feat that Best Buy hasn't seen recently.

Problem No. 2: Best Buy Should Be Renamed "Worst Value"
In a retail climate driven by warehouse stores that operate on razor-thin profit margins - Best Buy is outright trying to rip their clients off with some of their pricing. Magnolia confusingly prices their speakers "by the speaker" when they actually only sell in pairs. Their HDTVs are listed at retail price when they sell for upwards of thousands less on the Internet. Most importantly, Best Buy's software is an absolute rip off - and consumers know it. Is there value to a point of purchase sale right in your hometown? Absolutely. Every American wants what they want and wants it now but how much of a premium are they willing to pay when unemployment is at nine percent and we are nearly three years into a punishing recession?

For example, yesterday my wife and I were in Best Buy in West Los Angeles. It was packed with consumers in every department. We walked over to the Blu-ray aisle for me to prove a point about value at Best Buy from an earlier lunch conversation. We selected an aisle at random and looked for the biggest movie that jumped out at us, which was The Fighter. The price for the disc said $40 retail but selling for a mere $29.95. What a value, you might think - but then if you use an app on your iPhone or Android to compare prices using the UPC code as my wife did while in the store - you will learn that Amazon is selling the same movie for $19.95. So is Wal-Mart. Ebay has used ones for a little less. The application will allow you to search by your location to find the lowest price closest to you. Everyone has (or will soon have) a phone that can perform these feats using free applications. How much longer can Best Buy try to rip people off on AV software? Movies on Blu-ray are rarely worth $30 - let alone $40. At $19.99 they become much easier to buy as an impulse buy. For catalog movies even in HD - movies should sell on Blu-ray for $9.95 to $13.95 maximum. Blu-ray discs bring in the people who buy higher end HDTVs, speakers, audio and electronics - meaning the people who spend big dollars on profitable items. To push them to the Internet with 33 percent plus savings is a critical mistake by Best Buy. Just because Tower Records isn't around the corner doesn't mean that you don't have to compete with Costco, Target, Wal-Mart and the almighty Internet. Consumers can, will and do go elsewhere to buy their software if they think they are getting screwed on price.

Read about the other things Best Buy is doing wrong on Page 2.

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Problem No. 3: Best Buy Can't Sell Audio Like Specialty Dealers
I have a running joke with a number of industry executives about the fact that each and every time (without exception) I go into the Magnolia in the back of my West Los Angeles Best Buy, that I never get spoken to. There is no greeter. There is nobody to qualify me. There is nobody to ask me what I am looking for today. You are crazy to think there is somebody to ask me if I was in the mood to see "the most amazing 3D demo in a $20,000 MartinLogan or B&W driven home theater."

Literally, there is nobody in the store inside of a store. And when there is, it's one person who won't engage me. I promise I shower before I go in to the store. I also have spent upwards of $500,000 (retail) on audiophile and videophile electronics. I love the stuff and I am just the kind of sucker who can buy what they have to sell. I also refer readers, associates and friends to retailers weekly who spend tens of thousands of dollars per sale. With exceptional brands on display like Panasonic, Bowers & Wilkins, MartinLogan, Definitive Technology, Denon and many others - what would it cost to train someone to try to speak with me? Not much, unless you have to pay the suits and bean counters who are killing off Best Buy.

If Best Buy doesn't learn how to sell audio better - this alone could be the end of them. If they did learn how to sell audio - they could radically improve their profitability as they have the customers under their roof - but they aren't good enough to close them. I am living proof and have proven my point with over a dozen trips to this Magnolia store.

Problem No. 4: 3D Doesn't Move The Needle Like Past "It" Technologies
Best Buy is so powerful a retailer that they can literary make or break a technology. They also can ride the coattails of a technology, which is what they are trying to do with 3D - except for the fact that consumers don't like 3D. Not everyone wants to watch HDTV with glasses. 3D has lower light output than 1080p HDTV in 2D. Not everyone has eyesight good enough to even see 3D. Some people get physically ill from 3D. And most importantly - 3D HDTVs cost significantly more than 2D sets, which affects today's value buyer more so than ever.

One analyst for Best Buy in a recent Reuters.com story suggested that Best Buy's HDTV sales are down 10 percent in a category that makes up over 20 percent of their 16 billion dollars in sales. It's time for Best Buy to invest in better demos - meaning HDMI, high speed Internet connections and professional video calibrations. They need to be excellent at selling HDTVs as well as the profitable attach sales that come with them. The experience of buying an HDTV at Best Buy is pathetic in the local store that I go to. If you want a Google TV demo - the Internet isn't fast enough to show you what that set top box can do on the Sony TV. If you want to see the edgeless Samsung HDTV - I had to ask three people.

I found the set installed behind the reception area in the TV section and blocked by five other clearance HDTVs on a table behind the set. Literally, if you weren't sitting in one of two seats in front of the Samsung - you couldn't see the set. And when you could see the set, some genius of a manager had put on Shrek in 3D but converted it to 2D so that you too can get half the light output without wearing glasses. This amazing set with game changing form factor was hard to find and looked downright awful. No wonder Best Buy's HDTV sales are off 10 percent. If people want a crappy demo of an HDTV, they can go under the sodium lights of Costco, Wal-Mart or Target and save some money. Best Buy needs to learn how to bring the "special" back to specialty AV, as they simply can't compete on price only. If they can't educate in the stores - the Internet can and will. The Internet will also take the sale and say "thank you" as Amazon has everything Best Buy has to sell along with free shipping.

Problem No. 5: Best Buy Stores Are Too Diverse In Terms of Products
My trip yesterday to Best Buy was to look for office appliances for the pending new office for Luxury Publishing Group. I do have to give my salesman from Pacific Sales, a local kitchen store that Best Buy bought, props for knowing about his product in ways the audio and video salespeople didn't. He also enthusiastically greeted my wife and I and helped with our education. He did try to mildly close us, which I appreciate. I told him that I needed this gear in about six weeks and he modified his pitch away from close-out items to other elements that I needed.

The people in the Apple section of the store are good too but then again - they are not Blue Shirts. They are Apple employees, as Steve Jobs isn't going to have clerks selling his sexy products. He'll train them while using Best Buy's distribution chain to Apple's advantage. Jobs is pretty damn smart.

But then there is audio, video, software, musical instruments, appliance, video games, computers (non-Apple) and so much more in the store. How does a company manage this many challenges? How do you become excellent at all of these topics when there are so many to improve on? It's a big challenge and one that likely would cost the chain sales as it worked on its core competencies. Will Best Buy do this type of a project as Apple did by whacking so many retailers when Steve Jobs came back? Not a chance. Would it be good for Best Buy? Hell, it might save them.

Best Buy has the market share to be truly dominant. You could argue that they already are dominant but they are losing their grip on their market share in key areas. They are selling consumer electronics like it's a pure commodity, which it's increasingly becoming - however the margin is in selling the good stuff. Think Apple, Bowers & Wilkins, MartinLogan, AV software and beyond. You need a team of people that know how to sell the good stuff to be able to land the big deals and/or make the most of the sales that you have every day. Noel Lee, the founder of Monster Cable is best known for being the king of the "attach sale" with his audio cables in the 1970s. Best Buy needs to get back to the basics and improve nearly every element of the way they promote, demonstrate and sell audio, video and other CE products because if they want to battle it out with the warehouse stores and the Internet - Best Buy will lose. Just like Circuit City, Tweeter, The Good Guys and so many others before them.

Additional Resources
• Read more editorial content like this in our Feature News section.
• Explore more industry trade news from HomeTheaterReview.com.

Sources
Best Buy Shoppers Shun Pricey TVs; Outlook Dim

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