The fortunes of Best Buy are best understood as a heady mix of Greek tragedy and popular romance fiction. The company reached an all-time high in 1993 when it became the second largest retailer of consumer electronics in America. It was an awe-inspiring moment for its staff and customers that was only potentially topped by being named as Company of the Year by Forbes Magazine in 2004. However, the customer’s romance with the stores seems to be well and truly over. In 2012, the company announced a series of closures, and like in the best Greek tragedies, it seems that only a few of the stores will survive to see the closing act. Every tragic romance needs a villain, and in this case it would seem to be online retailers that are eagerly taking on the role. How and why is Best Buy losing business to online retailers like Amazon.com? As with every good story, it is best to start at the beginning.
A short early history of Best Buy
In 1966, there was a small store in Minnesota called the Sound of Music. In 1983, the store was rebranded as Best Buy and the company’s flagship store was opened in Burnsville, Minnesota. By 1993, Best Buy had entered Fortune magazine’s rankings at number 373. Four years later it became the first US retailer to sell hardware and software related to DVDs. It would be one of the many carefully crafted decisions, followed by a partnership with Microsoft and a move to the digital market that would cement its prominent place in the market both domestically and internationally. Best Buy opened its first retail store in Shanghai in 2007 and announced a 40% increase in worldwide operations. By 2008, Best Buy was the largest retailer of consumer electronics in the US and Canada, valued at $20.5bn. Its annual revenue of $40bn seemed untouchable at that time.
The twist in the tale
In early 2012, Best Buy closed two of its stores; this in itself is not a warning bell of a major tragedy. However, in April 2012 they announced that 50 stores in total were marked for closure, with most if not all expected to be closed between May and the end of the summer. The story grew darker in 2013, when the company announced that it would potentially close 250 more stores by the end of the year. The news followed disappointing holiday sales that showed a fall of 1.4% compared to the previous year. Overall, the company’s revenue over the holiday fell to $12.8bn. Its sales over the full quarter produced dramatic reading as well; they showed a decline of 4.3% in store sales, resulting in a loss of $0.04 per share.
Unmasking the villain
There is rarely if ever a simple relationship between the tragedy faced by the hero of a story and the villain of the piece. The relationships that lead to the closure of so many Best Buy stores are no less complex. To simply state that it is the fault of online retailers would be a gross oversimplification. Online retailers provide customers with a wider choice and the opportunity to shop from home, having goods delivered to their door. However, the crux of this is the customer; it is the customer that makes the choice between the store and the online supplier. So why have customers made such a dramatic shift towards online retailers, away from trusted stores with which they have long-standing trusting relationships?
Price is, of course, a crucial aspect; real world stores are unable to keep step with online retailers who can provide cheaper goods, partly due to lower overheads. However, price alone cannot be the answer. How are customers dealing with trust and gaining information about the products they want to source? The answer to this is termed as “showrooming.” Stores such as Best Buy are becoming trusted information hubs rather than purchasing points. While customers are visiting their local stores in the same numbers as before, they only want one part of the service that is offered; the knowledge and experience of the staff. They are sourcing the actual item online, getting the best of both worlds – reliable advice and lower prices.
How the story ends will depend greatly on whether the customer continues on this path and whether stores and companies can adapt to these new purchasing habits. Online retailers are seemingly here to stay, but customers still do not fully trust products that they cannot handle and see firsthand. Can the remaining Best Buy stores, along with many other retailers who are similarly affected, find a way to capitalize on this unique need? Only time will tell whether Best Buy can turn this Greek tragedy around and write a new chapter in their history.
The moral of the story is digital is here to stay and if your brand is not adapting quickly, no matter how strong and how recognized it is, it will fall sooner rather than later.
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