Unquestionably, the retail world has changed since 2004. The biggest driver of change is the emergence and continued growth of e-commerce. When we were writing Winning at Retail, as an example, Amazon.com's sales were around $5 billion; in 2011, they topped $48 billion and they remain one of the fastest growing companies. E-commerce, while still just around 7% of total retail sales today (and growing at a faster clip than brick and mortar retail), was just under 2% in 2004. The real impact of e-commerce comes in breaking down that general e-commerce number and begin to look at the impact category by category.
Which brings us to Best Buy, subject of countless articles and analysis over the past few weeks. Best Buy has announced a series of store closures as well as the resignation of the CEO. Their struggles have led to speculation that Best Buy might end up with the same fate of some of its historical competitors, companies like Circuit City, Silo, Highland, Fretter, etc...whose name litter the retail graveyards.
While we are not predicting Best Buy's demise (and this is still a $50 billion company--still bigger than Amazon), we do know that their business model requires radical reinvention, and fast. Best Buy's premise of biggest assortments within a physical retail space simply doesn't resonate with customers in the same manner anymore. This core EST principle built around assortment is almost impossible to sustain in a retail setting with the Internet offering nearly infinite selection at the click of a mouse. Other Biggest retailers in our historical model (Borders, Blockbuster, Circuit City) have suffered similar dire results.
When looking at the challenges of Best Buy, it is difficult to know where to begin:
- The digitization of core products (CD's, DVD's) which can be bought or streamed via the web. These products historically drove traffic to the retail stores where customers could then purchase bigger ticket products...
- It is now incredibly easy to price compare on-line. For considered purchase items (TV's, computers) customers are going to take the time to compare (and more times than not, beat the prices of a physical store)
- And while service is important, the drive towards simplification (see the iPad) makes more and more products "plug and play". While service offers like Geek Squad are brilliant, there may (in theory) be less geeks needed if products become easier and more intuitive to use.
We can criticize the quality of the service and other operational issues but the simple point for Best Buy now becomes: the stores are too big and they don't have enough stuff to fill them with. Ancillary categories (musical instruments, fitness equipment, office products) have been introduced but they are not enough to profitably move the needle. And, they can join the long line of retailers who think it would be a good idea to sub-let space.
So? Best Buy is opening Mobile stores more in line with consumer needs and smaller and more efficient to operate. E-commerce sales are growing but still represent less than 6% of total company sales. While that's a nice $3 billion business, 22% of electronics are now sold on-line. Best Buy is way, way behind where they need to be.
What's the fix? Clearly there's not an easy answer. Grow small stores, grow e-commerce but most of all, find a clear reason for the big box retail stores to exist. If Biggest is no longer valid, what is the new EST position that Best Buy can occupy?