Where's Best Buy's Value?

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Best Buy (NYS: BBY) has had its share of trouble recently:

  • Same-store sales falling over 5% in the latest quarter.
  • Former CEO Brian Dunn and Chairman and founder Richard Schulze stepping down after a scandal.
  • Closing 50 stores and cutting 400 back office employees this year.

And the market has priced it accordingly. But, if Best Buy can get the right leadership and practices in place, it can leverage its differences with Amazon.com (NAS: AMZN) to gain a solid footing. Here's how.

Convert "showrooming" into sales
The items Best Buy sells are not cheap, evidenced by its average sales per square foot of $823, according to RetailSails. For reference, RadioShack (NYS: RSH) comes in at $335, Target (NYS: TGT) at $280, and Bed Bath & Beyond (NYS: BBBY) at $261. Because of this, consumers like to test out the bigger ticket items in person. However, after testing out an item, 21% of Best Buy customers who check online prices in-store end up purchasing the item from Amazon, according to a ClickIQ study. This number is the same for Target customers who compare items online while in-store.


For these customers, 67% said price was the determining factor. And, Best Buy's prices are estimated to be an average of 4% higher than Amazon's. So while Best Buy adds value to the customer experience through its physical presence, online retailers reap the profits because they can charge less. To turn this around, Best Buy must add more value for a customer than simply letting them see the product in person. This value can come in many forms, and once added to the Best Buy experience, consumers will happily pay at the store instead of waiting for an online order to ship.

One source of value: Better customer service
As Fool Amanda Alix points out, Best Buy lacks the execution to develop a cult following. Pressuring customers to buy extras and unrelated services and unfulfilling holiday orders are just two issues that can drive customers away. However, if Best Buy could emulate the ease of shopping online with the service of actual humans, it could turn around customer sentiment. Instead of waiting in line for a register, which a customer never has to do while shopping online, Best Buy sales representatives could check you out with a mobile device. Customers don't mind waiting a few days for a product, but they really want to take it home today. Get rid of any friction, like lines or pitching extra services, so customers can easily give you their money.

Additionally, hire knowledgeable staff and train them in assisting customers, not selling add-ons that the customers come to resent. Shopping in person allows the chance for personal connections, and is a serious way that Best Buy can differentiate itself from online shopping. By creating a retail atmosphere that informs and connects people with the brand, customers won't mind paying the higher price as much.

It's all about perception
Best Buy was ranked the 5th most valuable retail brand by Interbrand in 2012, slipping from 4th in 2011. Both RadioShack and BestBuy lost 11% in brand value. On the other hand, consumer-cherished brands like Amazon, Target, and Bed Bath & Beyond all gained brand value. And even though Amazon sells many of the same things that Target and Bed Bath & Beyond sell, consumers still flock to those physical stores because of those brands.

Best Buy must improve its brand through better performance because, right now, the shopping experience of a website beats that of a store. And short of charging an admission fee to see its products, Best Buy needs to find a way to grab the cash from the customers that stop in. Consumers will pay for value; Best Buy just needs to provide a better value for their slightly higher prices.

Whether or not you believe in Best Buy's future, there is one retail company that is succeeding and poised to capitalize on an emerging market. It's also "The Motley Fool's Top Stock of 2012." Click here to read the free report that reveals which stock!

At the time this article was published Fool contributor Dan Newman owns holds no position in any of the above companies. Follow him @TMFHelloNewman.The Motley Fool owns shares of RadioShack, Amazon.com, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and Bed Bath & Beyond. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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