Why This Company Can't Stop Falling
Best Buy (NYSE: BBY) disappointed analysts when it came out with third-quarter profits that were significantly lower than expected because of aggressive pricing and promotional activity. Can the company stay afloat as it tries to keep up with its competitors?
Ringing it up
The retailer's revenues increased by 2% from the previous year's quarter to $12.09 billion. Comparable-store sales, on the other hand, rose by just 0.3%, mainly driven by sales of mobile devices, including tablets, e-readers, appliances, and movies.
Best Buy's aggressive Black Friday promotions, coupled with free shipping for online purchases, caused the company to pay a steep price in the form of a 29% cut in net income from the prior year's quarter. The current figure is $154 million.
When a shopper's paradise becomes a retailer's nightmare
A major reason for Best Buy's poor profits are the aggressive advertising and pricing it adopted to compete with players such as Costco (Nasdaq: COST) , hhgregg (NYSE: HGG) , Wal-Mart (NYSE: WMT) , and especially Amazon.com (Nasdaq: AMZN) .
In fact, the sector as a whole is seeing more price competition, as retailers push further with more promotions and discounts to attract penny-pinching, price-conscious consumers.
Best Buy's CEO said the company resorted to these measures to shore up revenues and market share. On the bright side, it did result in increased traffic and comparable-store sales, coupled with a significant increase in online revenue growth. However, lower profit was the price the company had to pay.
More competition in the online retailing jungle
Of late, online retailer Amazon has been giving all brick-and-mortar stores a run for their money. Early in December, Amazon promoted a mobile app that buyers could use to get a special discount on Amazon.com if they used the app to scan an item while in a competitor's store. Amazon's clever little scheme not only made customers see the difference in prices but also served as a valuable source of information on retail store prices.
So ultimately, it's promotional efforts like these that are forcing businesses such as Best Buy to slash prices just to preserve market share rather than grow it in any significant way.
As evidence of the effectiveness of its competitors' actions, Best Buy also announced plans to cut down on its big-box store space by 10% during the next five years. I don't think this will be a magic fix for the retailer's problems, though. What it really needs are more traffic and better margins, not necessarily less space.
The Foolish bottom line
Since price competition cannot be done away with, the only way the company can shore up profits is by simply reducing overhead costs and somehow increasing its sales. Shifting most of its emphasis to online retailing could possibly do the trick. However, more powerful players such as Amazon could continue to give Best Buy some very tough competition in that space.
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