Brian Dunn was practically ebullient. “The one critical thing we offer the world is choice,” the Best Buy (BBY) chief executive officer said in a March phone interview with Bloomberg Businessweek. He was trumpeting in particular his company’s role in guiding customers through the expanding smartphone universe. “We provide the latest and greatest choice of all technology gear, from Apple (AAPL) products to Google (GOOG) products, and that brings more opportunity to help people put technology to use. That is a great place for us to be.” A week later, reality intruded. The consumer electronics retailer posted a $1.7 billion quarterly loss and announced it would close 50 stores nationwide. On April 10, Dunn resigned.
Best Buy cited an unspecified “personal conduct” issue as the reason for Dunn’s abrupt departure, though the larger troubles plaguing the company haven’t changed. Founded in 1966 in St. Paul, Minn., Best Buy has watched its business stagnate because of a mix of macroeconomic forces and shifts in consumer behavior that essentially boil down to that one word Dunn bragged about as an advantage: choice. Shoppers are finding more choices online—primarily at Amazon.com (AMZN)—where they can often find a better deal. At the same time choice has narrowed in product categories such as HDTVs and PCs. There’s hardly a reason anymore to line up various models in a showroom.
Best Buy’s decline reflects a cultural shift that’s reshaping the retail world. All big-box stores, and Best Buy in particular, thrived in an era when comparison shopping meant physically going from store to store. The effort required of consumers was a kind of transactional friction. With the advent of mobile technology, friction has all but disappeared. Rather than ruminate with a salesperson before making a selection, tech-savvy consumers are more likely to walk into stores, eyeball products, scan barcodes with their smartphones, note cheaper prices online, and head for the exit. Shoppers can purchase virtually any product under the sun on Amazon or EBay (EBAY) while sipping a latte at Starbucks (SBUX). For traditional retailers, that spells trouble, if not death. “So far nothing Best Buy is doing is fast enough or significant enough to get in front of these waves,” says Scot Wingo, CEO of e-commerce consulting firm ChannelAdvisor.
It was not so long ago that Best Buy seemed invincible. As the housing boom boosted sales of TVs and stereo equipment, the chain’s lower prices and fat selection of music and movies helped run Circuit City out of business. Best Buy won plaudits for its progressive workplace policies, such as letting headquarters staff set their own hours. The share price of BBY more than doubled from 2000 to March 2006, when it hit a peak of $58.72.
Dunn bled a blue as intense as his employees’ iconic polo shirts. He started his career 30 years ago as a showroom salesman hawking stereos, then worked his way up to store manager, into the executive suite, and finally to the top spot in 2009. Well-versed in everything that made Best Buy successful in the first place, he adjusted strategy and hoped to open hundreds of smaller “connected stores” that would primarily sell mobile phones. With a bushy moustache and broad shoulders, Dunn forged a real connection with Best Buy’s 155,000 employees and customers. He maintained his own blog on the company website—which was immediately scrubbed after his resignation—and an active Twitter account. He boasted of support from the likes of Magic Johnson.
Yet Dunn was unable to solve Best Buy’s dilemma, which is apparent every time a customer walks into one of its cavernous superstores. Greeting the shopper on one side of the entrance, along with the orchestral warble of hundreds of TVs, stereos, and video games, are Apple products. IPods, iPhones, and iPads look good anywhere, but more and more consumers are making the choice to shop for those gadgets in Apple’s own gleaming retail temples—where Apple’s own employees know the products better. On another side of the entrance are mobile phones—from wireless carriers such as Sprint (S), Verizon, and AT&T (T)—all of which, like Apple, operate their own outlets and often have more informed customer reps.
Then there are Best Buy’s rows of shrink-wrapped music, movies, and software (the rack in a San Carlos, Calif., store displays 30 copies of the Steven Spielberg film War Horse). The purchase and consumption of this kind of media has been shifting online for years. Despite acquiring subscription music service Napster in 2008 (sold in 2011) and movie site CinemaNow in 2010, Best Buy hasn’t weaned itself off what retailers call “the shiny disk problem.” In part that’s because music and DVDs have historically lured Best Buy’s most loyal customers into stores, where they ended up making higher-margin purchases. “They did a marvelous job, but the product has been digitized,” says Bryan Gildenberg, an analyst with London-based consulting firm Kantar Retail. “Apple’s combination of selling [both] a device and the content sped that along.”
Best Buy is hardly alone in getting buffeted by choppy waters. The list of defunct big-box superstars of the 1980s and 1990s is long and getting longer. Remember Circuit City, Tweeter, Crazy Eddie—and Borders, which thundered out of business last year?
Even giants such as Wal-Mart (WMT) and Target (TGT) are striving to adapt and are beefing up their online operations while lowering their profile in the physical world. Target’s operating margin has slipped from 8.3 percent in fiscal 2008 to 7.6 percent for fiscal 2012, which ended in January. The company is opening five smaller CityTarget locations to seek growth in municipal areas. Wal-Mart, which also seemed invincible until recently, has offset years of declining sales of general merchandise with increased sales of groceries. Last year it added 21 small-format stores and plans to increase that number by as many as 100 this year. Most of those are Neighborhood Markets, which sell a higher percentage of groceries than the SuperCenters.
“I almost describe this as an Alcoholics Anonymous program,” says Fiona Dias, chief strategy officer at ShopRunner, a company that runs a two-day subscription shipping service on behalf of dozens of retailers. “It has taken a very long time for some of these companies to admit they have a problem.”
The question is whether it’s too late for companies like Best Buy to put themselves on the path to recovery. The retailer’s business hasn’t collapsed; annual sales have been stable at around $50 billion for the past few years. But it needs to adapt in a hurry. An excursion to the Apple Store in New York’s Grand Central Terminal illustrates how much the ground beneath traditional retailers has shifted. Despite the throng in the store, buying an iPhone charging cable lasts about three minutes: the time it takes to grab the box off a wall, scan it, tap a couple of security codes into the iPhone app that popped up, and walk out. No need to wait in a checkout line—or even speak to a salesperson—and if security personnel were watching, they were invisible. It’s a process designed to remove any lingering barriers between shoppers and their money. You might call it frictionless.
At a much less busy Best Buy two blocks away, there were no lines at the registers. Yet buying a similar cable took twice as long as it did at the Apple Store, and the experience didn’t end with the sale. A security guard posted at the front door rummaged through shoppers’ blue bags and verified receipts before allowing them to leave. Friction is overrated.