Best Buy's Unhappy Holiday Season

Best Buy Co. has avoided one of the pitfalls that frequently beset troubled incumbents: Management didn't just stick their heads in the sand and hope their upstart competition would somehow fade away. But they made a different devastating mistake: trying to beat the upstarts at their own game. In response to the competitive threat of Amazon.com Inc., Best Buy decided to match its prices. You can understand why it wanted to do this, but you can also easily see why this is insane. Best Buy is never going to beat Amazon on price; Amazon's warehouses give it giant economies of scale. And it doesn't have to spend money making the display space pretty.

Back in November, when Best Buy announced this strategy, I wrote, "It's hard to see this ending well." And it hasn't. Best Buy's shares plunged this morning on news of its brutal holiday season. Yet Chief Executive Officer Hubert Joly says he's going to continue the cost-cutting strategies that helped margins last year.