Best Buy Faces Unmerry Christmas

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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To its immense credit, Best Buy Co. has confronted the challenge of Amazon.com Inc. head on. Oh, yes, it could have done so faster. But really, most companies remain in denial until the Grim Reaper is knocking on the door and peering in the windows to see if anyone's home. Merely getting organized for change while you're still basically profitable is by itself quite an achievement.

But it is not, by itself, enough to guarantee success. By dint of cost-cutting, Best Buy has managed to remain profitable. But cost-cutting is not a race that Best Buy can win. Amazon's scale and its freedom from having to spend time and money keeping stores pretty and clean for customers give it a decisive edge that Best Buy will never be able to overcome. Once again, Best Buy is warning that it faces tough promotional pressure in the coming holiday season. Other companies are cutting prices deep in order to drive traffic in a soft retail environment. Best Buy is planning to follow suit, opening at 6 p.m. on Thanksgiving, staying open until the end of Black Friday, and keeping prices low so that it can sell, sell, sell! It doesn't sound like those sales will be very profitable, but they're probably better than no sales at all.

It's hard to see this ending well. The company is still above water right now, but next Christmas, Amazon will have even more warehouses even closer to Best Buy's stores, and the pricing pressure will probably be even worse. Unless it can fundamentally transform its business into something different -- something more curated, and less directly competitive on price -- Best Buy may end up in a race to close stores and fire employees before the bankruptcy court does it for them.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net