Show us the money. Please.

Photographer: Daniel Acker/Bloomberg

Is Best Buy Back?

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.”
Read More.
a | A

The last couple of holiday seasons, I've been writing dire warnings about Best Buy, the big-box behemoth that was struggling mightily with Internet competition. This year, however, the retailer seems to be heading into the retailing season with a spring in its step: Online sales are up, and cost cutting has improved its profit margins. Has Best Buy put the grim readjustment behind it?

I think the answer is: maybe. Chief Executive Officer Hubert Joly is a fiercely smart man, and I am loath to say that he will fail over the long term. But it's worth pointing out an area of concern: How sustainable is the cost cutting? Which is to say, were the costs that were cut simply useless fat, or were they things that supported the health of the retail operation over the long term?

Companies in trouble can often, though not always, deliver improved profit margins via rounds of cost cutting. The problem comes when the costs that were cut turn out to be things that helped the company appeal to customers. For example, a retail operation may cut floor staff. Over the short term, this delivers a profit boost, because people take a while to adjust their opinion of your brand. Over the long term, however, messy-looking sales floors and empty shelves encourage customers to go elsewhere, leaving you back where you were, except that you've spent down some of your valuable brand equity.

Here's a Best Buy-specific example of how this might work: A couple of weeks ago, I found myself in Indianapolis for four days without my laptop power cord. I had a couple of hours to get a new one, and I raced to the nearest Best Buy -- which, as it turned out, carried every MacBook power cord except mine. It didn't even stock it. So I had to go back to the car and head to the Apple Store, having wasted half an hour. That's probably going to impact my decision to turn to Best Buy in similar future emergencies -- and because this sort of purchase is one of its key competitive advantages over Amazon, that matters.

Now, I don't know that this was a result of cost cutting or some other sort of problem. The point is that customers who have that kind of experience tend not to come back. And stocking fewer SKUs, along with cutting floor personnel, is one of the major ways that retailers can save money.

I can't look inside the company to see whether it's cutting fat or vital muscle. The only way to tell is to see what happens next Christmas, and the Christmas after that. If Best Buy is still going strong, it will mean that it has endured as a credible competitor to Amazon, at least in the medium term. If it stumbles again, it will mean that it still hasn't figured out how to compete against Amazon's formidable cost advantages.

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

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net