Monday, December 16, 2013

"Isn't this reminiscent of the promise products?" - Underdog Against Amazon, Best Buy Charges Ahead

The New York Times


December 13, 2013

It was a lonely holiday season last year for David Strasser, an analyst at Janney Montgomery Scott. Of the 25 analysts covering the electronics retailer Best Buy, he was the only one to make a buy recommendation. And the stock kept going down.
“Everyone thought Amazon was going to put them out of business,” Mr. Strasser told me this week. “I’d go into a meeting with clients and the minute I said the words ‘Best Buy,’ they’d look at their watch and say, ‘Gotta go.’ ”
No wonder: Many retail chains were reeling from Internet competition. Best Buy’s former rival Circuit City had already gone bankrupt. Best Buy’s stock had dropped to $11.29 last Dec. 28, from over $50 in 2010.
Mr. Strasser clung stubbornly to his conviction that Best Buy would be an exception. Analysts at Janney aren’t allowed to invest in the companies they cover, but “if I could have dropped the coverage and bought the stock, I would have,” Mr. Strasser said.
But not even Mr. Strasser believed Best Buy could pull off one of the biggest turnarounds in retail history, which may be what it’s doing if the stock price is any measure.
Best Buy stock has gained nearly 240 percent so far this year, putting it among the top three performing stocks in the Standard & Poor’s 500-stock index. Now every struggling chain, from J. C. Penney to Barnes & Noble, is scrutinizing Best Buy to figure out how the company did it.
Hardly anyone on Wall Street knew Hubert Joly when he was installed as Best Buy’s chief executive in August 2012. A French-born graduate of the prestigious École des Hautes Études Commerciales and the Institut d’Etudes Politiques in Paris, Mr. Joly was chief executive of Carlson, which owns the travel service Carlson Wagonlit, the Radisson Hotel chain and T.G.I. Fridays restaurants.
Because Carlson, based in Minneapolis, is privately held, Mr. Joly wasn’t known in the investment community. And given the length of the search that resulted in his selection at Best Buy — nine months — many investors assumed that numerous others had rejected the job.
“Everyone assumed they had to scrape the bottom of the barrel,” Mr. Strasser said. “But my brother’s in the hotel business and he knew this guy. He said, ‘He’s the smartest guy in the room, even if he does speak with a French accent.’ ”
Best Buy at the time was in turmoil, its staff demoralized from declining same-store sales, its stock price falling, the previous chief executive ousted in a sex scandal and a leveraged buyout attempt underway by the founder, Richard M. Schulze. That effort later collapsed.
In his first major presentation to analysts, Mr. Joly coolly analyzed Best Buy’s strengths and weaknesses — which included the perception that Best Buy was not the low-price leader. In one survey, only 23 percent of respondents thought Best Buy’s prices were “lower than others,” far behind Walmart (71 percent), Amazon (56 percent) and Target (38 percent). The result was that many shoppers were browsing in a Best Buy store, using their phones to compare prices and then ordering online from a competitor.
Like many ideas that seem brilliant in hindsight, “the strategy is very simple,” Mr. Joly said in 2012, soon after he took the job. “We believe that price-competitiveness is table stakes. The way we want to win is around the advice, convenience, service.”
By matching the lowest price and enhancing service, he was determined to make sure that a customer who came to Best Buy as a showroom had no reason to buy anywhere else.
Mr. Strasser attended a conference where Mr. Joly spoke. “It jumped out at me,” Mr. Strasser said, “that the most important thing they said was, ‘If we get someone in the store and they don’t buy, then shame on us. If we get them in the store, they’re going to buy.’ ”
A few other analysts also took note.
“Embracing the showroom — that was brilliant,” said Anthony Chukumba, an analyst at BB&T Capital Markets, and the first analyst to upgrade Best Buy to buy, which he did in January of this year. “Customer traffic was never the problem. It was conversion. Best Buy said it would match any price. The knee-jerk reaction was that that would kill the margins. But Best Buy took out a lot of costs, and it can make back the margins on volume.”
But the strategy wasn’t premised just on price-competitiveness.
“Our goal is not to be lower than the competition,” Mr. Joly said. It’s to offer “a very compelling set of customer promises with the assortment, the advice, the convenience, the service. So our goal is simply to eliminate price as an obstacle to buying.”
As it happens, I’ve been in the market for a new television since the debut of “House of Cards,” the original Netflix series that I couldn’t get on my still-functioning television with its giant tube in the back.
After doing some research online, I settled on what the reviews called a “low-end” Panasonic Viera model (the 50-inch X60 series plasma), which seemed perfect for my modest needs. These TVs once sold for thousands of dollars, but (even before I had the idea for this column) I found it on the Best Buy website for $399.99, with free delivery. This week, it had jumped to $499.99.
Amazon had it for $610. Walmart didn’t have it. Sears offered it for $499.99, but wouldn’t deliver to my Manhattan neighborhood. On Google shopping, the lowest price was $399 with free shipping atElectronicMegaSale.com.
(A Best Buy spokeswoman said the store would match any price if a customer showed it to an employee and the price was from a list of designated sellers. But ElectronicMegaSale.com doesn’t qualify. She said Best Buy would also match its own lower price within 15 days of purchase or, in the case of the holiday season, through Dec. 24.)
I scheduled delivery online, and the night before, Best Buy called with a two-hour window. The TV arrived just a half-hour into the designated period, which is virtually unheard-of in my experience in New York City. And the deliveryman took away the huge old TV, all at no charge.
When it came time to set it up, I realized I needed a Blu-ray Disc player for DVDs and streaming from the Internet. So I walked a few blocks to the Best Buy store, which was recently renovated to feature Best Buy’s new “store within a store” concept featuring showrooms by brand, including Apple and Samsung. (In this, it’s mimicking department stores.) I was in the store only a few moments when a salesman materialized offering help. He quickly steered me to a Sony Blu-ray player that was $69.99.
At that price, I didn’t bother to comparison shop, but when I later checked online, Amazon had it for $78, as did Walmart. The salesman seemed to know what he was talking about and made no effort to move me to a more expensive model or talk me into any kind of service contract. I was out of the store in about five minutes.
As far as I am concerned, Best Buy seems to be delivering on its promises. And that seems to be showing up in the operating results. Best Buy announced a few weeks ago that the decline in same-store sales had been reversed in the most recent quarter, and had advanced 1.7 percent. Online sales jumped 15 percent. And earnings beat expectations.
“Our focus on delivering our unique customer promises is starting to pay off,” Mr. Joly said last month, as are “our efforts to control cost and to bring greater efficiency to our operations by improving our profitability.”
The lessons for other retailers may be fairly obvious: “Embrace your customer, don’t alienate them,” said Mr. Chukumba. “They want the lowest price? They’ll get it. Better service? Give it to them.”
By contrast, he said, J. C. Penney seemed to go out of its way to reject its customers. “The sales you always counted on? They’re over. The brands you love? Gone,” he said.
No one expects Best Buy stock to gain another 250 percent next year, but both Mr. Strasser and Mr. Chukumba are still recommending it. Fourteen analysts now rate it a buy or strong buy, and no one has downgraded the stock this year. But not everyone loves the Best Buy story: Michael Pachter of Wedbush Securities has had a sell recommendation all through this year’s run-up, and is now the only analyst who rates Best Buy a sell.
“The negative case is simple,” he told me. “It’s Amazon. The misperception about Best Buy is that, because they’re successful at intercepting the customer in the store and getting them to buy a television — and they’re doing a great job at that — they can do that with everything. That’s not even close to being true.”
He pointed to Sony lithium-ion batteries. He said they were $4.99 each at Best Buy, and $8.99 at Amazon — for 20.
“That’s 45 cents each!” he said. “Yes, Best Buy will match it, but who’s ever going to buy batteries there once you see that?”
Amazon doesn’t care if people buy televisions at Best Buy, he said, dismissing my shopping experience.
“That’s a low-margin product,” he said. “And Best Buy’s margins are eroding.”
The verdict is still out on this year’s holiday season, which will be an important test for Mr. Joly and his strategy. Mr. Strasser isn’t breaking out the champagne just yet.
“It was phenomenal, and it’s been a fun ride,” he said. “But the reality of this business is, you’re always right or wrong. You get humbled every day because something goes wrong. You’re only as good as your last call.”

 
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