as part of our
If there's one word that strikes fear into the hearts of
brick-and-mortar retailers, it's "showrooming." That's where
customers come into the store, have a look at an item and then buy
it online for less money-often from a competitor like
Showrooming is tough for retail chains to fight because they're
up against websites that don't have the overhead costs-such as
paying sales staff and building and maintaining stores-that chain
stores face. Retailers can fight back by matching online sellers'
prices or improving customer service, but both of those also
increase their costs.
A June study by comScore found that 35% of Americans showroom
when they're making purchasing decisions. Of those, 50% live in
urban areas, and their average age is between 25 and 34 years old.
The retailers with the most to lose from the trend? Sellers of
apparel and consumer electronics.
) in a particularly tough spot. The company, which operates 1,400
mostly big box electronics stores, estimates that 40% of its
customers visit its outlets with no intention of buying anything at
all. Worse, the Best Buy website is an also-ran in the online
electronics market, with just a 14% share, trailing second-place
), with 22%, and leader Amazon, which dominates with 60%.
How Best Buy Lost Its Way
If that wasn't a big enough challenge, Best Buy has been facing
a long list of internal problems-many of which are
self-inflicted-in the past year.
In March, the company announced plans to slash $800 million in
costs and close 50 of its stores in the wake of a
disastrous earnings report
. Then, just two weeks after announcing that plan, CEO Brian Dunn
resigned. "There was mutual agreement that it was time for new
leadership to address the challenges that face the company," said
Best Buy in its statement announcing the departure.
Investors reacted negatively to the news. The company's choice
as a replacement didn't seem to inspire confidence, either, as
Investing Daily's Jim Fink wrote at the time:
"Best Buy's new interim CEO is a member of the board named Mike
Mikan, whose background is in health care. Excuse me? How does a
health care background help you run a consumer electronics company?
It doesn't. No wonder Best Buy's stock fell 5.9% on Tuesday when
the story broke. I think the negative reaction wasn't just about
Dunn's resignation but also disappointment in the selection of
But that was just the beginning: it was later revealed that
Dunn, who is married, had actually resigned from Best Buy after an
investigation revealed that he had had an inappropriate
relationship with a female employee.
To top it off, when board chairman and company founder Richard
Schulze found out about this relationship in December 2011, he kept
it quiet instead of bringing it to the board's attention-a move
that also cost him his job.
"Talk about a palace coup," said Sanford Bernstein analyst Colin
Blue Christmas Looms for Best Buy
The company has since hired Hubert Joly, who led corporate
turnarounds at Vivendi's former video game business, tech firm EDS
and Carlson Wagonlit travel, as its new CEO. Joly plans to combat
showrooming by matching online retailers' prices throughout the
Christmas shopping season. He's also expanding the company's "Geek
Squad," which offers product knowledge and helps customers solve
In addition to the service improvements, Best Buy is testing a
new, smaller-concept store to reduce its overall square footage.
It's also shifting toward sales of smartphones and tablets to cut
its reliance on larger items, like TVs. However, the cost of both
the restructuring and price matching will put further pressure on
its profits in the coming months.
Meanwhile, the company's business continues to deteriorate. The
stock has fallen 53% in the last 12 months, to its current level of
In its latest quarter, Best Buy lost $13 million, or $0.04 a
share, compared to a profit of $173 million, or $0.47 a share, a
year earlier. Excluding restructuring costs, the company earned
$0.03 a share, falling well short of the consensus forecast of
$0.12. Sales were down 3.5%, to $10.75 billion. Same-store sales
fell 4.3%. That marked the company's ninth same-store sales decline
in the last 10 quarters.
Best Buy's cash reserves are also dwindling. It ended the
quarter with cash of $309 million, down sharply from $2 billion a
Best Buy's Only Hope? Go Back to the Future
In the background is the possibility that Schulze, who still
owns 20% of Best Buy, will lead a buyout of the company and take it
private. He is apparently working with three private-equity firms
on such a deal. His group had been considering a buyout price of
$24 to $26 a share, but given the stock's recent plunge, that
figure is likely to be much lower.
Even so, a deal still may not come to pass. Bloomberg
Businessweek recently reported that Best Buy's plunging share price
could be making it harder for Schulze to firm up his bid. In
August, he received the company's permission to examine its
financial information for a period of 60 days; he has reportedly
asked for a 30-day extension.
"Schulze is an insider and doesn't need more time for due
diligence," Erik Gordon, a business and law professor at the
University of Michigan in Ann Arbor, told Bloomberg. "He needs more
time to line up financing. Unfortunately for Schulze, the time he
needs to line up solid financing is working against him because the
news at Best Buy is getting worse." Best Buy may not be the best
buy right now, so you may want to check out some of the picks in
our free stock research reports instead.
This article by Chad Fraser was originally published on
Investing Daily under the title:
"Showrooming" Trend Runs Over Best Buy