Best Buy Goes Leaner As Customers Waver, Competitors Press

Best Buy’s finances took a hit in the third quarter, but the company also demonstrated that it understands the consumer and competitive landscapes have changed, and not necessarily in its favor.

Operating income declined by a third, Best Buy slashed next year’s capital spending budget by half and the company announced buy outs with the possibility of layoffs behind them. Given Best Buy’s emphasis on its personnel, with even its advertising featuring store employees, the suggestion of layoffs demonstrates a change in cherished priorities.

Even a 1.7 percent market share gain that might have been the third quarter’s bright spot really wasn’t so stellar. After all, the company’s main competitor, Circuit City, had to declare Chapter 11 bankruptcy even before the holidays began. The market share gain looks meager under the circumstances.

Best Buy clearly understands it is in a tight spot with discounters — including Wal-Mart — coming after mainstay businesses including television, digital cameras and gaming. Warehouse clubs have been grabbing a piece of the action, too.

Best Buy also has to cope with a market where consumers are scaling down their purchases. Looking at recent sales data, Shawn Dubravac, economist for the Consumer Electronics Association, notes that consumers aren’t as enthusiastic about big-bucks purchases of grander and more complex electronics.

Television shoppers, for example, are opting for less expensive sets. Electronics enthusiasts already have bought their main showcase televisions and don’t need huge screens and elaborate features for second or third TVs. In the meantime, most of the consumers who held off replacing the family television are downsizing from epic 42-inch screens to still-big but more reasonable 34-inch screens.

Best Buy’s decision to slow down expansion makes sense in a recessionary environment. Cost-conscious consumers are comparing prices online and deciding what and where to pay before they hop in the car. A shiny new Best Buy a little closer to home isn’t the attraction it might have been a couple of years ago. The initiative to scale back staff may be traumatic for the company, but it’s also sensible. Doing more with fewer employees, whether at headquarters or in stores, has been an important theme in retailing for many years now.

Best Buy’s real competitors — Wal-Mart, Target and Costco — use fewer employees to run the electronics business throughout and continue to figure out ways to sell electronics off right off the rack rather than through a sales clerk. Ironically, one main reason Best Buy surpassed other electronics retailers was that its stores were designed to let customers shop with minimal human interaction if that’s what they wanted, allowing people to avoid commissioned and sometimes aggressive sales people.

By becoming leaner, Best Buy is preparing itself for a competitive reality where consumers are becoming more considered about spending and where discounters and warehouse clubs are the major competition.