The so-called category killer retailers, such as Best Buy and Staples, are now on the receiving end of the competitive squeeze, according to “Retail Revolution: Category Killers on the Brink” by Rajiv Lal and José B. Alvarez (10/10/11 HBS Working Knowledge). These firms grew by taking sales from mass merchandisers, but currently face increased competition from online sellers and Apple’s strong positions in growing segments.
During the early 2000’s, new retail outlets boomed to the point where the country had excessive retail space for a strong economy and a massive overhang for the Great Recession. Consequently, retail productivity dived.
“Best Buy, arguably a bricks-and-clicks monopolist in the electronics segment, is a prime example of this impact. With the demise of Circuit City in 2009 one would have reckoned that Best Buy's best days were ahead. Instead, Best Buy is working fiercely to reinvent itself: its comparable store sales have barely kept up with inflation since 2008, and space devoted to its vast collection of music, computers, and televisions is becoming increasingly unproductive. Return on invested capital at Best Buy has declined from 23.68 percent to 15.01 percent since 2007, and domestic sales per square foot (including online sales) have also declined in the same period, from $909 to $853.”
“Store retailers must also compete against the compelling economics of the web-only retail business model. Amazon leverages its higher inventory turns, lower investments in physical assets, and faster cash conversion cycle to deliver up to 20 percent cost savings to the consumer. At a 5 percent price advantage, consumers might not see much advantage in shifting their purchases online, but at a 20 percent discount, it is not a matter of if but when the category economics will shift.” These retailers thought establishing their own web sites would address the competitive threat from the Internet, but extending to the online world did not address the fundamental uneconomic position of their retail operations.
Best Buy is constantly changing its retail presence by opening and closing stores as profitability and local demographics change. It is also testing and revamping the formats, and shrinking the square footage of stores as leases come up for renewal. The company attempting to make its web site more attractive by:
- Adding 20,000 SKU’s
- Establishing Best Buy Marketing for third parties to sell their products and give Best Buy a commission
- Deal of the Day to generate excitement
But when the CEO Brian Dunn of Best Buy was asked at the Q211 review with analysts (Fair Disclosure transcript), he replied:
“I think what's better about it and what it does for our consumers -- it allows them access to all the value-added things we're able to do. It allows us access to our customers to Geek Squad. It allows them access to our store network we think in a way that is compelling and differentiating. And again, when consumers think about CE and technology and we know this from exhaustive research, the first place they think about is Best Buy. And we think this opens up a broad array of choices that we're able to offer the consumers now that we weren't able to offer 6 months ago, and we'll be able to continue to grow that broad spectrum. And we think the combination of that and the might of Best Buy standing behind it is a compelling value proposition.”
Is this compelling or moving the chairs around on the Titanic?
Staples, an office supply retailer--Oh, wait a moment--Staples can no longer be considered a retailer. The company has invested in direct sales to businesses via physical delivery and Staples branded web sites. North American retail sales equaled only 35.1% of total revenue in the quarter ended 7/30/11 while North American Delivery, including the web business, constituted 48.1%. The rest is Europe. The retail business has been dropped as a percentage of the total for years as Staples has shrunk its model store size from 18,000 square feet to 15,000.
I might buy a PC or a tablet at Best Buy; the short life of these technology products makes that a safe bet, but while Staples stock has underperformed the market for years, I have more confidence about Staples’ long term competitiveness.