One of our flagship Minnesota businesses, Best Buy, was recently sliced and diced in expert fashion by a columnist for Forbes magazine.
As shoppers shifted online, author Larry Downes writes, brick-and-mortar retailers faced a severe culture shock: “Moving online required new thinking, new management structures, and new strategies.”
Best Buy, in his view, failed to adapt. And it’s paying a heavy price, losing 40 percent of its market value in the past year.
“[Best Buy] had decades of experience in retail, in customer service, in distribution, in forecasting, in marketing and sales,” Downes says. “It had expertise in the electronic products it sells, and potent leverage over key manufacturers to ensure favorable terms and access. But Best Buy squandered all of those assets.”
As I read the article, I couldn’t help but draw parallels to another institution that may have seen its best days: the newspaper business.
During the 1990s, as the Internet shifted from a dial-up curiosity to a basic household utility, newspapers were slow to recognize the threat to their business.
Newspapers had decades of experience in gathering and sharing information. They knew their communities like no one else. They had a virtual lock on local advertising, and they had hundreds of talented, hard-working employees in news, sales and distribution.
But none of the smart people running America’s newspaper companies grasped that the Internet would require completely new products and new ways of thinking. For far too long, newspapers continued to focus virtually all their top-level attention on their lucrative print products.
Newspaper websites, by and large, were run by skeleton staffs who merely shoveled the contents of the print paper into a template. On the ad side, web ads were given away as a throw-in with print buys.
There was little effort made to develop storytelling vehicles that tapped the potential of the digital space, or to create innovative ad services using the immense power of the Internet to interact one-on-one with customers.
I don’t blame the newspaper managers for failing to see the train that was bearing down on them. Because the fact is, we all missed it. In hindsight, I have a hard time identifying even a single prophet whose warnings to the industry were ignored. After the train hit us, we woke up. But until then, we were too busy getting out the paper every day.
It’s too early to write the obituary for either Best Buy or the newspaper business. Although wounded, both have strengths that will make it tough to drive the stake through their hearts.
But just the possibility that an obit could be in the works for either would have been unthinkable 10 years ago.
The problem Best Buy has is that it is forced to sell goods at low margins because the goods themselves, with a few exceptions, have no market differentiation. Consumers have learned that brand names mean little in the area of electronics, that a tv made by one manufacturer is pretty much the same as one made by another. The main competitive difference is price. Consumers have also learned that new TV’s come down in price quickly, and that given the durability and quality of their current tv, they can afford to wait, especially for holiday sales. Along with that, is the collapse of the music and movie business, which for Best Buy means the decline in sales of music players, CD’s and DVD’s. What Best Buy sells that people want is Apple technology. But they can’t offer a better deal for that than Apple.
Best Buy can put as much pressure on it’s suppliers as it wants. The problem is that those reduced prices don’t result in higher margins. Competitive pressures require that those reduced costs be passed along to consumer in the form of reduced prices.
The advantage newspapers have and still have is localism. They can focus on local news the way their national competitors like the New York Times and the Wall Street Journal cannot. But there are problems associated with that too. To take advantage of that localism, they have to hire people who are can create material people are willing to buy in addition to national material. Radio stations can on occasion do that. KQRS was able to push Howard Stern out of town. But newspapers have to do a lot more than provide the public with the equivalent of a hot local radio DJ. And consumers are well aware that much of their local newspaper isn’t locally produced, it’s composed of news services pieces available elsewhere earlier.
You can’t account for the decline of newspapers without mentioning Craigslist. Craigslist siphoned off the classified ad page dollars. Had the Strib created an online classified model they still would have lost money because Craigslist is free. The business model changed not just because of the web, but because of a viable free alternative.
Rachel makes an excellent point, one that gets at the heart of newspapers’ current difficulties. Two questions it’s good for any commercial enterprise to ask is, What are we selling and who are we selling it to? As much as anything, media generally, and newspapers in particular are in the business of selling eyeballs to advertisers. And as Rachel points out, the internet has just been devastating to what was formerly newspapers’ a huge segment of their advertising revenue. The internet simply does a vastly superior job of filling that market niche then newspapers ever can. The one bright spot for newspaper advertising are Sunday morning type ads, a form of advertising which emphasizes and benefits from localism. Whether that is enough to ensure long term survivial of newspapers remains to be seen.
Rachel is absolutely right, and it’s a very perceptive comment. Most people outside of the newspaper industry don’t realize how badly the loss of classifieds hurt. Papers used to run dozens of pages of classified ads every day. Those little blurbs went for anywhere from $10-30 and were an absolute river of cash, generated with very little effort by the newspaper — they just sat back and took the calls.
The other sides of the great advertising triangle were real estate and autos. Now realty firms and car dealers publish their own ads on their own websites, again cutting newspapers out of what once was a very lucrative business.
Best Buy is failing because they have nobody in management who can think objectively, much less observe and admit retail trends.
They’re still focused on trying to sell everything to everyone, and we’ve seen that doesn’t work in retail anymore. The stores are cavernous, noisy, and filled with competing products that can’t easily be differentiated except by price, and price is not a measure of quality, reliability, or satisfaction that consumers can use. Likewise, cutting out the noise and rearranging the stores so they are more friendly to customers would help immensely. And stop treating everyone like they’re a criminal when they try to leave the store.
If they get rid of the appliances and all the competing items that aren’t of the highest quality, that would focus their efforts on the things that would sell and make money for them. Yes, they do have some Apple products in their stores, but they make no effort to sell them. If they would do that, and have actual people who know Macs, they could sell an awful lot more. Even better, if they would have people who know Mac tech support, they could help users in the same manner of the Apple Store Genius Bar instead of willingly sending them there because they just don’t want to deal with helping their customers.
What’s more, they need to pay their employees a decent living wage (at least $17 per hour to start, plus company-paid benefits). They’re the ones doing all the work to move this stuff, so that makes them an asset, not a libability or a cost to be minimized.
Imagine that: a living wage. Shocking!
I knew Best Buy was in trouble when they built their gigantic corporate headquarters with the parking garage that rivals the Megamall’s at the same time they were rolling out their brand new online store. Something had to give. Both strategies wouldn’t succeed.
They never did fill the building to capacity, and in fact, farmed out their IT department. But when they cheered the demise of their major competitors like CompUSA, Circuit City and Highland SuperStores, it never seemed to occur to them that their business model was not that much different than theirs and without changing strategy (lower pricing) it was only a matter of time before they would suffer the same fate.
When laptops and flat screen TVs became commodities, and it finally came down to them and Walmart, during a long recession, when pricing would matter most, they couldn’t compete. Now Walmart is competing with Costo and Sam’s Club and Best Buy is still in the back stretch.
It’s a lot easier to identify Best Buy’s problems, then find a solution for them. The electronics business is simply a lousy business to be in these days. Apple stuff has the potential for a high profit margin, but I don’t know if there agreements with Apple make that possible. I don’t think Apple would terribly happy if they were in competition with an Apple lite version of Best Buy.
Looking around, I don’t see many cases where retailers have a lot of pricing power, where there isn’t a lot of pressure on margins. There are two reasons I would point to for that. First, in this struggling economy, people are looking for bargains and value. Secondly, the internet has made market more efficient, price comparisons easier. When I am considering a high end purchase, I routinely look for the cheapest price which is easily done on the internet. I don’t think I am alone in that.