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Best Buy’s travails part of the evolution of mass retailing

Shoppers lined up for Black Friday sales

I bought my first stereo at Schaak Electronics. The record player didn’t have a needle. (For you young folks, a phonograph required a needle in order to play the record.) I bought one at Sound of Music, a store near Ridgedale located in an old construction trailer.

Schaak Electronics is long gone, but Sound of Music evolved into Best Buy. A recent article in Forbes  argued that Best Buy is following Schaak into the history books. Events last week seemed to echo this when Best Buy announced layoffs, store closings and other cost-cutting measures designed to reduce the company’s losses.

Best Buy’s travails are part of a much longer story: the evolution of mass retailing since the Civil War. It’s a tale of growth, evolution, rebirths and corporate deaths. Best Buy, Target, Zappos, and Amazon are part of our retail culture, but Schaak Electronics, Dayton’s, Kinney Shoes and Sears once filled these same places and now are gone.

Transportation and communication revolution

The growth of mass retailing after the Civil War was made possible by a revolution in transportation and communication that was set in motion before 1860. The railroads provided, fast, all-weather transportation. The telegraph network (and later, telephones) delivered rapid communication across long distances 24 hours a day, seven days a week.

The two innovations worked together to create an integrated transportation and communication system. In particular, railroads used the telegraph to coordinate service across long distances. For instance, railroads could operate more trains on a single stretch of track with less danger of accidents and reduce the cost per ton-mile shipped. The railroad could then use the reduced costs to both charge their customers lower prices and boost their profits.(Alfred D. Chandler, Jr., provides the details of this revolution in his book “The Visible Hand: The Managerial Revolution in American Business.”)

Mass retailers

Three kinds of mass retailers arose after the Civil War: department stores in the 1880s, mail-order houses in the 1890s and chain stores in the 1900s.

Department stores came about in two ways. First, wholesalers such as Marshall Field grew large in the 1870s by taking advantage of the railroads and the telegraph to expand their territories and their lines of business. They then opened stores in large cities that sold goods directly to the public rather than to smaller retail stores. Second, dry goods stores located in big cities (for example, Macy’s) started purchasing goods directly from manufacturers. In both cases, the stores were organized according to departments, such as men’s clothing, women’s accessories and the like.

The dense populations of cities fueled department store growth. Retailers such as Dayton’s in Minneapolis and the Golden Rule in St. Paul stocked large amounts of goods and rapidly turned over their stock, knowing that they could order via telegraph more of what sold well and have it delivered via the railroads. Department stores could thus make money by reducing their profit margins and selling high volumes, a strategy that Target and Walmart later utilized intensively.

In 1872, Montgomery Ward applied these ideas to create the second type of mass retailer: the mail-order house. Customers in small towns and on farms could look through a catalog, choose what they wanted, and send their order to Ward’s central warehouse in Chicago either by mail or telegram. Ward’s filled their request, shipped the order by rail, and the customer could either pick up their goods at the nearest railway station or later have it delivered to them via parcel post.

Television, radio and phonograph department, Dayton's Southdale store
Minnesota Historical Society/Photographer: Norton & PeelThe television, radio and phonograph department in Dayton’s Southdale store in 1958.

Sears, Roebuck, and Co. was the premier example of the mail-order house. It began in 1887 selling watches by mail, adding jewelry, silverware, sewing machines and bicycles over the next five years. By 1899 Sears had departments ranging from “dry goods, men’s clothing, men’s furnishings, cloaks, shoes, notions, jewelry, groceries, drugs, hardware, carriage hardware, stoves, furniture and baby carriages, sewing machines, bicycles, buggies, vehicles, saddlery, sporting goods (including guns), musical instruments, gramophones, optical goods, stereopticons, and books..” All of this was available to anyone with a Sears catalog. Sounds a lot like…

The third kind of mass retailer was the chain store. Chain stores filled two niches: First, they offered items like groceries and lower-priced merchandise that were not offered by either the department stores or the mail-order houses. Second, chain stores grew up in smaller cities and towns, places that were too small for department stores like Marshall Field but were big enough to support high-volume retailing.

Most Minnesota towns and cities had main streets lined with chain stores by the 1930s. Woolworth’s, Ben Franklin, Kinney Shoes and Rexall Drugs are among the names many of us remember from earlier times but which have disappeared.

Lessons for Best Buy

In the 1920s and 1930s, the lines between department stores, mail-order houses and chain stores blurred. Sears opened their own chain stores while J.C. Penney started a chain store and added a catalog. Suburban growth fueled by the automobile pushed retailers of all stripes to build new stores and offer services tailored to this market.

By World War II, Sears was the dominant retailer in the world, with Ward’s and Penney’s competing fiercely. Regional department stores such as Macy’s, Marshall Field, Rich’s and Capwell’s dominated the major cities’ downtowns from New York to San Francisco, while chain stores filled in wide swaths of America’s small towns and rural areas.

Best Buy is facing the same question that mass retailers faced in the 1920s and 1930s: How do we evolve from our beginnings into something new that meets today’s needs and challenges?  Department stores, mail-order houses and chain stores converged on a new format in the 1950s: the shopping mall. I’ll examine those developments next week.

Comments (6)

  1. Submitted by Richard Molby on 04/04/2012 - 10:00 am.

    One thing you’re missing is that Best Buy has always survived in spite of itself. Bad decision after bad decision has never weighed the company down but, rather, has given them a false sense of immortality. This false sense has also allowed them to become lazy which has led to the company image being one of “give us your money and shut up.” Nobody I know willingly shops at Best Buy anymore; we’d rather take our chances with online retailers. At least then you expect to just be treated like a number.

    • Submitted by craig furguson on 04/05/2012 - 09:09 am.

      Lacking foresight

      Best Buy missed the train of internet buying. Now they’re kind of like Barnes and Noble, which barely survives off Nook revenue with no buyers in sight. They can’t compete with low cost retailers like walmart on mass products and any specialty items can be shipped direct to your door. Plus with the internet I can see the ratings for the retailer and the product before I buy.

      They’ll hang around for awhile because they’re the last game in town for big box and have soaked up some customers from other dead retailers, but they’re on life support.

  2. Submitted by Steve Titterud on 04/04/2012 - 10:02 am.

    Sears used to sell houses by mail order!

    You’d order from a catalog and it was shipped to you as a kit.

    Of course, you had to put it together!

  3. Submitted by Neal Rovick on 04/04/2012 - 10:42 am.

    Best Buy is a retailer that sells widely available products to the general public from a physical location. There are few product, if any, in their store that do not have an equivalent available elsewhere. They provide a physical place where buyers can “preview” what they want and then search for the best price in almost every other place, online or physical.

    So Best Buy is in a corner, the costs of stores and staff, yet having to meet or be close to the price of the most ephemeral seller. They have to compete with Walmart, Target and Amazon.

    Their customer base has then devolved to the unsophisticated buyer, the impulse buyer, the “gotta have it now” buyer, and the person who wants an installer to assemble the finished goods.

    Their future as a simple bricks and mortar retailer is over. They have to close many more stores and learn to exist as a integrated seller/installer of systems (not stand-alone, plug-in devices). But the scale of virtually all integrated seller/installer operations is much smaller than Best Buy is at this time.

    It’s hard to see how Best Buy will fill that “sand crawler” of a building that is their headquarters on 494 given their retailing future.

  4. Submitted by Gary Sankary on 04/05/2012 - 08:56 am.

    Customer Experience

    I believe that Best Buy made to mistakes that have contributed to their current situation.
    Once they eliminated all of their national competition mostly Circuit City, they began to tweak their profit formula to drive more revenue. They moved into a more aggressive high/low strategy where they remained competitive on high profile items and significantly raised prices on the accessories and add ons. Buy an HD TV at a competitive price, get the HDMI cable for $75.00. Consumers quickly figured out the accessories could be purchased elsewhere, Amazon, for $7.00. After some initial success their profits have eroded quickly as more consumers learn to cherry pick their low margin high profile items and buy the margin drivers elsewhere.
    In addition the customer experience in stores seriously deteriorated over the years. Customers going in for simple purchases were asked to buy warranties, installations, optimization features. Customers who didn’t buy a Geek Squad protection plan for example, we’re something to go wrong with an item were “punished” with the “have to send it back to the manufacturer” line, service went away.
    This idea that Amazon has eaten their lunch because customers cherry pick products and use them for a showroom for the online retailer is true, but not an excuse. The decline of Best Buy in my opinion is more about the change in their approach to service and guest experience. They’ve made it easy for their base to decide to shop somewhere else where returns and service are better.
    As a commenter has already noted “nobody I know willingly shops there anymore” is head over and over again, both on the street and recenly in the press.

  5. Submitted by Rich Crose on 04/05/2012 - 09:03 am.

    IT as a Competitive Advantage

    These big box retailers discounted technology as an expense after the Y2K bust and spent big money on marketing to bring customers to their brick and mortar.

    Amazon bet on technology as a competitive advantage and the results are clear. When Best Buy was outsourcing its IT department to off-shore suppliers to save money, Amazon was building the biggest ecommerce platform the world will ever know. Target and Walmart spent its IT money in the 90’s upgrading its supply system to move truckloads of products from China to huge warehouses to the shelf faster and cheaper. They found out that those huge warehouses were very inefficient at supplying one product to one customer via ecommerce and decided to double-down on marketing.

    Only when they figure out that technology will give them a competitive advantage will they turn their business model around. By then, it may be too late.

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