As Best Buy’s problems mount, there’s growing speculation that the company could be purchased in a leveraged buyout. Here’s a Minnesota-based solution: Target acquires Best Buy.
Last week I wrote that retailers must look closely at the talents of their people and the capital they have available to them and then answer a key question: How can we best use these resources? Target and Best Buy are both asking this question, and a merger may be the best answer, not only for the companies but for Minnesota’s economy as well.
Best Buy has too many large stores, needs a stronger presence on the Web and has a middling reputation for good in-store customer service. Target could remake its electronics sections into Best Buy mini-stores and apply its strengths in customer service to these boutiques. They could also set up free-standing Best Buy locations in smaller towns or in strategic areas of large cities; these would have the backing of a strong Target- Best Buy internet presence and be smaller than existing Best Buy stores.
Best Buy brings to the merger its brand and experience selling electronics, computers and major appliances.
Best Buy’s biggest asset, however, is Geek Squad. Imagine Geek Squad available in Target stores to deal with customer problems! Target could expand the Geek Squad brand to in-home service in a wide range of products that Target already sells.
A key factor in making this work would be the creation of a strong retail presence on the Web. This would allow the new Target to do something similar to what JC Penney is doing: telling customers that they can buy whatever they want online or in a store, return it by mail or in a store, and that the price will be the same every day regardless of where they do their shopping.
To do all of this, Target and Best Buy must integrate their corporate structures. This is where both companies being located in Minnesota helps the most. Physical distance and regional cultures often spell the death of mergers that look good on paper. The fact that both companies are based here in Minnesota minimizes these problems.
This is also a win-win for the Minnesota economy. All of the experience and intellectual capital of both companies would remain in Minnesota and the gains of the new company would be gains for Minnesota.
A Minnesota precedent
In the early 1980s, Northwest Airlines and Republic Airlines were both based in Minnesota. (The large Delta Air Lines building complex on the north side of I-494 at 34th Avenue S. was Republic’s maintenance facility and headquarters.) Airline deregulation, which began in 1978, hammered existing airlines and forced them to revamp their operations into hub-and-spoke systems rather than relying on non-stop flights.
Republic had hubs in Minneapolis/St. Paul, Detroit and Memphis along with a fleet of short- and medium-range aircraft (primarily DC-9s). Northwest’s hub was also Minneapolis/St. Paul, but its focus was on long-distance flights, including service to Japan. (Remember the name Northwest Orient Airlines?) Northwest had a roster of large, long-haul planes such as the DC-10 and the Boeing 747. It made sense to merge the two companies to create an airline that could compete both domestically and internationally.
I think Target and Best Buy are in the same position as Northwest and Republic in the early 1980s. Purchasing Best Buy and then creating a seamless customer experience in stores and on the Web built on the strength of both companies might even put Target on the edge of the next evolution of retailing.
I don’t agree
I don’t think that merging two dinosaur retail models necessarily yields a better outcome. Are they going to sell more flat screen TV’s?
I think brick and mortar stores should downsize and take advantage of bulk shipping rates and customer service to beat online retailers. I order many goods online and almost always take advantage of the deliver to store option if it offers free or cheaper shipping than to the door.
If they did more of this, they could offer a greater diversity of products at a lower total cost, maintain close customer relations and reduce their overhead.
If the internet taxes would be fairer, then it would also level the playing field a bit more and offer businesses with a local presence better odds at being sustainable.
“Best Buy brings to the merger its brand and experience selling electronics, computers and major appliances.”
This is like saying that Best Buy is the very best of the buggy whip companies, the last survivor in a dying industry. Take a look at your electronics. How much does the brand and experience of the folks who sold them to you matter to you now? Do you even remember where you bought them? And if so, are they even still in business? Best Buy is in trouble, among other reasons, because their brand and experience don’t matter to their potential customers. What does matter is price, an area where Best Buy simply cannot compete.
The electronics industry is a victim of it’s own success. The stuff they sell us is too good. It lasts a long time, and when it does wear out, we don’t service it, we just replace it, in my experience with something that’s a whole lot better and costs a whole lot less than whatever it is that we are replacing. The electronics industry sells us wonderful stuff we don’t need anymore. Not too long ago, I replaced my ten year old DVD player, with a better one that cost me maybe 80% less. I just don’t use it anymore because of computer streaming. That’s the state of the retail electronics business today.
And speaking of Target, I am a regular visitor to the store, and being something of a fogy, I always visit the electronics department. I am almost always the only one there. I don’t recall the last time someone other than me was at the checkout line purchasing an electronic item. The end caps the store uses to sell them look to me like a complete waste of valuable retail space.
That all being the case, is this a business Target really wants to expand it’s presence in?
Airline industry
By the way, the airline industry is another famously horrible industry to be in. I have often argued that it exists solely to provide a conduit of wealth from stockholders, to management consultants and bankruptcy attorneys, and it does that remarkably well.
They both have the same problem
They built their back-end computer systems based on moving semi-trucks to stores, not one product to one customer. You can’t go look in their vast warehouses for a single product. You have to ask the robot to bring you a pallet.
A dumb idea
The notion that Target should purchase Best Buy makes no sense at all, except in a bad dream.
Best Buy has way too many large stores, and that is a huge part of their problem; but they do have a web presence. The problem with their web presence is that it’s very hard to find what you’re looking for, let alone buy it at a competitive price. In fact, experience has shown that their inventory system for the web is completely unreliable: telling you something is in stock at a store to pick up, but when you get there, they don’t have any of them and nobody has a clue when they will.
Likewise, Geek Squad is not their biggest asset, much less an asset at all. Not only do they envision themselves as a “we can do it all” operation (which isn’t true), but their tech skills are limited, and they’re limited to Windoze PCs; they have no knowledge of Macs, which is the market that’s growing. Corporate doesn’t want to pay for any of them to be Apple Certified, or even pay them a market rate wage, which is a lot higher than what they get now. Even worse, those stupid titles and ridiculous outfits they wear is enough to make anyone cringe and run the other way at the thought of working for them.
No, the solution is to say ‘So long, Best Buy, and Good Riddance’!
I’m not so sure that the Target electronics division has anything it can learn or needs to learn from Best Buy. There are no secrets in the mass retailing of electronics. If Best Buy collapses tomorrow, ala’ Circuit City, Target and Walmart would easily pick up the former Best Buy markets with only small modifications and expansions. There is darn little “special expertise” or customer loyalty that would provide the incentive to buy the Best Buy brand.
It seems to me that the mass retailers have found it most profitable and easy to be the disburser of goods, rather than the servicer or installer of goods. I could see an affiliate role for Geek Squad or Magnolia, but it is my guess that the liability issues and the “long strings” attached to such services are far more problems than they are worth. It’s hard enough to stay on top of employee actions with the easy supervision of known tasks in a controlled environment, so setting them loose in customers homes and computers is a very difficult liability and supervisory issue.
My guess is that Best Buy is toast, Geek Squad and Magnolia in one form or another has a future as a separate affiliate, and that there is little reason for Target to buy a company that they’re beating. And regardless of whether they would buy Best Buy or let them sink, there will be a loss of retail jobs and management jobs, not offset by the gains in Target employment.
Best Buy
When Circuit City went out of business, there were some who said that would help Best Buy. As I recall, their stock price got a temporary boost. But looking back on it now, we see more clearly that the same factors that were destroying Circuit City were also hurting Best Buy. Best Buy was just better place to respond to them.
Now they are caught in a retail dilemma. Some say they need to reduce the number of stores and focus their business, carry fewer variations of what is basically the same stuff. This is a cautious strategy that may slow the deterioration of their business, but it also forgoes growth opportunities. And it isn’t responsive to the fundamental problems with their business model, specifically competition from the internet. Others say, they should become more of an internet retailer. That’s a possibility but that’s a game they are very late in entering and it means competing with companies that don’t have a lot of bricks and mortar dragging on their business model. This also goes to the nature of the electronics business. Apart from Apple, electronics retailers have very little pricing power because their products are all the same. They compete on the basis of price, in highly efficient and competitive markets, which means at best razor thin profit margins. That means the key to survival is reduction of costs, which is not something Best Buy can do very well.
Not a solution
I agree it makes no sense for Target to buy Best Buy. And the demise of Best Buy will do little, if anything, to bolster the sales of electronics at Target.
Mr. Foster, there is a reason you are the only person in Target’s electronics section. Woe unto the poor soul who buys a defective electronice device at Target and tries to return or exchange it. No consumer in his/her right mind would risk facing that gauntlet. (I’ve personally witnessed this many times.) Everyone I know buys through Amazon or Costco. You get customer service from them, not an assumption of guilt and an interrogation.
It’s not about the retail sale anymore
But Target will be quick to sell you a extended warrantee on a product that you could buy cheaper in a year if it breaks. Then they’ll offer you a credit card and use predictive analytic to see if you’re pregnant so they can sell you diapers. It’s hardly about service anymore.
The biggest on line advantage
will soon come to an end.
Probably the biggest advantage on line retailers have is they are not required to collect sales tax on the goods they sell. Of course, that does not absolve the customer from the requirement to pay the tax – but just how many people really send the state a check for the sales tax for their on line purchases? Not too many I’m guessing.
There was a general agreement among the states/Congress to leave this issue alone as a way to nurture a new industry (on line retail). But the loss of sales tax revenue to the states is becoming very significant. This status quo is not going to last. I predict that in line retailers will be required to collect sales tax within the next 3-4 years.
At that point, customers buying on line, who currently pay less for shipping than they would pay in sales tax at a local store for many goods, will be paying for both shipping and sales tax. That will even the playing field and make local retail far more competitive. And help the state’s tax coffers too.
Sales tax is not why people shop online
It may be true that online retailers will be required to collect sales tax before too long, but the sales tax issue is hardly online’s biggest advantage. Customers don’t shop online to save 7 percent in sales tax — but for prices that are often 20-30 percent lower than the prices at Best Buy. And to avoid the obnoxious pitches for cell phones, extended warranties, and other products and services that are the only way Best Buy can even hope to make a buck. The future won’t bring Best Buy a “level playing field;” more likely, it will bring bulldozers to level more Best Buys.
Piggybacking on Tim…
The other advantages enjoyed by Amazon and others are lower costs……for both wages and not having the brick and mortar.
But the short sightedness will soon catch up to us. Ever tried to order a product based solely on the photos or descriptions on a webpage? People will become extremely frustrated when that “medium” sweatshirt doesn’t really fit like a medium, or the green color of that sofa isn’t the same shade as the photo on the website. Someone will have to figure out how to fill that niche.
Ratings and Comments
The ratings and comments on amazon rock, especially if there are a lot on a product. Anything over 4 stars at a reasonable price with good comments gets my attention.
Lessons from the Dayton Hudson Era
Do you remember when DHC owned many, many brands including Team Electronics and Lechmere, a CE retailer, (and Mervyns, Diamonds, Browns, Hudsons, B Dalton, Brandens, Plums and a discount book chain whose name escapes me). Running one business successfully is hard.
Running multiple businesses successfully is extremely difficult. This would be the best reason to dump TGT stock if that company’s management acquired BBY.
Best Buy was (and might still be) fast moving and entrepreneurial. DHC (and probably Target) is careful, methodical and plodding.
If not the first rule of acquisitions, it’s one of the first: Company cultures cannot be in conflict.
If that isn’t enough to kill acquisition thoughts, then consider what kind of culture is needed in the very fast moving technology sector. How does that ‘requirement’ mesh with how Target is run?
Ridiculous
Why would Target — a fiercely competitive retailer battling Walmart AND the internet — want to chain a giant albatross around its neck? They would not only be taking on a vast array of little-used brick-and-mortar real estate, but also a giant HQ and thousands of employees who would soon be made redundant. At least Target probably has a decent future, despite Wally-World and online shopping. They sell things that people NEED, as opposed to the BBY business model of selling things that no one needs.
This would have been like BBY acquiring Circuit City — a disaster. I imagine that Target is now feeling about BBY the way BBY once felt about CC: let them die.
On a side note, it has become apparent that Geek Squad remains a profitable enterprise. I have no idea how that could be, given the depraved reputation they have.
Best Buy’s problems long time comming
I knew Best Buy was headed for trouble about ten years ago. I know a guy who was a photographer for BB at the time and they had a ridiculous set-up. They had ten to fifteen working in the studio with all the most expensive equipment you can find, AND they had a house up in Maple Grove that was all decked out with wiring etc. so they could hook up products and shoot there. All these guys were shooting was weekly ads and store displays. You have to remember manufacturers already have photos that vendors can use, and there’s no reason to have studios AND a house. These guys were blowing a lot of money on photography.
About the same time I also knew a woman who worked at the corporate office and was going through training on SAS (statistical analysis system). SAS is an extremely expensive ($8,000 per user license per year) package. It is also incredibly complex and powerful, and it was almost impossible that my friend needed to do whatever she was doing for $15.00 an hour. More than likely she could do her job with a spreadsheet and didn’t need SAS for anything.
All of this came to screeching halt when the bubble burst, both of my friends lost their jobs at best buy. But it’s unlikely that the executive process that produced that kind of spending and inefficiency was confined to those areas, and it’s unlikely that the incompetence has been completely purged from the system. The holiday screw up with delivery seems to indicate that someone’s still not firing on all cylinders.
I don’t know why BB still sells music, and I don’t know why anyone still sells DVDs. I mean in theory people will still buy these things in a store, but the problem is maintaining a stock. I think they’d be better off with a series of music kiosks that people could use to explore music and movies, and then buys stuff that would be delivered to their homes within 48 hours. Or, maybe some kind of system that would burn a CD or DVD on the spot and kick it out. But what do I know?
That won’t work
Or, maybe some kind of system that would burn a CD or DVD on the spot and kick it out. But what do I know?”
This will never happen. Not only would the studios never give up their belief that they must control every aspect of music production, distribution, and sales, but also the idea that their “marketing” efforts (packaging) add value to a disc. Even though they add nothing.
At the same time, they would never relinquish control of producing CDs or DVDs (custom or otherwise) for customers in a store. The idea that piracy may occur (employees making copies for themselves and friends for free) is too great a threat to their fragile but antiquated business model. Besides that, it’s not possible for many CDs and DVDs, since they contain more data than you can burn onto one.
Nope, it’s never gonna happen.
Never gonna happen?
Dude, millions of people are doing it right now with the studio’s blessing. You can buy music online and burn it onto a CD any time you want, so obviously the studios are willing give up control of that process. The only difference here is that you’d do it a store instead of at home. The advantage is that customers wouldn’t need a computer at home. I think a company with as many stores as Best Buy has could work something out with the music industry. The infrastructure is already there, you’d just have to work out the kiosk interface.
Keep in mind this would be a transitional move, people won’t be buying CDs of any kind for very much longer. Even my mom has a Nano now, so she’d be looking for a place to download music to nano. Ultimately I don’t know how big the market is going to be, but BB needs to be anticipating this.
Missing the forest for the trees
“Dude, millions of people are doing it right now with the studio’s blessing. You can buy music online and burn it onto a CD any time you want,[…]”
No, they’re not. They are taking advantage of a technology limitation, one they have decided to accept. If they had any other option to prevent that, they would seize upon it immediately.
“Keep in mind this would be a transitional move, people won’t be buying CDs of any kind for very much longer. Even my mom has a Nano now,[…]”
People may not be buying CDs for very much longer, but that really depends on a variety of factors that no consumer can control. For example, the record companies could actually start putting real, good music on CDs again so they would sell, instead of the crap they’ve been trying to pass off as music for many years. While it may seem that everyone has a portable music player these days, the fact is that a large portion of the world population does not, and that includes myself.
Secondly, you were referring to making DVDs in stores as well, and that’s clearly not going to happen, for the reasons I mentioned. Streaming of DVD titles is nice, but only if a full catalog is available to choose from, and only if you have the bandwidth required, which a large portion of the population cannot afford, so they are still limited to playing DVDs at home.
You can already to this.
Many small music stores already offer this service. Drop into the Electric Fetus and check it out for yourself. Of course, this only applies to music, not movies.
Target shouldn’t acquire Best Buy!
I would urge Target extreme caution with such a move, yes, it might be good in the short term for Minnesota, however, long term I doubt that such a move is a good for Best Buy, Target or Minnesota.
Look at what happened to Republic and Northwest Airlines, where did all of the good paying 15,000 plus jobs go that were once in Minnesota? They’re gone, along with the Minnesota home town pride and prestige that once filled the hangars and the skies. The leverage buy-out and the Minnesota bail-out only prolonged a regrettable and inevitable outcome.
The Airline industry went from reservation agents, paper tickets, city ticket offices, and real customer service. Now it’s e-everything, paperless tickets, electronic check-in, and customer service at a price. The retail market and consumer electronics must find a way as the airline industry to leverage customer service and price.
Best Buy needs to look long term as should Target, focus on the fundamentals of e-retail, which should include quality, price, and outstanding customer service to distinguish them from their competition.
Brick and Mortar retail buildings will always have a place with the consumer but in these tough economic times the customer will shop for the lowest price (guaranteed). However, I believe most customers still wants to ask questions, see, touch, hold, and play with their potential purchase prior to buying. The question for Target and Best Buy is at what cost? Can you charge a premium (Bag fee’s) for face to face customer service? I say, regrettably, they would be smart to study the airline industry and to look to see what they do well emulate the positives, avoid the errors and pit falls and move their companies forward independently. This is the best strategy for them, the consumer, and for Minnesota.
Target to buy Best Buy??
Is this an Onion story??!?!?
Target the retailer with the worst website in creation
I like Best Buy, and I like Target but Target’s website is unmanageable.
I have no problem from buying from Best Buy on line. If I could order my equipment and schedule an appointment for someone to come and install (other than the Geek Squad who is 0 for 2 on my count on something I eventually fixed) it that would be fine.
Go to service and support and Best Buy will be fine.
Target’s website
Nearly everyone I know who has used Target’s website has a complaint. There should be an article written on that with the hope of catching the right persons attention. From mis-spelled to laughably inconsistent product titles, doing a search is frustrating at best. Where is the quality control? I love Target but for online commerce there are better options. Before the hypothetical conversation on Target acquiring Best Buy, let’s talk about a real issue that is nicking away at a waning reputation. In my opinion Target has become too big…. and clunky.
Or, maybe some kind of system that would burn a CD or DVD on the
Actually, it’s already happened. There’s a company called Mix And Burn that allows a consumer to do just that. You go to a kiosk and choose from selected tracks to create a custom mix CD . I believe they charge about $4.00 for the first track and about a buck or so for every track thereafter. You can also personalize it with photos and such. It was experimented in a couple of stores around the Twin Cites in the mid 2000’s, but it never really caught on. The only stores I know that still have them are the FYE stores out east. As for Target buying Best Buy……not a chance.
Too much money
That Mix and Burn system is too expensive. Blank CDs are a pennies a piece, and people know it. I’m not surprised that system failed. But if someone like BB and Target went whole hog into it, and actually removed most of their physical CDs, as well as offering a reasonable price, say a dollar for the CD, and buck a track, maybe with a free CD after a given number of tracks, I think it might have some legs for a while. The thing is I don’t know how much the retailer would make on this music, so it would be a draw to bring people in and maybe get them to buy other stuff. Actually, I see something like working in some kind of coffee shop environment maybe more than a tech store. But what do I know?
Hard to take this article seriously…
This will not happen. Target has nothing to gain from BB’s existing online presence nor their store network. As much as I wish Best Buy well, they are a sinking ship. They need to reduce their store network/footprint very, very quickly to survive beyond the next couple years.
I don’t remember the last time I entered a Best Buy
without having first done an online price check to determine how big a premium I would have to pay to get the item today instead of next week. Even then, I can often find the item in question for a better price at a local B&M shop. When I don’t need it now, it’s not all about price, but there are many reliable web retailers who stand behind the products they sell for far less than Best Buy can, simply because they don’t have the overhead.
Whether it’s Amazon (which recently sent me two 1.25″ x 27″ bicycle tires in two separate 36″ x 54″ boxes filled with packing material) or Newegg (which has some of the best customer service I’ve ever encountered), Best Buy simply can’t compete on selection, price and support.
Knucklehead Idea
Wow, I would like to send the author of this post to business school. Target already has a huge footprint out there and a viable on-line presence. If they would acquire Best Buy, how would it advance their business? Let’s see. They would inherit some of the worst customer service programs, terrible inventory control, a murky distribution system, and dated inventory. Oh yes, they would also inherit a miserable company ethos with shoddy business practices. You know, after reading my own post I am going to short Best Buy stock.