Shopping Becomes a Mini-Vacation
Get set for luxury to win the battle for the brick-and-mortar marketplace.
"Clearly unsatisfactory" is what Best Buy CEO Hubert Joly called the company's third-quarter earnings. It's a droll bit of understatement--so French!--when words like "plunge" and "dismal" more accurately capture the numbers that the company reported on Nov. 20. Sales were $12.1 billion in the third quarter of 2011; a year later, that number had shrunk to $10.7 billion, with net income working out to just 3 cents a share. Five years ago, in December 2007, a share of Best Buy was worth more than $50; today the company is trading just under $13. This may be some sort of record--from profit powerhouse to basket case in under five years.
Best Buy used to be the king of the "category killers"--the big-box stores like Blockbuster, Borders, and Toys "R" Us that dominated their market segments, driving out thousands of smaller retailers who simply couldn't compete with each chain's reach and buying power. But as that list suggests, it's no longer a very safe kingdom to rule. The category killers are getting slaughtered by the competitive forces they themselves unleashed; the wave of relentless bargain hunters who once flooded their stores has now flowed onto the Internet, and especially to Amazon, where nearly anything can be purchased at bargain prices and delivered to your home in days. You might call them the "new window shoppers": whenever they want something, from a flat-screen television to a 36-pack of toilet paper, they just open a new window in their Web browser. Their disappearance from stores has left mass retailers like Best Buy with a lot of expensive real estate that sales can no longer support.
To survive, stores like Best Buy will need to kill their own category, remaking themselves into what might be called "small-box stores": more intimate, accessible, with a unique mix of products and expert personal service that the Internet simply can't provide. Other retailers have shown that it's still possible, even in this day and age, to get people to buy things in stores. But can the giants of yesteryear cut themselves down to scrappy, nimble competitors? Can Goliath transform himself into David before the money runs out?
To find out, I went to see the place where Best Buy is reinventing itself. Earlier this year, the firm announced that it would be closing 50 stores, while opening 100 smaller "mobile" locations. It's also undertaking extensive renovations on remaining stores to refocus them around personal service--the one thing that Amazon can't deliver via UPS. "With things like home appliances, people are going to want the things we offer, for example, the delivery to service and install. Or Geek Squad: thousands of people sitting in homes, doing installations, across all the platforms," says Stephen Gillett, the digital wizard who helped lead a turnaround at Starbucks before joining Best Buy eight months ago. "If you've got a Kindle, a Samsung television, an Android phone, good luck getting service for that at Amazon."
The idea is that nicer-looking stores and better service will help combat "showrooming"--the act of visiting a store to look at a videogame console or fancy television before you buy it, cheaper, on the Internet. The trend has been gathering steam for years, but over the past 18 months, smartphone apps like RedLaser and Amazon's Price Check have made it as easy as, er, stealing display space from a big box: just scan the item's bar code and the app shows you whether you can get it cheaper somewhere else.
Usually, you can. "They have lower fixed costs because they have no stores," says marketing professor Jean-Pierre Dube of the University of Chicago's Booth School of Business. "They have lower costs per transaction because there's no clerk. And they have massive economies of scale." Those economies of scale used to work in favor of the category killers. But Amazon's scale is even bigger: instead of hundreds of stores, they have 40 vast warehouses scattered throughout the U. …