The Best Buy Uncertainty Principle[1]

“You can’t sustain profits whilst investing in radical change.”

Having just spent the last two weeks in the United States, where I am working with clients and also starting an Austin-based business, it seemed highly appropriate to pick a US business to blog about today.

Best Buy, that started life as The Sound of Music, has something like a 19% market share of the consumer electronics market in the US.  It had revenues of $51bn last year and operates over 1100 stores. In January its CEO publicly responded to media comment that traditional “bricks” retailers would soon become extinct. They argued that the lower distribution costs for the likes of Amazon meant that online retailers of consumer electronics have an inbuilt cost advantage that is hard to ignore. He thought otherwise.

There is no doubt though that electronics retailers are not getting as good a return these days from their stores as people go and look at goods in store and then buy more cheaply online, something that is apparently called “showrooming”.

Rather intriguingly this same CEO has now resigned after the board began an investigation into his “personal conduct”.  I wonder what that is about? Analysts seem to think that his departure may not be wholly a bad thing. Whilst they admit that the job of repositioning the business for the networked age is perhaps too big for anyone, the fact that he started out as a store assistant and had spent all of his working life in Best Buy stores did not equip him as well as others for the sort of innovation and change that the business needs to continue to prosper, rather than to fade gradually away as others fill their place online.

The writing is now so big on the wall for Best Buy and similar store-centric retailers that a more imaginative, less costly and genuinely value creating “bricks” strategy is now required. Bricks will probably be a smaller part of the future retail story too. A new person now has a genuine opportunity to divert some of the company’s considerable cash flow into making the brand as strong online as it has been on the streets of the United States for so long now. But that is no small task and more of a leadership thing than anything else.

Why does this seem so simple to me but apparently so difficult for Best Buy and others like them? Well, it’s because big businesses have very short term performance horizons and this is a longer term investment opportunity. Actually, to my mind, more of an imperative than an opportunity. Best Buy needs a new leader able to convince shareholders that the time is right, if not overdue, for more radical change.

Sadly though, you can’t have this sort of change without profit dilution and that’s not an easy story to sell. I suspect that some shareholders are actually waiting for someone to come along with a sensible investment proposition to transform brick-centric retailers, but management doesn’t seem to have any ideas, or the guts, to propose one. Short term profit dilution needs to be seen as an investment in longer term shareholder value.

I wait with interest to see who is prepared to take on the challenge. I’d go for someone very young and completely at home online, but that is a big call. I am also intrigued to find out just what sort of “personal conduct” leads to a resignation these days. Perhaps Best Buy’s departing boss was caught buying stuff online.

Mark



[1] After Heisenberg’s uncertainty principle that says something like you can’t know the precise speed and location of a particle at the same time.

One Response to The Best Buy Uncertainty Principle[1]

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