“Nov'r is shaping up to be the worst month in retail since I’ve been here 30 years"

In Hard Times, Is Best Buy’s Best Good Enough?

http://www.nytimes.com/2008/12/07/business/07best.html

Damon Winter/The New York Times


Best Buy is emptying its bag of tricks to attract customers for the holiday shopping season.

By LAURA ZINN FROMM
Published: December 6, 2008

AMY ADONIZ, general manager at the Best Buy flagship store, knows what her staff wants for Christmas: a case of Red Bull.

Two weeks before Black Friday, Ms. Adoniz gave in to employees’ requests and had a Red Bull vending machine installed at the store, at 62nd Street and Broadway in Manhattan. Many in the sales staff of 140 are drama students, opera singers and actors who may run themselves ragged selling electronics by day and performing at night. To keep them from getting hungry and cranky over the long Thanksgiving weekend, Ms. Adoniz let them wear slippers and Uggs boots to work, and had food delivered three times a day.


Amy Adoniz, at the center of the table, with her employees in the break room of the Best Buy store she manages in Manhattan.


Employees aren’t the only ones being tended to this shopping season. To lure customers, Ms. Adoniz waits for — and on — their dogs. “We have a doggie water bowl with filtered water, and treats for them as well,” she says.

With unemployment rising sharply, and consumer spending plummeting, Best Buy managers are bending over backward to attract shoppers and are encouraged to put their personal stamp on the stores. For Ms. Adoniz, that means stoking employees with caffeine and carbohydrates and catering to customers’ pets.

It’s an extraordinarily tough time for retailers. “November is shaping up to be the worst month in retail since I’ve been here 30 years,” says Edward Schmults, C.E.O. of FAO Schwarz, the toy chain. “Now I know how that little kid felt who misbehaved all year and then wondered if Santa was going to show up in December.”

Next year could be even worse. Fitch Ratings forecasts that the United States economy will contract 1.2 percent in 2009, with consumer spending falling 1.6 percent. “The impact on retailers is almost tragic as the economy adjusts,” Mr. Schmults says.

And Best Buy, to limit the damage, is not just cutting prices. It is trimming inventory and advertising, promoting higher-margin, private-label lines and pushing exclusive products, like the Blue Label series of notebook computers made for Best Buy by Hewlett-Packard and Toshiba. It’s also adding new services and products that specifically aim at women.

If the stock market and consumer spending hadn’t plunged so precipitously, Best Buy, the nation’s biggest electronics retailer, with $44 billion in annual revenue, might not have had to bother stocking up on delectables for dogs. The chain’s chief rival, Circuit City, recently filed for bankruptcy protection and is closing 155 stores. Tweeter, a high-end rival, shut down this week, and Sharper Image’s stores, which sold more exotic electronics, are liquidating. CompUSA closed most of its stores last year.

But no retailer is immune from the drop in consumer confidence and spending, especially one that specializes in gadgets, not groceries. Sales at Best Buy stores open more than a year were down 7.8 percent in October, compared with the same month last year. The company will not release November figures until Dec. 16, but it’s already clear that November was a brutal month for electronics retailers. According to a report MasterCard Advisors released last week, sales of electronics and appliances nationwide sank 25.2 percent in November, versus the same month last year.

Best Buy’s stock price, which reached almost $54 in November 2007, closed Friday at $23.05, and its market capitalization has shrunk to $9.5 billion. Because of slumping sales, Fitch Ratings in mid-November downgraded the outlook on Best Buy’s $2.7 billion in debt to negative, from stable.

Nevertheless, Karen Ghaffari, a managing director at Fitch, says she thinks Best Buy will weather the storm. Its longstanding reputation for high-quality service helped it grab market share this year when Circuit City laid off many of its highest-paid — and most experienced — sales workers, and shuttered stores.

“Best Buy is a very strong operator,” Ms. Ghaffari says, “and long-term they should benefit from the difficulties being experienced by the weaker competitors.”

That may well be so. But consumers’ reluctance to spend is making Best Buy’s investors skittish. Though analysts expect revenue to grow slightly next year as the company expands overseas, profit margins will come under pressure from price-cutting, especially on televisions. “Given the circumstances and uncertainty in what’s coming here in this market, we decline to comment,” said a press officer at Gardner Lewis Asset Management, which owned almost four million shares of Best Buy in June.

In an interview, Best Buy’s president, Brian Dunn, discussed the challenges the company faced. “The depth and speed with which the economy stumbled was extraordinary,” said Mr. Dunn, who started as a salesman at the chain 23 years ago. “I’ve never seen anything like it. Our business was growing really nicely and then, all of a sudden, boom!”

BEST BUY’S winter holiday shopping season is crucial, as it is for every retailer. A good Christmas can make the difference between a mediocre year and a fantastic one. Ten percent of a retailer’s sales can come on Black Friday alone, and typically, almost 60 percent of Best Buy’s profit comes from fourth-quarter sales.

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Now that it’s clear that fourth-quarter sales and profits will be down substantially from last year, the chain is scrambling to cut costs. There will be fewer national TV commercials and more targeted e-mail crowing about low prices.

Best Buy stores are stocked with thousands of boxes of the hit video games Rock Band 2, Guitar Hero and Wii Fit, along with myriad camcorders, digital cameras, flat-screen TVs and GPS devices. Nevertheless, to make sure that the company isn’t stuck with mountains of unsold merchandise after Christmas, Best Buy is cutting inventory levels to match reduced demand, Mr. Dunn says. But the company will not say by how much.

“Suppliers are being flexible,” Mr. Dunn says. “Apple, HP, Samsung and Sony have answered the bell nicely and worked with us on inventory levels.”

To accommodate shoppers, Best Buy is offering more lenient financing. Customers who charge at least $499 worth of merchandise on a store credit card don’t have to pay interest for 18 months. “We don’t push it,” Mr. Dunn says, “but customers are grabbing the 18-month financing options.” Last year, shoppers had to spend at least $499 on one item to receive such financing. “Now you can put whatever you want into your cart to get it up to $499,” he says.

That strategy worked for Nadia Lora and her husband, Carlos, both 21. The couple work at Nunzio’s Grill, a restaurant in Vauxhall, N.J., where she is the manager and he is a cook. They were shopping at a Best Buy near the restaurant on the Friday after Thanksgiving, and they bought a JVC camcorder and a Garmin Nuvi GPS system, purposely spending enough to hit the $499 financing threshold. Ms. Lora said the Best Buy incentives allowed her to justify her purchases: “I like that they don’t charge interest for stuff for months.”

IN this stressed-out holiday season, Best Buy is trying to be hip and friendly. The chain is the only retailer to have exclusive rights to sell the new Guns N’ Roses album, “Chinese Democracy,” in its stores and has hired Magic Johnson to open stores in urban areas. Free limousine rides and mini-camcorders were offered to 25 customers in New York, Los Angeles, Boston, Miami and other major markets who wrote compelling, 250-word essays about why shopping at Best Buy on the day after Thanksgiving was a meaningful ritual for their families.

Claudia Di Folco, 35, an actress and former television news reporter, was shopping at Best Buy two days before Thanksgiving. She bought a $299 Slingbox, which transfers whatever is playing on your home television onto a laptop, cellphone or PC, so her husband could watch the New York Jets game during a trip to Rome. Ms. Di Folco lives a few blocks from the Best Buy store at 86th Street and Lexington Avenue on the Upper East Side and shops there often. “They always have special sales, or at least the big yellow signs make you think they do,” she says.

On the day after Thanksgiving back at 62nd and Broadway, hundreds of electronics fans lined up. “We had a fabulous day,” says Ms. Adoniz, 41, that store’s manager, though she says she was less confident earlier in the week. “With everything happening with the economy, we didn’t know if that was going to scare customers away.”

But when she arrived at 1:30 a.m. on Friday, 500 people were waiting. Customers had been outside since Thanksgiving morning: they sat huddled in sleeping bags; the line went around the block to Central Park West and back. Ms. Adoniz gave out coffee and sales fliers.

 

Teenagers played the video game Rock Band 2 at the Best Buy store at 62nd Street and Broadway. Best Buy has been cutting inventory levels to avoid a post-holiday glut of merchandise.

Samsung employees played trivia contests with shoppers, doling out T-shirts, tote bags and other prizes. Ms. Adoniz’s fliers detailed the store’s so-called doorbuster sales — 50-inch plasma televisions for $799, laptops starting at $329, GPS devices for $99, digital cameras for $50. Prices have inched up since then, but, Ms. Adoniz says, “there is still a lot of holiday traffic and a lot more online ordering.” Laptops are particularly popular.

Among televisions, the best seller at her store was the 42-inch Dynex, the chain’s private label; it sold for $499. Margins on private-label items are much higher than margins on name-brand electronics, so Best Buy is pushing Dynex as well as its Insignia line of digital cameras, televisions and GPS devices.

“The TVs were flying out the door; they were huge,” Ms. Adoniz says.

The company hasn’t released official figures for Black Friday, but analysts say sales were better than expected. In an effort to keep customers buying, Best Buy aggressively promoted low prices on its Web site every day last week.

In a down economy, the biggest challenge for Best Buy may be from discounters that are chasing its core base of gadget-happy consumers.

“Wal-Mart, Costco and Target have expanded their assortments,” says Steven L. Martin, who manages Slater Capital Management, a retail hedge fund. “Five years ago if you said Wal-Mart would sell plasma TVs, no one would have believed you.”

Best Buy also faces stiff competition from retailers like Amazon that do business exclusively online. The company is fighting back by allowing shoppers to make purchases online and then pick them up at Best Buy stores, which eliminates shipping costs. “Out of this storm comes new operating models,” Mr. Dunn says. “The ecosystem is going to change. We see storefronts closing.”

For now, though, Best Buy has a potent weapon in its battle with the discounters and online sellers: its staff. Members of Best Buy’s sales staff, a k a “Blue Shirts,” go through a 20-hour training program, then spend two weeks shadowing an experienced sales staff member around the floor. Historically, the Best Buy training program has been so strong, some people in the industry say, that competitors often waited for Best Buy to let staff go after Christmas, and then snap them up.

Ms. Di Folco, the actress, says: “Most of the time, I find really informed people who can actually answer my questions. It’s like they seem to be electronic junkies versus kids wasting time at a part-time job they don’t enjoy.”

Its sales force may give Best Buy a competitive advantage even in a holiday season when many customers are interested in rock-bottom prices.

“The importance of the salesperson is directly related to the price of the product being sold,” says Chris Denove, vice president at J. D. Power & Associates, the consumer research firm. “If you’re talking about toothpaste or pencils, the salesperson is immaterial, but when you’re talking about high-end electronics such as flat screen TVs, the salesperson can be critical.”

Target, meanwhile, is going after the technical support business — a big profit center for Best Buy — and has hired Zip Express, a company started by Chris Mauzy, a former Best Buy employee, to challenge the “Geek Squad” for which Best Buy is known. For a fee, members of the Geek Squad will install your purchase and provide technical support, even on products not bought at Best Buy. It’s a huge profit center for the company.

Mr. Mauzy, who left Best Buy to start Zip Express in October 2007, is introducing an electronics-installation service for 200 Target stores.

To further protect itself against inroads from the discounters, Best Buy is trying to make shopping more appealing to women. Its Omega Wolves program, a focus group made up of 3,500 working women in the United States and London, has a page on Facebook; Omegas socialize and give the chain feedback. Thanks to the Omegas, Ms. Adoniz’s store has what she calls “nicer fixtures,” like wood-trimmed displays and lighter backdrops.

Ms. Adoniz’s store also aims to stock accessories with women in mind: fake leopard skin and red crocodile cases for BlackBerrys and other gadgets from Liz Claiborne, Betsey Johnson, Dooney & Bourke, Tumi and Steve Madden. Crystal Stroupe, a personal shopper and an aspiring opera singer, spends much of her time at Best Buy keeping the accessories table neat and pretty.

Ms. Adoniz says the accessories table brings a lot of astonished looks, “but we know the female shopper was an underserved market.” Best Buy says women are now spending more money at its stores than men, which has led Ms. Adoniz and managers of other stores to expand accessories aimed at women. Many Best Buy stores now carry items like blow-dryers, curling irons and hair straighteners, as well as pink cameras and phones. “We have a whole personal care section and it does very well,” Ms. Adoniz says.

The effort to appeal to women may ultimately help Best Buy distinguish itself from traditional electronics retailers, which tend to market electronics to men.

“You can’t assume that every expensive TV is going to be bought by a male,” says Matthew J. Fassler, a retail analyst at Goldman Sachs. “Women need to be served as intently as men."

THAT said, Best Buy’s business is hard-core electronics, not blow-dryers; the company is betting that if a family buys just one gift this December, it will involve electronic entertainment. “When the customer gets into difficulty, they tend to cocoon,” Mr. Dunn says. “After 9/11, they invested in their homes and loved ones and experiences.”

Mr. Dunn says he usually wins his office pool for predicting December results; this year, he’s betting that cocooning drives sales, but he acknowledges that “it’s too soon to tell” how the holiday season will play out.

“As the economy becomes tougher, people think more carefully about whether they really need to buy an item,” he says. “The threshold for a considered purchase has moved down. Last year, it might have been $500. This year, it might be $300, $200 or even $100 for some families.”

Enough for an iPod case and a Slingbox cable, but not much more.

 

Last week I show that the two best performing sectors were Specialty Retail and Retail, up 8.13% and 4.48% respectively. It's noteworthy considering that the Dow Industrials was down 2.19% for the week, and the average of the 40 most active stocks for the week was down 4.41%.

The Sporting Goods sector led the Specialty Retail sector up with Dick's Sporting Goods up 24.66%, Big Five Sporting Goods up 17.41% and Hibbet Sports up 13.13%.

Home Furnishing led the Retail Sector up with Williams Sonoma up 36.09%, Bed Bath and Beyond up 21.19%. Haverty Furniture was the 3rd best performing stock in the sub-sector, but it was down 0.82%.

 

Every day I run a scan searching for stocks that are rising on subtly increasing volume. Today, three apparel stores appeared in it, and it's unusual to see stocks in the same subsector appearing on the same day. The three were Finish Line, Chico's FAS, and Guess?. The scan searches for stocks who have risen on a subtle increase in volume over the last nine days. I'm hoping to detect something that's trying to sneak in under the radar, sometimes it works out and sometimes it doesn't.

 

An acquaintance of mine works at Best Buy. I was planning on purchasing a higher end LCD TV. I had him look up what I paid on it after I had purchased it on cyber monday.

It was sold AT COST.

Makes sense, 'cause what I paid for it was a steal. (at least this month)

Massive liquidation of inventory, it seems.

 

I'd buy a big screen if there was anything to watch