As if competing against Amazon and Wal-Mart wasn’t hard enough, Best Buy apparently faces another upstart rival that doesn’t even sell smartphones and televisions.
That would be Spirit Airlines, the ultra cheap airline that notoriously charges passengers for overhead baggage and water.
In a recent interview with the Los Angeles Times, Spirit CEO Ben Baldanza said his company’s business model is so unique that he doesn’t even consider Delta or even JetBlue to be real competition.
“Our competition is Amazon.com and Best Buy and other places you will spend your discretionary funds,” Baldanza said.
On the surface, Baldanza’s argument seems odd. Retail and airlines are completely different businesses.
But are they? In today’s weak economy, consumers have a limited amount of money to spend. So companies as varied as Spirit and Best Buy must offer consumers a compelling reason to buy their goods or services. The way Spirit sees it, the company wants buyers to choose a cheap flight to Vegas over that 20-inch flat screen.
Spirit has clearly established its niche in price. The company offers really cheap fares because they charge customers for everything else. They also pack more people into their plans by offering less leg room than other airlines.
Not surprisingly, some flyers are peeved about Spirit's perceived lack of quality customer service. That's akin to complaining that the $20 bus fare you paid for Megabus didn’t include a facial and massage. You get what you pay for and Spirit has prospered handsomely from that philosophy.
Best Buy, on the other hand, is betting on customer service. Consumer electronics aren’t simple products and what will separate Best Buy from the rest of the pack knowledge and expertise.
But that’s hardly a neat marketing slogan. Customers respond more easily to price than the relatively abstract idea of expertise. Compounding the challenge is that Best Buy carries everything from $10 DVDs and $15,000 televisions. Such an eclectic range of products makes it hard to tell customers what you’re really good at.
Can Best Buy develop a similarly simple yet compelling identity like Spirit? That remains to be seen.
Paired together, “tornado” and “Best Buy” are usually in reference to the retailer’s legendary turnaround when it held a tent sale at the State Fairgrounds in St. Paul after a tornado destroyed the flagship store in Roseville in 1982.
Today, the words carry a different meaning for corporate employees at Best Buy’s headquarters in Richfield.
Over the past several months, Best Buy has been laying off groups of employees on Tuesdays, a tactic that has prompted the rank and file to nickname the second day of the work week as “Tornado Tuesdays” or “Termination Tuesdays.”
Multiple sources say the layoffs vary wildly across all departments, ranging anywhere from a handful of workers to as high as 25.
It’s no secret that Best Buy needs to trim its corporate headcount. Under Best Buy’s Renew Blue strategy, the company has been working to shave $700 million of the company’s balance sheet over the next few years.
Since CEO Hubert Joly has ruled out cutting stores, Best Buy’s corporate employees will bear the brunt of any cuts focused on its work force.
“When we committed to reducing costs as part of our Renew Blue transformation efforts, we said our first priority was to identify savings in non-salary expenses,” spokeswoman Amy von Walter said Monday. “But we have also had to make some difficult decisions involving headcount which ultimately allow us to accelerate our work to transform our business.
In February, Best Buy laid off about 400 employees, stage one of its cost cutting effort. So far, the company has shaved about $295 million in costs, though not all of that has come from job cuts.
Since then, there has been a steady drip of layoffs week to week. Employees say such a piecemeal approach has damaged morale. Large corporations tend to announce in one larger move so to minimize distractions over time.
But stretching small numbers of layoffs over several months means employees who survive one week still must worry whether they will make it through the next.
Employees say it makes coming to work on Tuesdays especially difficult.
“Whenever someone leaves their desk, we think that person just got laid off even he or she might just be going to the bathroom,” said one employee who requested anonymity because the worker was not authorized to speak to the news media.
Some employees suspect that Best Buy prefers this approach because they don’t want to report larger layoffs as required by the federal WARN act. But the law requires a company to report cumulative layoffs under certain situations over a 90-day period.
Best Buy may be retreating a bit from the music business. But the Richfield-based consumer electronics retailer is still finding ways to stay in the game.
A recent innovative deal between Jay-Z and Samsung could wind up helping Best Buy. The rap/hip hop artist recently struck a deal with Samsung in which the Korean electronics maker purchased one million copies of Magna Carta for $5 million and distribute it free to owners of Galaxy S III, Galaxy S4 and Galaxy Note II devices via a special app three days before the album’s early July release date.
So if Jay-Z album give away leads to additional sales of Galaxy smartphones and tablets, Best Buy, which hosts 1,000 Samsung Experience shops in its stores, also benefits from those sales. That’s probably why you see Best Buy’s logo appear at the very end of commercials that promote the Jay-Z and Samsung partnership.
Under CEO Hubert Joly, Best Buy plans to reduce the amount of space it devotes to CDs and DVDs in favor of higher growth merchandise like appliances, mobile device, and store-within-a-store concepts like Samsung Experience.
Not only does Samsung lease the store space from Best Buy but the retailer also likely takes a cut of any sale the originates in the store-within-a-store.
In short, the deal allows Best Buy to continue to position itself as a music destination without having to get its hands dirty in the relative thankless task of directly selling music.
It’s just as well since Best Buy hasn’t had much luck with music in recent years. The retailer bought Napster for $121 million in 2008 only to sell it to Rhapsody three years later. Best Buy also tried to market itself as a seller of musical instruments. But it seems like the company is phasing out that business, according to the redesigned store space Joly showed to investors.
Interestingly enough, Samsung may have borrowed a page out of Best Buy’s playbook a few years ago. In 2008, Best Buy reportedly paid $14 million to exclusively sell 1.2 million copies of Guns ‘N Roses’ “Chinese Democracy” but actually budged over 600,000 units.
Samsung probably hopes it will get more bang out of its $5 million investment with Jay-Z.
Instead of selling music through the usual channels like iTunes, Jay-Z has chosen a maker of electronics devices to distribute the album. At $5 a pop, Jay-Z probably earned a much higher royalty for his music than any deal he could strike with iTunes.
Unlike Best Buy, Target Corp. continues to invest in its music section.
Earlier this year, Justin Timberlake partnered with Target to exclusively release an extended version of 20/20 in stores, backed by a well-received commercial that aired immediately after JT’s performance during the Grammy Awards.
Despite booming digital sales of music and movies, the Minneapolis-based retailer continues to stock its shelves with the old fashioned CDs and DVDs, hoping its exclusive partnerships with Taylor Swift, Beyonce, and JT can still drive traffic to its stores.
Since joining Best Buy last September, CEO Hubert Joly has launched a major campaign to win back Wall Street. He has given detailed information about the company’s poor performance to analysts and his plans to correct it. He has hired former Williams-Sonoma executive Sharon McCollam, a darling among Wall Street, as chief financial officer.
Best Buy even managed to eek a slight gain domestic same store sales during the fourth quarter. Joly’s efforts have mostly paid off: since December 2012, Best Buy stock has more than doubled to over $26 per share.
But there is one analyst who has proven himself immune to Joly’s charm offensive: Michael Pachter of Wedbush Securities.
Of the 26 analysts tracked by Bloomberg who have issued ratings on Best Buy stock in 2013, Pachter is only one of two who recommend investors dump the stock.
Even more startling is Pachter’s 12 year price target for BBY: $9 per share. (The next lowest estimate was $21 by S&P Capital’s Ian Gordon.)
That means that when Best Buy stock (which had once surpassed $50 a few years ago) tumbled to as low as $11.20 in early December, Pachter still thought the stock was overvalued.
He did not return a call seeking comment.
Pachter, a long time Best Buy bear, is known for his…uh…strongly worded opinions on the retailer in both his research reports and quotes in the media. He was particularly harsh on former CEO Brian Dunn, whom he called completely unqualified for the job. (Many analysts privately said the same thing but Pachter had no problem saying it publicly.)
But not even a complete leadership change has softened Pachter. He called Joly’s credentials “unimpressive,” especially to turn around a struggler retailer like Best Buy. Joly is a former CEO of travel and hospitality giant Carlson.
Pachter did profess strong words of praise for McCollam. But Pachter said he continues to doubt Best Buy’s turnaround strategy.
Fair enough. A little skepticism is not unwarranted, given Best Buy’s struggles in recent years.
But Pachter’s research note in February, just before Best Buy released fourth quarter and fiscal 2013 earnings, makes you wonder if the analyst will ever change his mind about BBY.
His estimates weren’t just wrong. They were REALLY wrong.
Pachter predicted Best Buy would earn $1.35 per share in the fourth quarter. The company earned $1.64 per share.
Pachter predicted Best Buy’s profit margins would fall 170 basis points in the quarter. Best Buy said margins declined 10 basis points. He did say the “magnitude of the decline is only a guess.”
But McCollam in January already indicated that gross margins would not dramatically fall. So either Pachter was not aware of the guidance or simply wasn't moved by it.
When Best Buy releases its first quarter earnings next Tuesday, Pachter will no doubt be watching.
But no matter what Joly and McCollam say, don’t expect him to change his mind about the stock.
Brad Anderson and Al Lenzmeier have officially rejoined the board of directors at Best Buy Co.
But what exactly will they be doing?
A closer read of the company’s recent proxy statement gives an important clue: the two ex-Best Buy executives will both serve on the Finance and Investment Policy committee.
According to the proxy statement, the committee “advises the Board regarding our financial policies and financial condition to help enable us to achieve our long-range goals. It evaluates and monitors the: (i) protection and safety of our cash and investments; (ii) achievement of reasonable returns on financial assets within acceptable risk tolerance; (iii) maintenance of adequate liquidity to support our activities; (iv) assessment of the cost and availability of capital; and (v) alignment of our strategic goals and financial resources.”
That’s a lot of fancy corporate speak. But in a nutshell, this committee will oversee deal making at Best Buy, whether it’s selling something or buying something.
Best Buy declined to comment.
It’s no accident that Anderson and Lenzmeier belong to this committee. The two directors represent the company’s largest investor and founder Richard Schulze.
Schulze, you may remember, tried to take the company private but ultimately gave up and rejoined Best Buy as chairman emeritus.
Should Schulze consider using his 20 percent stake to attempt another deal in the future, Anderson and Lenzmeier could supply Schulze with valuable intelligence.
Anderson “is as much there to keep on an eye on what’s going on in there for Dick,” said David Strasser, an analyst with Janney Capital Management. “There are not a lot of issues but that could change in about a year.”
That’s because Best Buy still faces a precarious situation. Though the company seems to have stabilized its core business, some investors wonder if Best Buy can consistently string together several quarters of growth in sales at stores open for at least a year.
A sudden downturn in Best Buy’s performance could pressure the nascent alliance between Schulze and CEO Hubert Joly.
In addition, the committee would also evaluate any proposal to sell Best Buy assets. For example, many analysts expect Joly to eventually dissolve Best Buy’s joint venture with Carphone Warehouse in Europe and find a buyer for its Five Star operation in China.
And should Best Buy tried to sell anything else off, say leases to any of the 1,000 big box stores in North America, Schulze, through Anderson and Lenzmeier, will no doubt have a say in that.
Best Buy Co. said Thursday that it appointed Russell Fradin to its board of directors.
Fradin will replace Ron James, who will not stand for re-election.
Fradin, 57, brings much needed technology and operations experience to Best Buy's board. He is president and CEO of SunGard, a software and technology services company that generates about $4.5 billion in annual sales.
He is also a former CEO of Aon Hewitt, a management consulting firm, and served as an executive with BISYS Group, Inc., Automatic Data Processing, and McKinsey & Company, where he was a senior partner.
"His background in operations, streamlining cost structures, executive compensation and strategic consulting will be beneficial to Best Buy as it continues its Renew Blue transformation," chairman Hatim Tyabji said in a statement.. "We look forward to Russ offering his insights in support of management's work to transform Best Buy and make it the preferred destination and authority for technology products and services."
Fradin is the third new director to join Best Buy's board this week. The company also seated former CEO Brad Anderson and former president and vice-chairman Al Lenzmeier.
James, the CEO for Ethical Business Cultures, has served on the board since 2004.