Ax falls on 50 stores, hundreds of jobs in a reboot of Best Buy

  • Article by: THOMAS LEE , Star Tribune
  • Updated: April 4, 2012 - 3:52 PM

Faced with a stubborn slide in sales at its U.S. stores, Best Buy Co. Inc. announced Thursday its steepest round of cuts: closure of 50 big box stores and elimination of 400 positions at corporate headquarters in Richfield.

The closings include five stores in the Twin Cities area, leaving 301 workers without jobs. Nationally, layoffs will likely be in the thousands since each store employs roughly 100 workers, including so-called Blue Shirts and Geek Squad technicians.

Best Buy, once known as the undisputed discount king of consumer electronics, has been struggling to find its place in a world dominated by flashy high-end brand temples like Apple Stores and low-cost Internet retailers like Amazon. Customers have been increasingly migrating online, where they often find better deals, forcing Best Buy to figure out a reason why shoppers would need to visit an actual store.

Last year, Best Buy lost a staggering $1.2 billion as it deeply discounted merchandise to keep pace with rivals Amazon and Wal-Mart.

All in all, Best Buy hopes to shed $800 million over the next three years, savings the company plans to use to fund its new "connected" store remodels, international expansion and digital services. But even CEO Brian Dunn admits the company's efforts to remake itself are fraught with frustration and uncertainty.

"I'm not satisfied," Dunn told the Star Tribune.

"We have a long [history] of transforming ourselves to be where the customers need to be," he said. However, "I need more information."

For example, the company plans to reduce its retail square footage in the Twin Cities and San Antonio by 20 percent this year. Instead, Best Buy will remodel its big boxes with smaller "connected stores" that focus more on high-level service. Will Best Buy customers like the new format, shop more online, or simply go to Wal-Mart or Target? Dunn wants to know.

Given the severity of Best Buy's problems, however, some experts wonder how long it will take Best Buy's strategies to work, if they do.

Things are not going to get easier in 2012, said Jeremy Brunelli, an analyst with Consumer Edge Research, a firm based in Stamford, Conn. He noted Best Buy now expects sales at stores open for at least a year, a key growth number for retailers, to fall between 2 and 4 percent this year, compared to its earlier estimate of a 1 percent decline.

Brunelli said he believes there is a growing disconnect between Wall Street and Best Buy. While Dunn believes the company should prepare for the future, investors believe Best Buy is better off just returning that $800 million in cost savings to shareholders, not exactly a vote of confidence in the company's prospects, he said.

Indeed, Best Buy stock fell nearly 7 percent, or $1.85, to close Thursday at $24.77.

But Dunn remains optimistic, noting that Best Buy still boasts plenty of cash and a highly trained workforce.

"When I see our Blue Shirts talking to customers, I like our chances very much," he said.

What Best Buy needs to figure out is how those Blue Shirts will operate in the fast-changing retail environment Dunn calls the "new normal."

In truth, Best Buy's plan to close 50 big-box stores this year is probably only the beginning. The company operates about 1,100 stores in North America. Most debuted in the mid-1990s when Best Buy went on its growth spurt, said Flora Delaney, a retail consultant and former Best Buy executive. Since leases typically run 15 to 20 years, Best Buy could simply let those leases expire, she said.

In their place, the retailer wants to build more of its highly successful Best Buy Mobile stores and test its "Connected Store" concept.

In developing the format, Best Buy appears to be borrowing heavily from Apple's playbook. The connected store features a "Central Knowledge Desk," similar to Apple's Genius Bar, where customers can receive technical support and even take classes.

But Best Buy will face a daunting challenge replicating Apple's retail success, Delaney said. The company must shift its store employees away from a numbers-driven sales culture to one that offers patient, high-level service.

Whereas Apple can afford to wait for customers to eventually buy an iPad or iPhone, Best Buy faces relentless pressure to generate quarterly sales, Delaney said.

"Best Buy can't drive that enthusiastic loyalty" that Apple commands, she said.

But the company has no choice but to try. Its stores generate most of its $50 billion in annual sales so Best Buy must find ways to reinvent them, experts say.

Best Buy also wants to speed up its digital sales, one of the company's fastest-growing businesses, but a relatively small unit compared to revenue from the company's physical stores. Earlier this month, the retailer hired former Starbucks chief information officer Stephen Gillett to oversee its digital operations, including online and mobile offerings.

But in the end, Best Buy's fate rests with its stores.

"They can't walk away from the brick and mortar business because it's so important to them," Delaney said.

Shadowing Dunn are critics calling for his dismissal. Dunn says he pays them no heed.

"I don't give them any time or attention," he said. "I've been at this company for 28 years. I'm sure our strategies are right."

Thomas Lee • 612-673-4113

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