Best Buy slashing wages, eliminating jobs in stores

  • Article by: CHRIS SERRES , Star Tribune
  • Updated: April 15, 2009 - 10:31 PM

The Richfield-based retailer is slashing wages and eliminating jobs in its stores. Some observers draw comparisons to Circuit City.

Thousands of Best Buy store employees will see their pay slashed or their positions eliminated as the Richfield-based consumer electronics chain moves to reorganize its stores amid a weakening consumer spending environment.

Best Buy Co. Inc. last Saturday notified employees of the staffing changes, which a spokesman said were motivated by "a desire to get more of our people in front of our customers" by shifting many store managers and senior-level sales people into jobs where they will interact more directly with shoppers.

Best Buy would not disclose the number of people affected, but New York investment firm Sanford Bernstein said in a research note Wednesday that as many as 1,000 assistant store managers would have their positions cut. Up to another 8,000 senior sales associates would be demoted to regular sales positions that would pay 25 percent to 50 percent less than their previous jobs.

Colin McGranahan, an analyst with Sanford Bernstein who wrote the report, cautioned Wednesday that these numbers are estimates based on conversations with Best Buy; the retailer would not confirm or deny them.

However, the severity of the job and wage cuts led some industry analysts to draw comparisons to Circuit City Stores Incorporated's ill-fated efforts nearly two years ago to slash costs by eliminating thousands of its higher-paid, but most experienced, salespeople. Service levels suffered, hastening Circuit City's demise, some analysts argue. The Richmond, Va.-based retailer went out of business earlier this year.

"What Circuit City did was a pretty big blunder," said Brady Lemos, who follows Best Buy for Morningstar. "They let their most experienced sales staff go, and it was clear that people who worked there weren't interested in helping you. ... Best Buy must be careful not to do anything to that degree."

But Circuit City's collapse may be part of the reason Best Buy can afford to make these changes, some analysts argued. It solidifies Best Buy's dominance in the consumer electronics category at a time when demand for TVs and many gadgets remains steady. And it gives Best Buy a pool of talent that it can tap in case its own employees object to the changes and leave in large numbers.

"The liquidation of Circuit City ... reduces the competitive threat and could supply a ready group of replacement associates who would likely be thrilled to work at the lowered rates" at Best Buy, wrote McGranahan in his research note. "Overall, we see some -- but relatively limited -- risk of store-level disruption over the next few quarters from this reorganization."

So far, Best Buy has weathered the recession much better than other retailers. The world's largest consumer electronics retailer easily beat analysts' expectations when it reported quarterly earnings last month. However, many of the items that did well -- such as flat-panel TVs and computers -- are considered "family" purchases. More discretionary personal gadgets, such as MP3 players and digital cameras, have seen double-digit declines over the past year. With unemployment still rising, it's only a matter of time before the "family" purchases begin to decline, too, some analysts argue.

As a result, the retailer has been under increased pressure from Wall Street to keep its costs under control. Earlier this year, the company cut 750 jobs at its corporate headquarters in Richfield through a combination of layoffs and voluntary buyout programs.

The deep cuts at the head office likely will make the layoffs at the store level more palatable to employees, McGranahan said. "Now they can go to the stores and say, 'We've already tightened our belt at headquarters, and now it's your turn,'" he said. "They're going about this the right way."

Overall, Best Buy expects a "very minimal" reduction in head count, said spokesman Justin Barber. The changes involve shifting some senior salespeople who are in supervisory roles to positions in stores in which they "have more customer face time," he said.

Some managers will have their positions eliminated, but they will still be able to apply for jobs as regular salespeople, he said. He noted that each store will make the changes separately, and there are no targeted cost savings involved in the reorganization.

"It's not about cost savings," Barber said. "It's about positioning ourselves for now and in the future. We've hung our hat on putting our customer at the center of everything we do."

Best Buy is also being careful to avoid an exodus of store personnel, McGranahan said.

To give demoted sales associates an extra incentive to stay, Best Buy will give them quarterly lump-sum payments equal in size to their pay reductions, McGranahan said. Those payments will end after three quarters, leaving employees at the new, lower rate, he said.

Barber, the Best Buy spokesman, declined to confirm these payments.

Even so, Best Buy risks weakening employee morale and service -- its biggest competitive advantage over the growing array of discount retailers that are now selling consumer electronics, Lemos of Morningstar said. "If they keep cutting service," he warned, "then people like Costco and Wal-Mart and Target will become bigger and bigger threats."

In 2007, Circuit City fired 3,400 store workers and replaced them with new hires willing to work for less. The laid-off workers, about 8 percent of its total workforce, were told they would have a chance to reapply for their former jobs, although at a lower pay rate. The move backfired for the chain as morale sank and customers evaporated.

Best Buy's "approach is very different, but the end result is the same," McGranahan said. "And that's reducing their per-employee wage rates."

Chris Serres • 612-673-4308

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