How Best Buy Missed Out on the Mobile Revolution
On October 26, 1999, both Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) were added to the Dow Jones Industrial Average as component stocks. On that date, Microsoft and Intel shares traded hands for a respective split-adjusted $33.52 and $26.79. Roughly fifteen years later, on July 7, 2014, Microsoft and Intel shares closed out the trading session at $41.99 and $31.03, respectively. In retrospect, the move to identify both Microsoft and Intel as Dow component stocks may have marked the pinnacle of the personal computing movement. The technology sector has long since moved on to embrace the mobile revolution.
Best Buy (NYSE:BBY), of course, is a consumer electronics retailer that was also hailed as a story stock through the 1990s.The Best Buy heyday did trackthe original personal computer revolution, when customers relied upon knowledgeable sales associates to walk them through major purchases. Web 2.0, however, has literally rendered the Big Box business model all but obsolete.
The Web 2.0 business model
The Web 2.0 business model installs a social element above the general dot-com site. Today’s webmasters and software engineers effectively serve as broker-dealers who match advertisers to an established user base. The most lucrative Web 2.0 outfits may even bypass third-party advertisers altogether, in order to close direct sales to consumers. Consumers have become more sophisticated over time, as people often follow the advice of trusted reviewers through online forums. In terms of costs, a brick and mortar establishment simply cannot compete with virtual space. The plethora of dead malls may serve of evidence that Web 2.0 has decimated traditional retail. James Greiff and Bloomberg have already compared the interiors of these dead malls to that of a “horror film.”
Numerous analysts would highlight Amazon (NASDAQ:AMZN) as the spearhead of Internet retail. Amazon is largely notable for bait-and-switch tactics where product is practically given away at cost, in order to drive online traffic toward higher margin goods and services. For example, the Kindle Fire tablet begins at $139, as a relatively cheap gateway for consumers to purchase content and durable goods at Amazon. For the sake of comparison, the 16GB Apple iPad Air retails for $499. Amazon has leveraged its bait-and-switch business model to rank ninth in 2013 U.S. retail sales, according to the National Retail Federation. Last year, Amazon generated $44 billion in global retail sales, which was a 27.2 percent improvement above 2012.
In terms of hardware, it is Apple that has emerged as the leading mobile ecosystem for computing, telecommunications, and entertainment. Taken together, the iPhone and iPad accounted for $123.3 billion out of the $170.9 billion in 2013 total net sales at Apple. Mobile customers, of course, may purchase subsidized iPhone handsets at wireless carriers Verizon (NYSE:VZ) and AT&T (NYSE:T). Steve Jobs, for his efforts, was to also establish the Apple Store as a leading retailer. Research firm eMarketer has ranked Apple as the most successful American retailer, with $4,551 in sales per square foot. In all, Apple Stores and iTunes combined to generate $26.6 billion in 2013 U.S. retail sales, which was an 11 percent year-over-year improvement. The National Retail Federation listed Apple Stores and iTunes as the fifteenth largest U.S. retailer, in terms of sales.
The bottom line
A strong case may be made that the Web 2.0 economy has largely bypassed Best Buy. The National Retail Federation ranked Best Buy as the twelfth ranked retailer in America, with $35.8 billion in 2013 retail sales. At Best Buy, this U.S. sales performance was actually a 1.2 percent decline compared to the prior year. In all, Best Buy total net sales declined from $43.9 billion to $42.4 billion between 2013 and 2014. Best Buy aggressively cut costs, in order to close out 2014 with a mere $687 million in net profits. Be further advised that Best Buy did rack up $482.9 million in 2013 losses.
For years, retail analysts havedismissed Best Buy as “Amazon’s Showroom.” Apparently, wily consumers would visit Best Buy stores simply to physically handle the merchandise, before logging on to their Amazon accounts and actually making purchases. Beyond Amazon, tech savvy consumers have learned to scan the Web 2.0 marketplace for the best deals, which would arrive largely at Best Buy’s expense.
A recent Wall Street Journal article titled “Best Buy Is Trapped Between Wal-Mart and Amazon” has headlined the inevitability that this Minnesota retailer will lose the sales war upon both cost-cutting and technological fronts. Ironically, the paper also suggested that Best Buy mimic the tactics of both Radio Shack (NYSE:RSH) and the failed Circuit City, by closing stores and limiting retailing space. At this junction in time, Best Buy lacks a clear mission amid the mobile revolution. As such, Best Buy investors should consider selling out of their positions, in order to avoid staggering losses going forward.