Best Buy’s Turnaround Plan Sends Retailer In the Wrong Direction

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Best BuyIn a move to shave costs and regain its focus, Best Buy (BBY) is closing 50 of its stores and laying off another 400 employees at the corporate and support levels.

Sometimes investors applaud these moments of corporate self-awareness. Shares of Sears Holdings (SHLD) have been rallying since the Sears and Kmart parent announced that it would be closing dozens of stores and unloading its smaller concepts.

However, Best Buy investors know that in this case, it isn’t a sign of a turnaround. It’s a sign to turn around — and run the other way.

Circuit City, the Sequel?

Shares of Best Buy opened 5% lower on Thursday — and were trading as much as 10% lower — after the consumer electronics retailer served up mixed quarterly results. Adjusted earnings may have clocked in ahead of Wall Street expectations during the holiday quarter, but comparable-store sales fell by a disappointing 2.4%.

Investors were warned. The store closings and layoff announcements indicate that things aren’t going to get any easier, either.

Best Buy isn’t working on a comeback strategy. It’s simply rearranging the deck chairs aboard the S.S. Circuit City. Here’s the course this ship is likely to chart.

Best Buy’s Big Plan: Downsize — Literally

“Best Buy’s retail store strategy is to increase points of presence, while decreasing overall square footage,” reads Thursday’s press release.

In other words, it may be closing down some stores but it will open far more small Best Buy Mobile shops that specialize in selling smartphones and other mobile gadgets and accessories. It’s actually looking to open 100 of its small-box mobile concepts, even as it shutters 50 of its superstores.

It’s a great plan on paper. Who wouldn’t want to run a concept that requires little in leased space manned by just a couple of employees doing a lot of big-ticket transactions?

Well, ask RadioShack (RSH). Best Buy’s mobile store concept is really a dolled-up RadioShack, and if you saw “the Shack” get whacked over its horrendous holiday quarter earlier this year, you know that even RadioShack doesn’t want to be RadioShack these days.

How it Plans to Stop Amazon’s ‘Showroomers’

There’s a popular knock that Best Buy has really become little more than Amazon.com’s (AMZN) showroom. One of the biggest complaints from shoppers is that Best Buy’s prices are often out of whack with what they can get elsewhere.

Best Buy knows that Amazon is eating its lunch, and it’s tired of selling folks the smartphones, tablets, and laptops that introduce them to the wider online world of cutthroat pricing.

So, the company plans to pass on some of the hundreds of millions that it expects to realize in cost reductions to customers in the form of “competitive prices.”

Surely “competitive prices” will bring shoppers back — but how competitive can Best Buy truly be?

It will never be able to match Amazon’s razor-thin margins, kept so low by its lack of physical storefronts. Earlier this month, Amazon spent $775 million on the company that makes the automatons that wheel around its distribution centers to make fulfillment more efficient.

How could Best Buy compete with robots when it’s already having a hard time compensating for disparities in cost structures and — in most states — sales tax rates?

In-Store Help Is About to Get Really Aggressive

If Best Buy is taking a hit on the product markups, how will it make back the difference?

Well, if you’re one of the thinning herd of Best Buy loyalists who’ve been shopping at the chain lately, you can already guess: Expect employees to push even harder on the company’s high-margin extended warranties, Geek Squad tech support, and buyback protection programs.

The company’s already telling its khaki-donning staff to prepare for the hard sell.

“The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals,” reads the release.

Now, getting paid more for “customer service” excellence would be great, but there really isn’t an indisputable way to determine if the customer is satisfied. Buyers obviously won’t be all that pleased if they’re walking out with a competitively priced product that has been saddled with a bunch of questionable services at marked-up prices.

Do some buyers benefit from these extended warranties and obsolescence insurance add-ons? Sure. However, Best Buy wouldn’t be selling them if the sum of its customers was getting more out of these plans than they’re paying to receive them.

The company doesn’t get that this is one of the reasons — along with price and convenience — that store-level sales have been falling since shortly after the Circuit City liquidation.

You can be sure that the attachment rate of these services will be a major part of these enhanced financial incentives to further Best Buy’s “business goals” here.

If you thought the Best Buy experience was questionable before, you’re probably not going to be happy with what it has in store for you next holiday season.

Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. Some retailers get it — and are thriving despite difficult times for consumers. Click here for a free research report on two companies changing the face of retail. The Motley Fool owns shares of RadioShack, Amazon.com, and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com.

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Tagged: Best Buy Earnings, BestBuyEarnings, Circuit City Stores Inc, Extended Warranty, ExtendedWarranty, Geek Squad, Kmart, Layoff, layoffs, Radioshack Corp, Sears, Sears Holdings Corporation, store

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