Best Buy Co. shareholders are lucky that CEO Brian Dunn pulled a “Mark Hurd” and resigned as a result of allegations of an inappropriate relationship with a staffer. Dunn was not the right person to lead Best Buy into battle against online-only competitors that use the company’s spacious stores as showrooms for their products. Dunn and the current management team were going about their business as if they were still competing against Circuit City Stores and Wal-Mart Stores. They did not wake up to two paramount realities: Best Buy cannot have lower prices than its online competitors, and its stores lack the breadth of selection of Amazon.com, putting it at a permanent competitive cost disadvantage.
The new strategy Dunn announced a few weeks before his resignation — of closing big stores and opening a lot of smaller stores — made little sense. It was basically turning Best Buy into RadioShack Corp. It would have been great if this approach had worked for RadioShack, but it hadn’t.
Best Buy’s strategy for the brave new world requires thinking that cannot be delivered by somebody who spent 28 years in the Best Buy box. It requires the strategy of an Amazon or Netflix, where management was willing to bring forward and execute a disruptive new approach that undermined its current cash-cow business. Amazon did this by bringing electronic readers to the masses. Netflix did it by streaming movies and TV shows.
The new plan for Best Buy must involve a much tighter collaboration of physical stores and the company’s Internet presence — the stores need to be turned from a liability into an asset. Maybe Best Buy should become the intentional showroom for electronics manufacturers. Yes, you read it right. It should take a page from drug distributors’ playbook.
Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email, click here or read his articles here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.