Best Buy Isn’t – Chasing Supervalu to the Bottom

In a fascinating move this week, Best Buy's septuagenarion founder (who is no longer part of the company) has started calling company execs and offering them jobs – at Best Buy!  Apparently he hopes to engage a private equity firm to take over Best Buy, and he wants to keep some of the exec team, while replacing others.  Even more fascinating is that at last some of the execs are taking his calls, and agreeing to his "job offer." Clearly these folks have lost faith in Best Buy's future.

This happens one day after the Board of Directors fired the CEO at Supervalu, parent company of such large grocery chains as Albertson's, Jewel-Osco, ACME, Shaw's and Star Markets.  Apparently this pleased most everyone, since the company has lost 85% of its equity value since he was brought in  from Wal-Mart while simultaneously killing bonuses and even free employee coffee.  Even though just last week he was paid a retention bonus by the same Board to remain in his job!

And even thought the Chairman at Wal-Mart was clearly in the thick of bribing Mexican officials to open stores south of the border, there is no sign of any changes expected in Wal-Mart's leadership team. 

What is sparking such bizarre behavior in retail?  Quite simply, industry leadership that is so stuck in the past it has no idea how to grow or make money in a dramatically changed marketplace.  They keep trying to do more of the same, while growth goes elsewhere.

Everyone, and I mean everyone, outside of retail knows that the game has changed – permanently.  Since 2000 on-line sales of everything, and I mean everything, has increased.  Sure, there were some collosal flops in early on-line retail (remember Pets.com?)  But every year sales of products on-line increase at double digit rates. It's rare to walk through a store – and I mean any store – and not see at least one customer comparison shopping the product on the shelf with an on-line vendor.

What 15 years ago was a niche seller of non-stock books, Amazon.com, has become the industry vanguard selling everything from apple juice to zombie memorabilia. Even though most industry analysts don't clump it as a direct competitor to Best Buy, Sears, and Wal-Mart – holding it aside in its own "internet retail" category – everyone knows Amazon is growing and changing shopping habits, and reducing demand in traditional stores.

The signs of this shift are everywhere.  From the complete collapse of Circuit City and Sharper Image to the flat sales, reduced number of U.S. outlets and falling per-store numbers at Wal-Mart. 

Across America drivers are accustomed to seeing retail outlets boarded up, and strip malls full of empty window space.  You don't have to be a fancy analyst to notice how many malls would be knocked down entirely if they weren't being converted to low-cost office space for lawyers, tax preparers, dentists, veterinarians and emergency clinics – demonstrably non-retail businesses.  Or to recognize an old Sears or superstore location converted into an evangelical nondenominational church.

For example, in the collar counties around Chicago vacant retail space has accumulated to over 3million square feet – a 45% increase since 2007.  In that local market retail rents have fallen to $16.76 per foot, down 29% in the last four years.  And this is typical of just about everywhere.  America simply has a LOT more retail space than it needs – and will need for the foreseeable future.  Demand for traditional retail is going down, not up, and that is a permanent change.

It is not impossible to make money in retail.  But you can't do it the way it was done in the past.  The answer isn't as simple as "location, location, location;" or even inventory.  As the new, and struggling, CEO at JC Penney has learned the hard way, it's not about "every day low price." Or even low price at all, as the former WalMart exec just fired at Supervalu learned – along with all their employees. 

Today traditional retail store success requires you have unique products, unique merchandising, sales assistance that meets immediacy needs, strong trend connectivity and effective pricing.  Just look at IKEA, Lululemon, Sephora, Whole Foods, Trader Joe's and PetSmart – for example. 

Of course there will be grocery stores.  Traditional retail will not disappear.  But that doesn't mean it will be profitable.  And trying to chase profits by constantly beating down costs gets you – well – Circuit City, Toys R Us, Drug Emporium, Pay N Save, Crazy Eddie, Egghead Software, Bradlee's, Korvette's, TG&Y, Wickes, Skagg's, Payless Cashways, Musicland — and Supervalu.  There is more to business than price, something the vast, vast majority of retailers keep forgetting.

Fifty years ago if you wanted a TV you went to a television store where they not only sold you a TV, they repaired it!  You selected from tube-based machines made by Zenith, RCA, Philco and Magnavox.  The TV shop owner made some money on the TV, but he also made money on the service.  And if you wanted a washer or refrigerator you went to an "appliance store" for the same reason.  But the world changed, and the need for those stores disappeared. Almost none changed to what people wanted – they simply failed.

Now the world has changed again. The customer value proposition in retail is shifting from location and inventory to information. And it is extremely hard to have salespeople – or shelf tags – with comparable information to a web page, which have not only product and price info but competitive comparisons on everything.  There simply isn't enough profit in a TV, stereo, PC, CD or DVD to cover the overhead of salespeople, check-out clerks, on-hand inventory and the building. 

And that's why Best Buy had to shutter 50 stores in March.  On its way to the same ending as Polk Brothers, Grant's Appliance and Circuit City. 

Don't expect a 70 year old retailer to understand what retail markets will look like in 2020.  Or anyone trained in traditional retail at Wal-Mart.  Or anyone who thinks they can save a traditional "retail brand" like Sears.  The world has already shifted – and those are stories from last decade (or long before.) 

If you are interested in retail go where the growth is – and that is all about on-line leadership.  Sell Best Buy and put your money in Amazon.  You'll sleep better.

Gladiators get killed. Dump Wal-Mart; Buy Amazon


Wal-Mart has had 9 consecutive quarters of declining same-store sales (Reuters.)  Now that’s a serious growth stall, which should worry all investors.  Unfortunately, the odds are almost non-existent that the company will reverse its situation, and like Montgomery Wards, KMart and Sears is already well on the way to retail oblivion.  Faster than most people think.

After 4 decades of defending and extending its success formula, Wal-Mart is in a gladiator war against a slew of competitors.  Not just Target, that is almost as low price and has better merchandise.  Wal-Mart’s monolithic strategy has been an easy to identify bulls-eye, taking a lot of shots.  Dollar General and Family Dollar have gone after the really low-priced shopper for general merchandise.  Aldi beats Wal-Mart hands-down in groceries.  Category killers like PetSmart and Best Buy offer wider merchandise selection and comparable (or lower) prices.  And companies like Kohl’s and J.C. Penney offer more fashionable goods at just slightly higher prices.  On all fronts, traditional retailers are chiseling away at Wal-Mart’s #1 position – and at its margins!

Yet, the company has eschewed all opportunities to shift with the market.  It’s primary growth projects are designed to do more of the same, such as opening smaller stores with the same strategy in the northeast (Boston.com).  Or trying to lure customers into existing stores by showing low-price deals in nearby stores on Facebook (Chicago Tribune) – sort of a Facebook as local newspaper approach to advertising. None of these extensions of the old strategy makes Wal-Mart more competitive – as shown by the last 9 quarters.

On top of this, the retail market is shifting pretty dramatically.  The big trend isn’t the growth of discount retailing, which Wal-Mart rode to its great success.  Now the trend is toward on-line shopping.  MediaPost.com reports results from a Kanter Retail survey of shoppers the accelerating trend:

  • In 2010, preparing for the holiday shopping season, 60% of shoppers planned going to Wal-Mart, 45% to Target, 40% on-line
  • Today, 52% plan to go to Wal-Mart, 40% to Target and 45% on-line.

This trend has been emerging for over a decade.  The “retail revolution” was reported on at the Harvard Business School website, where the case was made that traditional brick-and-mortar retail is considerably overbuilt.  And that problem is worsening as the trend on-line keeps shrinking the traditional market.  Several retailers are expected to fail.  Entire categories of stores.  As an executive from retailer REI told me recently, that chain increasingly struggles with customers using its outlets to look at merchandise, fit themselves with ideal sizes and equipment, then buying on-line where pricing is lower, options more plentiful and returns easier!

While Wal-Mart is huge, and won’t die overnight, as sure as the dinosaurs failed when the earth’s weather shifted, Wal-Mart cannot grow or increase investor returns in an intensely competitive and shifting retail environment.

The winners will be on-line retailers, who like David versus Goliath use techology to change the competition.  And the clear winner at this, so far, is the one who’s identified trends and invested heavily to bring customers what they want while changing the battlefield.  Increasingly it is obvious that Amazon has the leadership and organizational structure to follow trends creating growth:

  • Amazon moved fairly quickly from a retailer of out-of-inventory books into best-sellers, rapidly dominating book sales bankrupting thousands of independents and retailers like B.Dalton and Borders.
  • Amazon expanded into general merchandise, offering thousands of products to expand its revenues to site visitors.
  • Amazon developed an on-line storefront easily usable by any retailer, allowing Amazon to expand its offerings by millions of line items without increasing inventory (and allowing many small retailers to move onto the on-line trend.)
  • Amazon created an easy-to-use application for authors so they could self-publish books for print-on-demand and sell via Amazon when no other retailer would take their product.
  • Amazon recognized the mobile movement early and developed a mobile interface rather than relying on its web interface for on-line customers, improving usability and expanding sales.
  • Amazon built on the mobility trend when its suppliers, publishers, didn’t respond by creating Kindle – which has revolutionized book sales.
  • Amazon recently launched an inexpensive, easy to use tablet (Kindle Fire) allowing customers to purchase products from Amazon while mobile. MediaPost.com called it the “Wal-Mart Slayer

 Each of these actions were directly related to identifying trends and offering new solutions.  Because it did not try to remain tightly focused on its original success formula, Amazon has grown terrifically, even in the recent slow/no growth economy.  Just look at sales of Kindle books:

Kindle sales SAI 9.28.11
Source: BusinessInsider.com

Unlike Wal-Mart customers, Amazon’s keep growing at double digit rates.  In Q3 unique visitors rose 19% versus 2010, and September had a 26% increase.  Kindle Fire sales were 100,000 first day, and 250,000 first 5 days, compared to  80,000 per day unit sales for iPad2.  Kindle Fire sales are expected to reach 15million over the next 24 months, expanding the Amazon reach and easily accessible customers.

While GroupOn is the big leader in daily coupon deals, and Living Social is #2, Amazon is #3 and growing at triple digit rates as it explores this new marketplace with its embedded user base.  Despite only a few month’s experience, Amazon is bigger than Google Offers, and is growing at least 20% faster. 

After 1980 investors used to say that General Motors might not be run well, but it would never go broke.  It was considered a safe investment.  In hindsight we know management burned through company resources trying to unsuccessfully defend its old business model.  Wal-Mart is an identical story, only it won’t have 3 decades of slow decline.  The gladiators are whacking away at it every month, while the real winner is simply changing competition in a way that is rapidly making Wal-Mart obsolete. 

Given that gladiators, at best, end up bloody – and most often dead – investing in one is not a good approach to wealth creation.  However, investing in those who find ways to compete indirectly, and change the battlefield (like Apple,) make enormous returns for investors.  Amazon today is a really good opportunity.