Best Buy’s New CEO Will Be Walking Into Hell

Best Buy logo After 28 years with the company — the last three of which he served as CEO — Best Buy’s (NYSE:BBY) Brian Dunn has turned in his keys and is packing up his personal effects, ending a forgettable era in Best Buy’s history.

His exit wasn’t argued from either side. Rather, he and the board of directors seemed to agree the chemistry just wasn’t right.

Of course, it took the vultures about two nanoseconds to swoop in, pointing out every misstep Dunn has made, and blaming a truckload of Best Buy’s problems on him.

Fair enough. He did make some mistakes. On the other hand, he took the blame for few woes that weren’t his fault, and just because someone new is on the way (while Mike Mikan takes the helm in the interim) doesn’t inherently mean those problems are solved.

Just to make sure BBY owners have the right expectations going forward (and don’t have the wrong ones), here’s a closer look at the Dunn mess the new CEO will be cleaning up, and the bigger challenges that have less to do with Dunn and more to do with circumstances.

What Brian Dunn Didn’t Get That Can Be Fixed

These challenges can’t be fixed easily, but they can be fixed. It will just take a lot of elbow grease:

  1. Everyone’s a competitor on price. If you’ve ever done any comparative price shopping between what Best Buy is selling and the same item being sold elsewhere — and statistics say there’s a very good chance you have — then you’ll know Best Buy hardly lives up to its name. While the price-comparison finger usually points to Amazon (NASDAQ:AMZN) as the biggest reason for Best Buy’s struggle, Wal-Mart (NYSE:WMT) sells games and DVDs too, and Sears (NASDAQ:SHLD) also sells appliances. Fact is, technology, gizmos and appliances are commodities that no longer command a premium. Best Buy tried to charge one anyway.
  2. Everyone’s a competitor on service. Guess which retailers didn’t decide to outright cancel 30,000 online orders just a few days before Christmas? If you said any other name besides Best Buy, you were right. Most threats to never shop at a store again because of bad service are idle threats. In this case, though, the Christmas-ruining attitude really did burn bridges with customers.
  3. You can’t shrink your way to success. Just a couple of weeks before Dunn found the exit, he unveiled an $800 million cost-cutting initiative that includes closing 50 stores … part of a major real estate overhaul that has been gaining momentum for several months. Cutting costs is good. Unfortunately, that doesn’t solve the actual marketability problem. It just creates a liquidity crunch.

Headaches That Will Linger Longer Than Dunn’s Footprint

On the flip side, don’t assume Brian Dunn’s replacement will only need to fix Dunn’s stumbles to get the company back on track. There are some bigger philosophical issues that need to be addressed, too.

  • Big-box retailing is on its death bed. I covered this point in early January, and nothing has changed in the meantime.
  • Best Buy has developed a less-than-stellar reputation with investors. To give credit where it’s due, Best Buy has at least held the line in terms of revenue for the past three years. Total annual sales have been hovering around $50 billion since 2009. Unfortunately, the top line should have been increasing as the economy gained firmer footing. Even without the stagnant top line, though, the bottom line has been dwindling for the last three years, and even turned negative in the all-important holiday shopping period from the last quarter of 2011. If you can’t get it done during the Christmas season, you just can’t get it done.
  • Best Buy has developed a less-than-stellar reputation with consumers. Have you given up on Best Buy just because you don’t want to be asked to buy an extended warranty on everything you bring up to the cash register? Or maybe you’re one of the 30,000 that didn’t quite get everything you wanted for Christmas last year. Whatever the case, you’re not alone.

Bottom Line

So, is the eventual replacement for Brian Dunn walking into a virtual hell? Probably.

While most retailers do some things well and other things poorly, in its current state, Best Buy seems to be doing everything poorly. It’s a model that worked when consumers were flush and confident in the pre-2007 (and pre-smartphone) environment. Now, though, that business model and attitude are relics.

To be clear, the Best Buy name, reputation and framework are all salvageable. Fixing any or all of them aren’t lay-ups, though, and unless the new guy orchestrates things perfectly for the next two to three years — and completely reinvents the company while running the existing one — Best Buy might not survive the surgery.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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