A blueprint for fighting Amazon

Best Buy was considered just another Amazon casualty in retail but it survived. This is how.

In America, they call it the retail apocalypse.  In 2017 alone, 50 US retail chains filed for bankruptcy, shutting over 9,000 stores. This year another 25 chains have already gone, with more than 12,000 locations wiped off the map.

Retail (specifically, fashion and electronics) has been in retreat for years and, rightly or wrongly, most fingers point to one culprit: Amazon.

The behemoth has killed retail indiscriminately. Barnes and Noble, Toys R Us, Quicksilver, Radioshack and plenty of others have fallen prey. Yet one business has escaped the carnage.

Enter Best Buy

Best Buy was supposed to fail alongside Circuit City and Radioshack. With over 1,000 retail locations and over 120,000 staff, it was exactly the kind of business in Amazon's sights: a high-fixed-cost seller of commodity goods with legacy systems and healthy margins.

Circuit City and Radioshack went bust as expected and Best Buy appeared to be headed the same way. As recently as 2012, it lost a billion dollars and, by 2014, it was earning half what it was in 2010.

Since then, profits have been restored and the share price has hit record highs. How was Best Buy saved?

The company responded differently to the Amazon threat than its peers. Where competitors cut costs to meet Amazon, Best Buy immediately made price parity a store wide policy.

It then cleaned out its old logistics and inventory systems to make delivery quicker and more reliable. Warehouses that only operated scant business hours were turned to full time operations. Best Buy now offers same day delivery to 40 cities and offers click and collect which saves on freight costs. That couldn't have happened a few years ago.

These were logistical changes that, while vital, merely made Best Buy competitive with Amazon.

The differentiator came when Best Buy realised how to turn its 1,000-strong store network from a cost heavy liability into a key advantage.

Become the landlord

The trick was to turn its retail outlets from centres to flog goods into centres to showcase goods.

The business invited suppliers to create boutiques inside their stores to showcase new products, offer demonstrations and effectively become retailers themselves without the cost or expertise required.

Best Buy was the first third-party retailer to open Apple boutiques inside their stores. Samsung stalls followed and, today, Microsoft, Sony and even Amazon themselves utilise Best Buy to demonstrate their products.

This has turned Best Buy from a pure retailer into a mini mall where it can collect stable rental fees from brands.

As brands tend to supply and train their own staff, costs are lower and price competition becomes less important when brands are agnostic about where their products are bought.

The third plank of the turnaround involved service. Best Buy bought an installation and help desk service called Geek Squad and has deployed the service with enormous success.

Recognising that new devices which now can be tethered to each other, a smart phone or other appliances, Geek Squad repairs and installs product and can even be a point of contact for recommendations and new services. Did you know, sir, that your washing machine can connect to your phone and your speaker? That kind of thing.

With almost 400 advisors, they are like NRMA's roving mechanics; brand ambassadors who create a lot of goodwill. Although costly, the service has done no harm to the financial results of the business.

Restored

Profits have boomed and returns on capital are now 50% higher than they were in 2014 when many of these changes were implemented.

Best Buy perfectly illustrates what many investors refuse to see: Amazon is not necessarily the death of retail. Early damage was done when existing retailers dismissed Amazon or tried to fight it on price.

JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN) would be aware that there is a demonstrated way to survive the Amazon onslaught. They are unlikely to make the same mistakes as the early American casualties of the retail apocalypse.  

Disclaimer
Intelligent Investor provides general financial advice as an authorised representative under the AFSL held by InvestSMART Publishing Pty Limited (Licensee). InvestSMART Funds Management Limited (RE) is the responsible entity of various managed investment schemes and funds and is a related party of the Licensee. The RE may own, buy or sell the shares suggested in this article simultaneous with, or following the release of this article. Any such transaction could affect the price of the share.

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