April 16, 2012 at 11:29 AM ET
A crisis is a terrible thing to waste, as the old saying goes, and it’s an adage that’s especially relevant to electronics retailer Best Buy right now, observers say.
Best Buy’s CEO Brian Dunn, a 28-year veteran of the company, abruptly resigned last week after the electronics retailer opened an investigation into his “personal conduct” at the company. Later in the week, reports said the probe was to explore whether he misused company assets in the course of an alleged relationship with a female subordinate.
Less than two weeks earlier, the electronics retailer posted a $1.7 billion quarterly loss and Dunn announced a major restructuring, including plans to shut 50 of its struggling big-box stores. The huge loss came after the company had seen its business model suffer amid stiff competition with nimbler rivals including Apple and Amazon.com.
Whatever the circumstances of Dunn’s departure, the moment of crisis at Best Buy is an opportunity for the electronics retailer to take the steps needed to prevent the company going the same way as the likes of now-bankrupt electronics retailers such as Circuit City, Comp USA and Crazy Eddie, experts say.
“A crisis like this one can be an opportunity,” said Chris Syme, a principal at CKSyme.org, a communications and crisis consultancy based in Bozeman, Mont.
“We’re not talking about a mid-course correction here, because I think they need to give the new strategy a chance,” Syme continued. “But I think they need to be willing to fail fast; they need to have another strategy ready to go if the current one doesn’t work.”
The first job for the Best Buy board of directors will be to find a new CEO to replace Dunn -- a process that the company said is expected to take six to nine months to complete.
“They need a new, strong operating CEO to help do some radical things and make some changes,” Telsey Advisory Group analyst Joe Feldman told CNBC.
Feldman said he’d like to see Best Buy get the right person in position soon, “and then see what kind of radical, operational changes they can make to really drive some underlying stability in the business and make this more of a cash flow machine.”
A change of leadership won’t solve all of Best Buy’s problems, but the retailer does have a fighting chance of survival, he said. The retailer has a relatively healthy balance, it generates a lot of free cash flow and many of its stores are still profitable. The problem is there are too many of them.
Best Buy tried to address its size issue a few weeks ago when it announced a turnaround plan that includes shuttering 50 of its big-box electronics stores. But the move was viewed as not substantial enough to solve the struggling retailer’s problems.
Shutting some big stores and focusing on smaller outlets will save money and help lower prices, but it won’t solve one of Best Buy’s biggest problems -- the effect of something called “showrooming,” when shoppers go to Best Buy to try out a new gadget, and then buy it online for less.
Best Buy and other big-box retailers suffer from a disadvantage over their rivals because of the cost of maintaining their stores, said Michael Pachter, an analyst at Wedbush Morgan Securities.
“It’s a big real estate problem,” he told CNBC. “Best Buy literally spends $6 billion on bricks-and-mortar stores on a $50 billion sales base -- that puts them at a 10 percent price disadvantage to all their online competition, and they have to whittle that down to 3, 4 or 5 percent, and then try to sell convenience to consumers. I think they’ll lose that battle.
“This restructuring should have started 10 years ago,” he added.
Pachter reckons the right kind of leadership is essential now for Best Buy.
“If they don’t get the right guy and continue to whittle away at the problem they will continue to see their stock going down,” he said. “I think earnings keep declining because I think they’re losing massive share to Internet retailers. But this company is going to go away in five years if they don’t do something, and do it soon.”
Shares of Best Buy were down slightly in trading Monday.
Is Best Buy going to make it? Discuss it on our Facebook page.