Best Buy faces competition from more retailers dipping in to electronics market

In 2009, Best Buy was dominating the consumer electronics business, but the Richfield-based retailer is facing increasing competition from the likes of Wal-Mart, Amazon.com and Target.

Best Buy was running an ad a little over a year ago that poked fun at consumers shopping the competition, but looking to Best Buy for advice. In the ad, the Best Buy blue shirt gets a customer to come to Best Buy to purchase a TV, giving him the same price Wal-Mart would.

But in the real world, Best Buy has been losing sales to shoppers who find they're getting good enough prices and selection elsewhere -- like at Minnesota's other large retailer Target.

NEW CHOICES FOR CONSUMERS

Over the past five years, Target has increased floor space for electronics at about half its stores by nearly ten percent, with an emphasis on TVs, video games and mobile phones. Target also offers TV installation services, free tech support, and an electronics trade-in program. Nik Nayar, who oversees electronics for Target, said they are top of mind for the retailer's customers.

"The key difference for us is we have a consumer that's time starved," Nayar said.

At Target you can just as easily pick up a gallon of milk, garden hose and prescription medication as you can a TV or cell phone.

Sean Walker of Apple Valley has been making most of his big electronics purchases at Target stores.

"TVs, surround sound systems, a number other things; the quality, the price, everything seems to be pretty good," Walker said. "The selection seems to be reasonable. So, I really haven't seen much reason to go elsewhere."

Consumers like Walker are hurting Best Buy's financial results.

In its most recent quarter, Best Buy's sales at stores open at least 14 months --- a key benchmark in retail -- dropped five percent year-over-year. Its market share fell as well. Best Buy declined to be interviewed for this story, saying it's in a quiet period before releasing financial results.

But the retailer still has a lot of loyal customers, like Rick Purvis of St. Paul.

Purvis was checking out TVs at the Eagan Target store recently. Purvis said he was disappointed with the 50 sets on display and that he's inclined to make his purchases at Best Buy.

"[Because they have] more selection," he said. "They seem to have a little more high-end stuff, and here seems to be more on the budget for most stuff. A lot of the resolutions and refresh rates are lower, and Best Buy kind of has whatever you want."

MORE COMPETITION

About a one-third of Americans say Best Buy is the place where they do most of their shopping for consumer electronics. About one-fifth turn to Wal-Mart, and Target remains a distant fourth but has been gaining share. Those numbers are according to BIGresearch, an Ohio consumer research firm.

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Analysts say Best Buy has done best when hot new products hit the market and people turn to Best Buy for a broad selection and knowledgeable salespeople.

But Morningstar analyst R.J. Hottovy said Best Buy hasn't been able to figure out how to compete with the low prices from retailing giants, such as Wal-Mart and Amazon.com.

"If you can't be the low-cost provider, you got to figure out a way to differentiate your business and I honestly don't think Best Buy has done enough on that front," Hottovy said.

Recently, Best Buy disclosed that it is considering a major change to its business model, and moving to an everyday low price strategy, like the one Wal-Mart pioneered. The thinking is many consumers are unwilling to wait for sales at Best Buy if they find better every-day prices elsewhere.

Best Buy's product mix is a problem, too. Music, video games and movies continue their migration toward digital distribution. People don't buy them in stores like they once did. They now download or stream them over the Internet.

Hottovy said Best Buy has to come up with something to replace what have been very profitable products.

"It leaves big hole in the center of the store for Best Buy," he said. "And frankly, anything you can come up to replace that is going to be a slower turning, lower-margin good."

Best Buy has explored selling everything from musical instruments to exercise equipment. The retailer has partnered with Sonic Solutions to rent movies via the Internet. But Hottovy said that business is pretty crowded.

"Wal-Mart 's got Vudu; you have iTunes being very competitive in that space, and Netflix continues to gain subscribers at an astronomical rate," Hottovy said. "So, it's not an easy space to gain traction in at this point for Best Buy."

This is not the first time industry experts have thought Best Buy's best days might be behind it. Edward Jones analyst Matt Arnold said Best Buy has left doomsayers disappointed many times in the past.

"When VCRs became obsolete, people worried that Best Buy's party was over," Arnold said. "Same with DVD players; same with a lot of these technologies. But innovation continues to happen."

And when new products do take off, Arnold expects Best Buy's fortunes will rise with them.

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