Best Buy Co. has avoided one of the pitfalls that frequently beset troubled incumbents: Management didn’t just stick their heads in the sand and hope their upstart competition would somehow fade away. But they made a different devastating mistake: trying to beat the upstarts at their own game. In response to the competitive threat of Amazon.com Inc., Best Buy decided to match its prices. You can understand why it wanted to do this, but you can also easily see why this is insane. Best Buy is never going to beat Amazon on price; Amazon’s warehouses give it giant economies of scale. And it doesn't have to spend money making the display space pretty.
Back in November, when Best Buy announced this strategy, I wrote, “It’s hard to see this ending well.” And it hasn’t. Best Buy’s shares plunged this morning on news of its brutal holiday season. Yet Chief Executive Officer Hubert Joly says he’s going to continue the cost-cutting strategies that helped margins last year.
As I say, this is understandable, but ultimately, it’s hard to see how endless cost-cutting is going to keep Best Buy in business. It's never going to get down to Amazon’s cost structure -- especially because Amazon has other businesses, such as the third-party marketplace and its cloud computing services, that could be tapped for revenue to see the consumer electronics side through a price war. As I argued in a 2012 Newsweek feature, Best Buy is more likely to succeed by focusing on the areas that Amazon can’t match, such as top-notch service and carefully curated stock.
To be fair, that’s not an easy strategy to carry off. Getting the internal support to try would be hellishly difficult; a lot of jobs would be significantly changed, or eliminated, in the switchover. Then there are the stores to think about: A high-service, curated collection probably implies a very different retail format than the “giant box” stores Best Buy currently occupies. Unfortunately, Best Buy still has years to run on a lot of leases for giant boxes.
Besides, it might not work. Some companies just can’t be saved; no amount of clever strategery was going to keep the buggy-whip business going once Model Ts started rolling off the assembly line. It’s hard to make a big risky move when success is so uncertain. On the other hand, failure seems virtually assured on Best Buy's current course.