245-Best Buy in a Leader’s Trap

Few industry leaders believe their prices are too high. Often, they are right. They are usually less right in a market where prices fall. Consider GM in automobiles and IBM in personal computers in the past. At one time or another, most industry leaders will get caught in a Leader’s Trap, where they assume that customers will stay loyal to their products because the low-end products do not enjoy their quality and reputation. This assumption rarely, if ever, holds. Best Buy has been in a Leader’s Trap and its assumptions won’t hold this time either.

Through the third quarter of 2009, Best Buy was gaining market share in flat panel TVs and personal computers. However, in the most recent quarter of 2010, the company lost over 1% of its market share in televisions and computers to competitors who were discounting. (See the Perspective, “The Two Best Consultants in the World” on StrategyStreet.com.) Now, if it were just a simple low-end, low value competitor, Best Buy might not worry. But their discounting competition was Wal-Mart and Amazon. By any definition, these companies would count as peers of Best Buy in the television and personal computer retail market.

In the recent quarter, Best Buy emphasized high technology, and high margined, TV and personal computer products. Customers did not follow along. Best Buy noted that it had faced tough competition from off brand televisions at lower price points.

Best Buy could have offered private label products to compete with low-end, off brand, competitors. Its store brands include Dynex and Insignia. The company decided not to emphasize these lower-priced products in their promotions because they have low profit margins. Best Buy “failed” its customer by refusing to offer something that at least half the other competitors could and would offer. (See “Audio Tip #35: How Does a Company “Fail” in a Market?” on StrategyStreet.com.) Nor did competition “win” the customers who switched. Amazon and Wal-Mart simply took what Best Buy allowed them to take. (See “Audio Tip #34: How Does a Company “Win” in a Market?” on StrategyStreet.com.)

The result: Best Buy missed its targets and saw its stock price fall by 15%. The company lost market share to peer competitors. And its sales and profits fell in televisions and personal computers. Competitors gained strength.

Best Buy is a fine company with capable management. It won’t stay down for long. You may expect to see them leave the Leader’s Trap very soon.

Posted 1/24/11

Update:

Best Buy has long ago left its Leaders Trap. But it has done much more than that to become a very successful electronics retailer. It revamped its culture to focus on training its people and helping them establish real relationships with customers. The company increased its pay scales and trained their employees to help customers find and become comfortable with what they might buy at Best Buy. Best Buy introduced an in-home advisory program which sent company salespeople, paid on salary rather than commission, to make up to 90 minute in person house calls to help customers choose products that would work in their homes.  It employed its popular Geek Squad to help with product installation and maintenance. The company built a seamless omni-channel sales process which made any purchase easy for the customer.  As a result, nearly 40% of company sales now occur online.

Over time these Convenience and Reliability innovations in its value system led to more satisfied employees and trustful customers. The company accompanied these changes with an aggressive “price match” policy. This policy will meet any local competitor price within 25 miles of the Best Buy store. The policy also matches any online price for the same product. Further, it will match these prices for up to 15 days after the customer has purchased the product, effectively offering a customer a call on the product.

The company converts what used to be a weakness into a strength. Several years ago, the company suffered from “show rooming”, where customers would see, touch and feel a product in a Best Buy store and then buy it online for a lower price. With its aggressive “price match” policy Best Buy argued to every customer in its store that its price was as good as they could get so why not buy it right then at the store. This argument often worked with customers who had been encouraged to join in a relationship with Best Buy. The company became a winner on Reliability, Convenience and price. Quite an accomplishment.  See HERE and HERE and HERE for more perspective on Best Buy’s success in a hostile market.

11/22

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