Written by: Thomas Stone 

A recent decline in sales has caused Best Buy to re-evaluate its strategy and change the way the company does business.  In particular, Best Buy aims to mitigate the cost of all the retail space it holds by renting out space in its big stores, doing more business online, and opening smaller stores in the future.  Big Box retail is going the way of the dinosaur, and it looks like Best Buy is trying to avoid extinction by evolving into something more agile and more akin to its online competitors.

Best Buy’s sales have been decreasing this year, compared to the five percent increases the company posted in the previous two years.  Stock prices have followed a similar decline.  Best Buy’s decision makers could write this off as a temporary effect of the recession, but instead they seem to see the writing on the wall.  Big box retail, especially high-end gadget big box retail, is on its way out thanks to a number of converging factors. 

The most obvious reason for Best Buy’s decline is the economic recession.  Business is hard for everyone right now, but stores like Best Buy are getting hit particularly hard. DVDs, Flat screen TVs, and digital camcorders are not exactly recession-proof.

Consumers are pursuing media and technology both offline and online.  Consumers are increasingly getting their media from sites like Netflix, Pandora, Hulu, YouTube, and file-sharing sites, all for little-to-no money.  Netflix is even feeling confident enough to raise their rates, splitting streaming-and-mail subscription into a streaming-only and a mail-only subscription so that if the user wants to keep the same services they will have to pay 60 percent more than they currently do.

When consumers buy gadgets they are turning to online retailers like Amazon or Newegg, with cheap promotional deals.  The few consumers that can afford to buy high-end gadgets in stores have been flocking into Apple stores seeking the newest iPad or iPhone.  

But Best Buy’s troubles are not likely to abate with the recession.  Consumers are becoming increasingly resourceful and finding cheaper ways to acquire media and technology and it is unlikely that they will turn back from this path once the economy gets better.  Agile companies that are meeting consumer needs online will continue to experience the best growth.

Best Buy is responding to this change in the market by embracing it.  In the company’s recent announcements, Best Buy seems to be actively trying to mimic its more flexible competitors.  Best Buy is attempting to reduce its retail space by 20 percent while increasing the goods it offers on its online store.  To reduce its retail space, Best Buy is renting out some of its square footage to stores like Sephora and Trader Joe’s in an effort to create a mini-mall atmosphere inside of its big spaces.  In the future the company is looking to open fewer big box locations and more small Best Buy Mobile locations.

Best Buy is wise to see the changes coming and try and embrace them, but will it be able to adapt quickly enough?  Primarily-online retailers like Amazon already have the jump on Best Buy.  Online retailers have been enjoying a lead on in-store retailers for several reasons:

1. Since stock is shared across numerous warehouses and distributors, it is easy for online stores to boast large selections and to simultaneously keep items in stock.

2. It is much more efficient—faster, less expensive, has more of an impact—to change the banner and featured products on a store’s web page than it is to change all the posters and promotional materials of an in-store campaign.  So online stores can respond much more quickly to consumer trends, capitalising on what is hot when it is hot.

3. Online order processing removes the lag time between when a product is removed from the shelves and when that sale registers with the company.  Online stores can keep an accurate real-time inventory, while traditional stores cannot.

4. Online companies get to collect more consumer data for free.  They tend to know the name, address, and spending record of their buyers more often than traditional stores do.

5. Retailers that have a well-integrated online store are more convenient for consumers than those that do not.  Consumers want to be able to start an order online and finish it in-store without having a disconnect.

Because of the immense advantages that online stores possess, brick-and-mortar stores will only be able to compete if they take other steps to mimic the efficiency of online stores.  Many companies are turning to fulfillment services to increase the speed and efficiency of their order fulfillment and delivery. 

Companies also approximate the data collection advantages of online stores when they have member cards or credit cards that will track customer purchases.  Digital Asset Management lets stores keep better track of their inventory in their real stores.  If Best Buy hopes to compete with the agility of online stores, expect the company to also take measures like these so that they can respond more intelligently to trends in real time.