Best Buy essentially sells 3 things: hardware, media, and expertise
The first business is hardware: selling LCD TVs, Blu-Ray Players, Laptops, and cellphones
In the hardware business, there’s the Cost of buying the hardware from manufacturers and the operational costs of distributing that hardware across stores, and then the cost of operating the stores including the overhead, the people, and then of course the costs of managing a customer support center and finance / HR / marketing.
Amazon has all of these same costs, except that it has no stores, no overhead of operating and staffing the store. Which means it can pass on these savings to consumers, and deliver a price that is consistently 10% cheaper on laptops, TVs, Blu-Ray players, etc. Apparently Best Buy’s profits plummeted 29% – probably because of deep discounting to bring customers in and compete on price against Amazon.
The second business is media: selling Blu-Ray DVDs
As we move to digital distribution models for all of these things, this business is just going to move entirely online. Amazon now has their own online store selling digital music and movies that competes with iTunes, as well as an online movie streaming service that competes with Netflix, so in the medium term and the long term, as this business moves to online distribution, they have made the right investments. BestBuy has not. They are going to see this business shrink or disappear altogether.
As Americans replace their cars and home stereo systems with systems that support wireless streaming off mobile devices, the demand for physical music media will disappear. And movies, which are increasingly available via streaming services, can just as easily be purchased on BluRay online, rather than going down to your local Best Buy.
The final business is expertise.
Best Buy has tried to differentiate with its Geek Squad of highly knowledgeable staff who are domain experts. In general, I personally just assume most people are idiots, and so regardless of where I make my purchase, I read 30+ reviews on Amazon so I can get 30 different opinions, in the hopes that 1 out of 30 people will say something useful, that I can then go research further, and then form my own opinion about a product.
Now here are some ways that Best Buy can differentiate, add value, and survive:
First, I can see expertise as being a way for Best Buy to differentiate. People are influenced multiple factors:
expert product reviewers
Amazon is in a great position because it has become, for people like me, the starting point for reading online reviews. But Amazon has done a poor job of connecting that back to expert reviews and a surprisingly poor job of connecting that to your Friends’ purchases and likes via Facebook. This is a huge opportunity for Best Buy. Companies like sociable labs are able to show an online shopper what brands their friends like and what products their friends have bought in the past. The fact that Amazon hasn’t done this boggles my mind, so it’s a huge opportunity for Best Buy to get here first.
Second, Local/Mobile is both a threat and an opportunity for Best Buy. It is a threat, because Amazon is – very smartly – using this as an opportunity to undercut Best Buy at the point of purchase – “scan the barcode and see if we’re cheaper” – and has turned Best Buy into a showroom for people to check out products before purchasing online. However Local is also an opportunity. Best Buy already offers free-shipping if you pick-up in-store. Local is an opportunity for Best Buy because you can use “get it today” instead of waiting for Amazon’s “super saver shipping in 5-10 business days.” Moreover, local becomes an asset when something breaks. What if Best Buy said they will offer 1 month of free customer support from Geek Squad – just come back into the store and we’ll answer all your questions – and then beyond 1 month you can buy one of our protection plans (a high-margin upsell at point-of-purchase that they probably would never do-away-with). I know my dad would be willing to chose Best Buy (rather than Amazon) if he knew he could always come-back and get questions answered by a real human being.
Third, Add value in Social Media
Geek Squad has also been a differentiator in social media – where Amazon is surprisingly inept. Imagine if someone from Geek Squad knew to send you a message 2-3 days after your purchase to see if you had any follow-up questions after installing your new Blu-Ray player – 5 minutes on the phone with Geek Squad to help me figure out how to set up that iPod dock or letting me know about an interesting TV guide companion app for my phone might really create some loyalty. And you have thousands of Geek Squad staffers in-store – what if the message was coming from a real Geek Squad member who works at the store I bought from – and I can go back to him – not whoever is there – but him –
Fourth, Move from products to services
Geek Squad could probably grow its services. Tune-ups for my phone and ipad, integration with manufacturers customer support, training seminars to make you a power-user on productivity apps like Outlook, ipad apps, or a photography class for DSLR cameras. Maybe even events like an Angry Birds or Wii Tennis tournament. Maybe a midnight party for the release of the Wii 2 or the newest Xbox game. Barnes and Nobles and Apple are both known for the events they do on topics like how to airbrush photos or parties around the launch of the latest Harry Potter book.
Fifth, Add value to shopping itself
Adding value to shopping itself is something that’s really hot right now, but is something that’s really challenging to do well. A lot of startups are working on mobile shopping scenarios around price comparison and rewards. But there are other value-drivers. A mobile companion that lets you get more info on any product. Mobile payments. Feature-comparison chart that I can build dynamically by scanning barcodes. Another idea might be a bundle-builder – something that gives me a deal when I add some monster cables and a DVD to my blu-ray player purchase, along with a coupon to laz-z-boy for a new recliner.
Ultimately, Best Buy probably can’t afford to compete with Amazon on price alone – their model simply has higher costs because they’re operating physical stores. The only alternative is to add some value at the store itself.