The Creative Destruction of the Internet may put Best Buy Stores out of Business

Posted by PITHOCRATES - August 11th, 2012

Week in Review

Best Buy and Circuit City were once fierce competitors in retail electronics.  Big box stores that carried an amazing range of consumer goods from televisions to car stereos to cameras to computers to refrigerators.  Their marketing plan?  Trade volume for margin.  They sold at low prices with low profit margins that mom and pop stores could not match and remain profitable.  But because of their high volume Best Buy and Circuit City could make a profit with those small margins.  Which they padded with those extended warranties.  It was a successful business model.  For awhile.  Circuit City is no longer with us.  And now Best Buy is struggling (see Best Buy founder proposes taking retailer private by Dhanya Skariachan and Nadia Damouni posted 8/6/2012 on Reuters).

Best Buy Co Inc (BBY.N) founder Richard Schulze on Monday made a bid to take the struggling U.S. electronics retailer private just months after being forced out as chairman.

If Schulze succeeds, it could result in the world’s biggest leveraged buyout of the year. But early reaction suggests he faces an uphill battle in taking his once wildly successful company in a new direction…

Best Buy has been closing stores, cutting jobs and trying out a new store format to improve business. It has faced criticism for being too slow to react to a changing retail world, where many use Best Buy as a “showroom” to try out gadgets and then buy them online or elsewhere for less.

It takes money to maintain inventory.  And every Best Buy store has inventory.  It’s a huge cost.  But it also gives them purchasing power.  This is why the mom and pop stores went bye-bye.  With their low sales volume they had small purchasing power.  So the little they bought came at higher unit costs than Best Buy’s.  Which meant they had to charge higher prices to cover those costs.  And now it’s happening again.  Only it’s online sales that are squeezing the profits out of Best Buy.  From suppliers that have no retail stores.  And a more consolidated inventory.  With no sales force or cashiers to pay.  They have high sales volume and low operating costs.  So now Best Buy is getting a taste of what it was like for the mom and pop stores.

We call this creative destruction.  And it’s a good thing in capitalism.  Everyone agrees.  Having a cell phone is better than having a pager that displays a phone number to call.  Then finding a public telephone to make that call from.  Cell phones have hurt the pager industry.  Just as digital cameras have hurt the instant camera industry.  Just like the MP3 player has hurt the compact disc industry.  Which hurt the cassette tape business.  Which hurt the 8-track tape business.  And now the Internet is hurting the big box retail industry.  We call this progress.  And it’s what the people want.  Because it’s the people driving this change.  They’re the ones buying the cell phones, digital cameras, MP3 players, compact discs and cassette tapes.  And it’s the people who are now shopping online.

New technology is always replacing old technology.  When it does it destroys a lot of jobs.  But it also creates a lot of new jobs.  Yes, it’s sad to see some of our favorite businesses go out of business.  But they only go out of business because there is something better out there attracting our business away from those old businesses.  And the day we stop wanting this is the day we give up our smartphones.  Or whatever will have replaced our smartphones in the future.

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