11 December 2012

Best Buy & Shopping

Newsweek Magazine | Megan McArdle | The Future of Shopping: Get set for luxury to win the battle for the brick-and-mortar marketplace.

“Clearly unsatisfactory” is what Best Buy CEO Hubert Joly called the company’s third-quarter earnings. It’s a droll bit of understatement—so French!—when words like “plunge” and “dismal” more accurately capture the numbers that the company reported on Nov. 20. Sales were $12.1 billion in the third quarter of 2011; a year later, that number had shrunk to $10.7 billion, with net income working out to just 3 cents a share. Five years ago, in December 2007, a share of Best Buy was worth more than $50; today the company is trading just under $13. This may be some sort of record—from profit powerhouse to basket case in under five years.
Like I was saying yesterday about diamonds, it's easy to say that the advantage of physical retailers is that they can provide "service," but it's not clear to me that having an actual salesman around providing "service" is actually that much benefit to consumers. It certainly can be, but I wouldn't jump to list that in the "pro" column without a lot of consideration.

This is an actual service:
[Best Buy] is also undertaking extensive renovations on remaining stores to refocus them around personal service—the one thing that Amazon can’t deliver via UPS. “With things like home appliances, people are going to want the things we offer, for example, the delivery to service and install. Or Geek Squad: thousands of people sitting in homes, doing installations, across all the platforms,” says Stephen Gillett, the digital wizard who helped lead a turnaround at Starbucks before joining Best Buy eight months ago.
But too often I hear people say physical stores can provide customers with service without really laying out what that's going to be. I don't know about you, but my experience with the employees at places like Best Buy is that they're usually disorganized, sullen and uninformed. They're not as bad as the employees at Staples, but they're not particularly pleasant to interact with or helpful. Perhaps this is the introverted geek in me speaking, but at a lot of retail locations I would pay extra not to deal with employees.  If I was in charge of a big box retailer I would be really hesitant about staking out a strategy that revolved around those people as linch-pin assets.

Another thing to consider: if "service" really does become a competitive advantage for traditional retail chains, there's not much reason to believe online chains couldn't snatch that away from them. No advantage is permanent, after all. (See: "What Killed Michael Porter's Monitor Group? The One Force That Really Matters".) Didn't Geek Squad start out as an online operation? Is there some reason Amazon couldn't staff up it's own teams of in-home installation & repair experts?

If you're Best Buy you need to invest in a couple of people in every location who are helpful and knowledgable enough to help people make good decisions about buying a TV. If you're New Egg, you only need a few dozen people who can do that in the whole country. They don't need a home stereo expert waiting around in every single store waiting for someone to come in looking for advice and education about BlueRay players. I would not simply assume that online retailers won't be able scale "service" the same way they have scaled up everything else.

One example: my experience with Land's End customer service over the internet and phone has been exemplary. Really first rate stuff. My experience with them in stores has been maybe 3/10 stars. I can get far better service not in person than I can in person, and that's within the same company.

(Sidenote:
“Home Depot and Lowe’s will survive, because people who go into those stores need a lot of help,” he says. So do many electronics consumers, and DubĂ© believes that the best way to win them back is to provide expert in-store service.
I'll believe most of the people who go into a hardware store need help. But I'd be surprised if most of the revenue comes from people who need much help. If someone could siphon off all the small contractors and tradesmen from Home Depot & Lowes I think those stores would end up looking a lot different.

I'm getting into speculation now, but I'd think number of builders who would be comfortable ordering most of their tools & supplies from an online retailer isn't going to be shrinking in the next twenty years. And it doesn't just have to be an online catalog-with-delivery. There's a lot of possibility for new business models like "tools-as-a-service.")
But upskilling the workforce means swimming against the trend for retailers, who have been steadily moving to more part-time workers on lower wages and shorter shifts. Sophisticated software now allows managers to project store traffic flows based on time of day, holidays, even the weather. Workers plug in the hours that they’re available, and the computer spits out a schedule that uses them only when they’re most needed, which can shave labor costs by 4 or 5 percent.

In a business with thin margins and high labor costs, this can mean a big improvement in the bottom line. But it’s hell on workers, who complain that they have to make themselves available for 60 hours in order to get 20—while never knowing which 20. [...] This is not the way to attract a high-end labor force that can sell your customers on service. But giving up those savings means that the price gap between brick-and-mortar and online stores grows wider. And the pressure to use shorter shifts will get even more intense next year when the Affordable Care Act begins to require that companies buy health insurance for any employee working more than 30 hours a week or else pay a stiff penalty.
Again, this works in New Egg's favor. They can hire someone to sit in front of a webcam 40 hours a week and answer customers questions from anywhere in the world rather than trying to guess when to staff experts for a couple of hours in a thousand places. (It's also easier to predict how many people you'll need, since you're trying to estimate a single Poisson process using lots of data rather than an independent process for every single retail location using much thinner samples.)

Is Grandma going to be comfortable using a webcam to consult with an expert before getting a new microwave? Maybe not. But her kids may be. And her grandkids almost certainly are.

And doing so is only going to get easier. If big box stores got into this mess in the first place because people got more comfortable doing things online and using smart phones and gadgets, then I'd say they'd be pretty unwise to adopt a solution that counts on people not being comfortable doing things online and using gadgets to shop.

7 comments:

  1. You have to figure out a way to either charge for your expertise, or prevent the customer from leaving and purchasing elsewhere at a lower priced outlet (online or onground).

    All too often when providing information to establish your expertise, you give enough away for the prospect to go elsewhere for less.

    On your side note: Tools as a Service. That is what I might call a plumber and an electrician, etc. HD and Lowe's keep the small contractor as a customer because they are very well priced on sheet goods and dimensional lumber (the heavy and large stuff, they will have a store close to your job). But if you know what you're doing, you always have to supplement your trip to HD/Lowe's with a trip to a specialty outlet.

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    1. That's a good point about the advantage of keeping bulk good near the job.

      What I had in mind for "Tools as a Service" was something a little different. It's not my idea; I heard about it about a year or two ago and now can't figure out where.

      The idea is that right now a construction company owns their own... I dunno... masonry saws? A lot of the time they aren't being used. Sometimes they're broken. Sometimes they're at the wrong job site. Occasionally they're left behind, or stolen, or whatever.

      So instead of owning your own masonry saws, you sign a contract with a tool provider which gives you access to a saw on so many days. They take care of keeping track of it, maintaining it, insuring it, upgrading it, replacing it, whatever. IIRC it's sort of a combination of a time share, a lease, and a maintenance contract.

      I think this is already happening for big ticket tools, and for things like airplane engines as well. I'm betting that as John Q. Contractor gets more comfortable messing around with his iPhone is might be profitable to apply this to more routine items like the masonry saw and perhaps less bulky supplies as well.

      Think of how much waste there is in construction because the tiles showed up three days late, or there were twice as many as you needed, or 90% of the order was on time, but then you needed to wait a week for the other 10%. If there was a way to apply internet-enabled logistics to ensuring you've got the right number of tiles at the right place at the right time then you could make big productivity improvements.

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    2. I've been doing residential remodeling off and on for the last 10 years. I've specialized in high end kitchen remodels. Your idea is sound, but there is a lot to overcome. The trade guys (the plumbers and electricians) are way behind on this stuff. Most of them don't use e-mail for work. Everything is done by phone.

      I could go on and on.

      I think about this stuff daily. I know I'm not very smart, but if I could only...

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    3. I'm not at all surprised that these guys are way behind on embracing technology, and I totally agree that there are hurdles to overcome. But eventually I think the time will come for this.

      I have extended family members who work for their fathers' trade and building companies. The fathers don't even have email addresses, but the sons never put their iPhones down. Right now they're only using them to check fantasy football scores, but a decade from now they could be using them to order parts or track inventory.

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  2. I have recently been doing some boat repairs that require me to purchase a very unusual tool. After 6 months, I am still unsure about the size, but I have it narrowed down. I live in France. When I look for the tool here, it is only available to me, even over the internet, from the UK for about $80. When I look on-line via Google US, I can find it for about $10. I have ordered one and received it at an address in the US, and determined I want a slightly different size, so I am about to order another one slightly smaller, for $10 more. I will then have 2 of them for $20, instead of the $80 I would pay here. There is nothing that any brick-and-mortar store here in Europe can help me with this, and the prices are outrageous. So, I buy in the US, and when I make my periodic trips back there I pick it up. (FYI, shipping from the US would probably triple the price, at least)

    I buy a lot of stuff like this, where I know what I want, and can see it on-line. I can only think of one case where this was not true, because the specs for the device did not list an important dimension, but that was unusual.

    I think Lowes and HD will continue to exist because it is not really feasible to have drywall or lumber shipped by UPS, and the prices of stuff like most electrical and plumbing parts is still competitive. They will continue to sell commodities, but will gradually shift away from specialized items with low turnover. And, when you are doing a project and the kitchen is torn apart and your in-laws are arriving in 3 hours, you cannot afford to buy something on-line - you need to visit HD RIGHT NOW, or SWMBO will be verrrrrry cross...

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  3. Agreed. I hadn't really considered the impact of bulk goods. But how much of their business is that? The margins on that commodity material must be pretty low, right? What proportion of revenue are they getting from "holy shit I need this stuff in an hour before my in-laws show up"?

    I'm not predicting they'll get wiped out like Tower Records, but I do think things will change enough that they will have to massively re-organize.

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  4. One last observation. Large contractors don't usually buy stuff from HD. They have specialty suppliers who deliver enough drywall for an office building in their own trucks, or thru a specialty shipper. Same for lumber or bricks or mortar. Smaller contractors often have accounts at HD or Lowes, and they also have stuff delivered to them. They can just call a number, read off their order, and it arrives on site. I seem to remember that this sort of relationship was in effect even back in the 60s(!), when I did my first house renovation work(!). So,the internet now just changes the mechanics of the process, from calling on a phone, to using a terminal/phone.

    Construction materials for professionals have been using the internet model for quite a while. For individual DIYers, not so much, and since many/most of them want to actually touch the stuff before they buy, the stores will not go away. I think there has already been a change in stocking, because I remember old hardware stores that had everything you might need, but you needed to ask, so that someone could remember where it was. HD wants to cut down on the service staff, but not too much.

    Last time I was in the US, I needed to buy some parts for a fan. I had to take SWMBO to make sure that I bought something aesthetically acceptable, and I had to open the box to make sure that it would fit. I can't do either on-line.

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