The Wall Street Journal reports this morning on Best Buy founder and ex-Chairman Richard Schulze's plans for the struggling electronics retailer. As you probably know, Schulze hopes to take the company private. The paper reports that Schulze "envisions a turnaround plan for the electronics retailer that involves cutting prices to better compete against Amazon and other online retailers while ensuring that the in-store customer-service experience is as good as Apple's according to people familiar with the matter." Naturally, such a plan to lower prices, while not reducing costs aggressively, will shrink profit margins.
We need to know much more about this turnaround plan before being able to evaluate its prospects thoroughly. However, this initial news has not put investors and analysts at ease (understandably). The Wall Street Journal cites skepticism from Sanford Bernstein's retail analyst Colin McGranahan, who says, "As long as the top line is
slowing you have to cut costs at a similar rate or your cash flow starts
Beyond the simple math problem cited by McGranahan, the strategy may be flawed. Schulze appears to be trying to compete on price, while offering a premium experience a la Apple. However, we know that Apple achieves that premium experience by spending generously on branding, training, design, and the like. There is no free lunch. They make up for higher costs in some areas by charging premium prices. Schulze appears to want that premium experience, but if he doesn't get strong pricing, how will he generate decent profits? The risk here is clear. Could Best Buy end up stuck in the middle? They might not have the cost structure to compete with Amazon, nor the premium image and experience to compete effectively with Apple.