Is Wal-Mart pulling a Circuit City on Best Buy?
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Is Wal-Mart pulling a Circuit City on Best Buy? Two years ago, the mega-retailer’s electronics push helped send Circuit City into bankruptcy and eventual liquidation. Best Buy thrived for a time on its rival’s misfortunes. But its own falling same-store sales suggest it may be the next weak link in the retail food chain.
Sales fell 3 percent in the quarter compared to the same period last year. Yet domestic same-store sales fell 5 percent. The company said TVs, laptops and video games did particularly poorly. It could be that many wealthier consumers have recently stocked up on such higher-end devices, so the sector is missing out on healthy holiday spending. U.S. spending on retail and food rose an estimated 7.6 percent in November in seasonally adjusted terms. Sales at electronic and appliance stores rose just 0.9 percent.
But the retailer admitted price wars are doing particular damage to its business. It pinned most of its shortfall on discount retailers selling no-name brands for cheap. That should be read as Wal-Mart, which has been making a concerted effort to increase electronics sales, not least to get shoppers into its giant stores where it can sell them a broader array of products. Best Buy estimates its market share fell by more than 1 percent.
Internet rivals are also playing a part. Best Buy’s online sales in the quarter grew 7 percent compared to last year. Amazon’s North American “electronics and other general merchandise” sales is grew 80 percent last quarter. Sure, the figures aren’t directly comparable. But it’s notable that Best Buy’s online efforts are growing slower than retail sales as a whole, while Amazon is growing at an incredibly robust pace.
While this may be just a one-quarter hiccup, investors should be wary. Wal-Mart’s scale means it can continue to offer lower prices. Best Buy claims it has an edge with its more knowledgeable sales staff. That’s not always apparent to shoppers. If the company has to improve its efforts in this regard, by hiring more sales help, margins may be pressured. Best Buy’s stock may appear reasonably cheap at nine times estimated earnings for next year. But Wal-Mart’s nibbling on its business may just presage a bigger bite to come.