August 14, 2014

Best Buy

One of the ways to understand what is happening to retail is to compare what I call "Indexed Sales" to sales gained under normal inflationary conditions.

Let's use Best Buy as an example. Their fiscal year, like many retailers, runs through the end of January. In other words, Fiscal 2014 concludes at the end of January 2014.

So, at the end of fiscal 2008 (through January 2008), Best Buy experienced seven consecutive years of comp store sales increases. That's hard to do, folks!

But the economy collapsed in Fiscal 2009 (year ending January 2009). Best Buy never recovered.

Now, when you look at small negative comps, you are lulled into a false sense of peace. "Our comps are averaging -2% over the past two years, that's not terrible".

I compare comps over time with what should have happened assuming 2.5% annual inflation. At the end of Fiscal 2008, Best Buy experienced Indexed Sales that were up 32.1% over the end of Fiscal 2001. Six years later, Best Buy has Indexed Sales that are up 21.0% over the end of Fiscal 2001. Meanwhile, had Best Buy posted comps roughly at the rate of inflation (2.5%) over the past six years, Indexed Sales would be 53.2% greater than at the end of Fiscal 2001.

In other words, the cumulative impact of six tepid years is a significant reduction in in-store demand ... 1.21/1.53 = a true 21% drop in sales vs. average inflation rates.

In six years, Best Buy dropped 21% vs. inflation.

Think what that means, in terms of the in-store experience. It means that there used to be 20 customers in the store at any one time ... now, there are 16 customers in the store.

Now, this isn't a Best Buy challenge ... this is an industry-wide challenge. Sales are tepid, but when compared against inflation, sales are awful. Yes, there are many retailers performing well. Pay attention to what those folks are doing.

We're getting close to Q4-2014. It's my opinion that retailers became proficient at e-commerce 3-4 years ago. Once retailers became proficient at e-commerce, the reasons to physically spend time going to a store disappeared. I don't think we're going to fix this problem by making stores more "digital" - we digitized the business and drove customers out of stores in the first place. Maybe the answer is to do the opposite ... to make the in-store experience so fantastic that the customer feels compelled to drive to the store.

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