Markets

Best Buy Reorganizes Stores to Face Wal-Mart, Costco and the Mass Market Threat

By Mike Duff

Updated on: April 17, 2009 / 12:08 PM EDT / MoneyWatch

Trying to determine just what Best Buy will accomplish with its store reorganization is difficult. The company is reluctant to definitively explain its actions and goals, substituting the mantra: We want to get employees out in front of customers. Now, certainly there it truth in that, but, in practice, its the effects look like this:

Best Buy, with the demise of Circuit City, wants to make itself a more effective competitor versus the big mass market and Internet retailers it has identified as current and future rivals, making stores more cost effective in terms of labor and more differentiated by adding services.
The company is determined to reduce store management devoted to behind-the-scenes business operations and put personnel with supervisory experience on the sales floor in support of or as -- in what would essentially be a demotion -- hourly personnel engaged in customer service.
It wants to eliminate wage tiers on the sales floor to simplify how it accounts for labor costs over the store base, which should make running stores easier, particularly those stores losing management positions.

If Best Buy explanations about its store reorganization goals are generally vague, company spokesperson Justin Barber insisted that the initiative isn't primarily about cutting labor costs, as only about one in three stores is going to lose a management position, and that it is based on store-level input about how to improve customer service.

Best Buy faces increasingly intense competition and shrinking margins as the major products it carries such as flat-panel televisions rapidly go from being pricey specialty wares on introduction to commodities under the influence of the mass-market retailers such as Wal-Mart and Costco. As price rather than loyalty drives consumers, Best Buy has to discount products as the cutting edge enthusiast who will pay to own the bells-and-whistles laden latest thing gives way in short order to the bargain hunter who knows prices will fall and is willing to compromise on features to find savings.

Yet, Best Buy, as the last man standing among major specialty electronics chains, can jump on particular opportunities in products and services, as it has with its Magnolia home theater operation and its Geek Squad computer service, using effectively trained employees to provide support for the many customers who need help in dealing with complex, often intimidating high-tech items.

So, Best Buy requires competent employees who are directly engaged with customers, but, as the company demonstrated a couple of months ago with headquarters layoffs, it also needs to cut its costs to become more competitive with the largely self-service electronics operations offered by what are now its primary competitors.

Best Buy still offers hourly workers relatively high wages and the opportunity to advance up the ranks but may face disgruntlement and defections as the recession gives way and the possibility of real corporate growth arises. Circuit City made a big move to cut labor costs a couple of years ago and failed to halt its decline. By trying to become more and less like its mass-market competition at the same time, Best Buy will face a reckoning as it weighs what the store reorganization costs in labor proficiency and enthusiasm and gains in efficiency and cost savings.