Big news: Excessive price cuts hurt profitability

These are a couple relatively old items that have been sitting around because I was feeling lazy over the holidays.

It appears that the huge price cuts Best Buy and Circuit City took for Black Friday had a negative impact on their bottom lines. Imagine that!

Circuit City took the worst hit, because they are the weaker of the pair:

Circuit City Stores ... lost money during the three months ended Nov. 30. Investors already knew that the consumer electronics retailer from Richmond, Va. has been battling cut-throat competition, but they had expected at least a little profit.

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money....

But Best Buy was hurt, too:

The company’s gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent to $186 million for the three-month period, which included the first three days of the Thanksgiving holiday.

Best Buy justified their moves with the market share defense:

However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.

Which has some validity, of course. Particularly if Best Buy is playing a game of chicken with Circuit City -- having deeper pockets and being overall stronger, they can afford to play the price-cut game harder and longer. But there are two problems with the game, as I see it. One is that there's another company that can play it better (and we all know who it is), and the other is that consumers' expectations are changed by such events. Now that we've seen that laptops can be sold for $250 and hi-def TVs for $600, we're not likely to flock into stores to pay triple those prices.

Black Friday ads

Want to check out what's going to be on sale the day after Thanksgiving? No need to wait, just go to BlackFriday. Laptops for $499.99! A two-gig jump drive for $19.99! Hurry -- supplies limited!!

Best Buy had their lawyers threaten a lawsuit to get their ad removed, but I suspect this wave is unstoppable -- there are several other such sites. And ultimately, Black Friday may recede in importance. With Wal-Mart beginning their price-cutting in October, it appears that just as the Christmas shopping season is starting earlier and earlier, so will the price-cutting season.

Someday the after-Christmas sales will start on December 1.

Best Buy partners with SanDisk and Real

Best Buy will be marketing a new line of SanDisk MP3 players together with subscriptions to Real Networks' download service.

The company said it would use Real's Rhapsody subscription service, hand-in-hand with a new line of SanDisk Sansa digital music players, much in the way that iPods work with iTunes.

"The customer expects everything to work together," said Jennifer Schaidler, vice president of music for Best Buy.

The service and players will both be available starting October 15 and will be heavily supported in its more than 840 nationwide stores.

The article doesn't say so, but it sounds like an exclusive deal.

Best Buy said it will throw its promotional weight behind the new service, offering buyers of the Sansa a free two-month subscription with up to 30 hours of preloaded music already on the player.

It will be interesting to see if this three-way partnership can cut into iTunes' 88% market share or iPod's 60%.

Budget axe falls at Best Buy

Best Buy is out to cut spending -- $300 million of it.

The belt-tightening is seen as a reaction to Wall Street criticism that Best Buy hasn't done enough to rein in costs. In December, the company disclosed that its sales and administrative expenses rose 22 percent in the third quarter -- more than double the company's overall sales increase. The news caused Best Buy's stock to fall 12 percent in a single day.

Best Buy has been doing a lot of talking about customizing its stores to certain demo/psychographic customer profiles (Jill the soccer mom, Barry the affluent professional, etc). It seems inevitable that such customization would result in higher costs -- did nobody foresee this? And aren't $300 million in cuts going to impact service at a store that is trying to differentiate itself by being "customer-centric"? Not that customer-centricity ever got me a quick answer to my questions at Best Buy.

Pursuing a strategy for a short time and then quickly changing to another strategy is usually a poor idea.

Tuesday quick notes

Federated settled with New York, paying $725,000 to resolve claims of false advertising and sales promotion. "Kaufmann's ... used small print in ads to exclude many items from sales, featured photos of items not eligible for sales, and used misleading in-store signage. It also created false senses of urgency to buy with such promotions as "Biggest Sale of the Year" and "One Day Only Super Sale," only to retain lower prices after the sales were supposed to end..."

Best Buy is reported to be looking to buy a piece of Five Star, a Chinese consumer electronics retailer. Best Buy had said they were entering China this year, and it appears they want to buy into Five Star as a way of creating a strategic alliance.

Hain is rolling out an organic baby formula product as part of its Earth's Best line of infant and children's foods. This is in line with the health trend we commented on here.

The numbers on the wall

This blog has the details on what the numbers on the wall at Best Buy mean. Apparently they maintain a scoreboard for shrinkage, warranty upsells, and so on.

Best Buy continuing to cut back on rebates

Best Buy announced today that it is eliminating rebates on laptops and introducing an on-line rebate submission process. In April last year Best Buy announced they would be phasing out rebates. The corporate press release said:

"Best Buy is taking a leadership position within the retail industry with our plans to eliminate mail-in rebates," said Ron Boire, executive vice president and global merchandise manager, Best Buy. "Our customers told us they hate mail-in rebate programs. As a result, we're working as a company and partnering with our vendors to find new solutions to give our customers a better shopping experience, while remaining competitive on pricing."

Best Buy saw the light on rebates right after the FTC nailed CompUSA.