On July 6, 2012, various media outlets finally confirmed what Seeking Alpha readers have known since July 3, 2012 - Best Buy (BBY) has started to lay off its workforce. As first described here, experienced field service technicians are being cut by the company and whatever morale was left "just fell off a cliff." Of course, based on the number of Best Buy employees that have joined LinkedIn (LNKD) over the past three months, the company's formal layoff announcement probably confirmed what many "blue shirts" already knew
The latest move by Best Buy is extremely troubling because it shows that the company is replicating the bad decisions made by Circuit City in 2007, right before that company went belly up in 2009. It is almost as if Best Buy's current management team studied the transformation strategy outlined in Circuit City's annual reports from 2006 and 2007, in an attempt to replicate it. For context, in 2007 Circuit City's turnaround mantra (as described in its 2007 annual report) was "Its all about helping you." That turnaround catchphrase is remarkably similar with Best Buy's 2012 transformation tag line: "Making technology work for you."
Additionally, the following quote pretty much sums up Best Buy's new retail space transformation strategy:
It is a more efficient use of space. Typically, our stores are 35,000 square feet, and less than 18,000 of that is selling space. The new prototype is 20,000 and has 17,000 of selling space. This fundamentally changes the economics. We can get higher revenue per square foot, higher-margin dollars per square foot, and we can find additional sites that weren't necessarily available for our old box.
That quote could have come from a recent interview of George Mikan, but it did not. Instead, the quote was taken directly from a February 11, 2008, Wall Street Journal article of Phillip J. Schoonover, about one year before Circuit City imploded. That 2008 interview can be found here.
More articles with specific details showing the similarities between Best Buy and Circuit City will be forthcoming over the next few weeks. Readers who want to conduct there own due diligence can find Circuit City's annual reports from 2006 and 2007, here, and here. For readers who prefer a synopsis, those annual reports will show that Circuit City's cash position seemed relatively strong between 2004 through 2006 but started to decline in 2007 due to an "impairment charge" posted by the company due to overseas operations. If that sounds familiar, it is because many current advocates of Best Buy argue that Best Buy's poor numbers last year are distorted by "impairment charges" incurred by the company due to overseas operations. Those annual reports also show similarities in Circuit City's margins in 2004-2007 and Best Buy margins today (i.e. both were/are in the 22 to 25 percent range). Margin comparisons between the two companies back in 2007 can also be found here.
Rather than focus broadly on the similarities between the two companies, this article focuses solely on the layoffs announced by Best Buy last week and Circuit City's 2007 layoffs. It will also provide an analysis to explain why Best Buy's move today is worse than Circuit City's 2007 layoff decision.
Those Who Cannot Remember the Past are Condemned to Repeat It.
On March 28, 2007, Circuit City announced plans to layoff 3,400 store workers and to replace them with lower-paid new hires. Articles discussing those layoffs can be found here and here. The move by Circuit City in 2007 to layoff 8 percent of its workforce is arguably different from Best Buy's current decision to lay off 2,400 employees because a smaller percentage (1.4 percent) of the Best Buy's workforce is being cut. Remember though, those 3,400 Circuit City employees who were cut back in 2007, were let go in order to bring wages in line with economic conditions at that time. and were given an opportunity to re-apply for their old positions after a ten week "cooling off period." So while the Circuit City cuts were larger (both in numbers and percentage of workforce), the remainder of this article will explain why Best Buy's recent layoff announcement is so much worse for the company, and why it couldn't have come at a worse time.
Destruction of Trust Between Management and Workforce
First, Best Buy's decision to lay off workers comes about only one week after the company announced that it was giving $10 million in bonuses to four executives for doing nothing more than not leaving the company. An article describing those "continuity bonuses" can be found here. The layoff decision announcement also comes about one week after Apple (APPL) decided to give its retail employees a 25 percent pay raise.
The timing of the layoff announcement could not have been more poorly planned by the Best Buy management team. Unlike Circuit City's layoff decision, Best Buy is not able to justify its layoffs by arguing that it is bringing wages in line with economic conditions. The company already copied the Circuit City wage reduction move back in April of 2009, as described here. Those 2009 Best Buy wage cuts and the smaller 1000 person layoffs have resulted in the erosion of the "blue shirt" brand and the poor customer service that consumers now associate with Best Buy today. While the company has talked significantly about "training" its workforce to increase customer service, there is nothing that will kill a workforce's desire to deliver customer service to consumers faster than feeling as if they are being mistreated by corporate management.
Apple's recent decision to raise the pay of its retail workers shows that they understand this concept, as described here. It is a concept that has led to the success of other retailers like Costco (COST). Best Buy's decision to give continuity bonuses to senior executives to in order to simply keep them at their desks, while dumping their workforce, shows just how out of touch the current Best Buy management team currently is. Some may argue that the cuts are small and that Best Buy is only cutting non-productive workers. The problem here is that George Mikan failed to communicate such a message during the Best Buy Q1 earnings call or the most recent annual shareholder meeting. The failure to properly communicate the recent layoff announcement makes the entire workforce lose trust in senior management. The destruction of trust also means that the best and the brightest of Best Buy's workforce (i.e. those employees who are most qualified) have already put plans in motion to try to leave the company, as described here.
Destruction of Trust Between Best Buy and Consumers
Although the specific details of the Best Buy layoffs are still fuzzy, one thing we do know is that part of the Geek Squad extended repair service will be outsourced to third party companies (as described here). Conversations with actual Best Buy floor employees along with information passed on by Seeking Alpha members with connections to Best Buy, confirm that most rank and file employees don't see a future for the company, nevertheless any reasons to believe they have a future within it. If employees have no reason to help the customers who walk into the store, incentives for consumers to purchase products from the retailer diminish dramatically (as it has been over the past few years). While Best Buy management has assured consumers that the cuts to the Geek Squad extended repair service will only take place in certain regions, and will not apply across the board, the move gives Best Buy patrons even less reason to purchase the extended warranties that the company relies so heavily upon. Why buy a service plan or warranty from a company that has shown a willingness to outsource those responsibilities? Why not buy those same products, service plans, and warranties directly from the manufacturer's retail stores (e.g. Apple retail stores, Microsoft retail outlets, etc.), especially when there are valid concerns over whether Best Buy will even be around in three to five years? Also, and as discussed above, the layoffs are having a significant negative impact on Best Buy employee morale, which ultimately translates to poor customer service to the end consumer.
Ultimately, many pundits and analysts will probably debate whether Best Buy's decision to cut these jobs were good or bad for the company, just as they did with Circuit City's layoff decision back in 2007. Two articles, each taking a different perspective on the 2007 Circuit City layoffs can be found here and here. Hindsight being 20/20, readers know the outcome of how that scenario played out with Circuit City. There is little evidence to show that the future outcome of Best Buy's decision will be any different. At a minimum, the analysis above should help to show investors that they should be at least somewhat wary of Best Buy's future. Best Buy investors with long positions may want to hedge their portfolio's to protect against a potential impending implosion of the company. Best Buy investors with short positions may want to add to their current short positions based on the recent run-up in the stock price which is mainly attributed to speculation and rumors about a potential buy out offer that was supposed to come last week, but which never materialized.
Disclosure: I am short BBY.