The announcement of Best Buy's (NYSE:BBY) founder Richard Schulze's offer to purchase the struggling retailer has been met with much skepticism, and for good reason. BBY has burdened themselves with large and inefficient stores that have precipitated the collapse of several big box retailers in the past.
The brick and mortar business model is broken and cannot be fixed. Retailers that do not sell perishable goods simply cannot compete with their online competition. With the ease and cost effectiveness of online shopping, and not having the expense (and headaches) of operating large stores, online retailers have a competitive advantage that is insurmountable.
Perhaps Mr. Schulze should do some research on the fate of the predecessors to Best Buy, like Comp USA and Circuit City. Both companies operated gargantuan stores and flourished for a bit, but were eventually forced into bankruptcy and liquidation.
Along with large stores come rent, employees expenses, huge overhead costs, and long-term commitments in the form of leases. It is these long-term leases that can be the most cumbersome costs to overcome. BBY expanded at or near the top of the commercial real estate boom in this country and there is no turning back. They are obligated to honor their leases unless they go into bankruptcy, which may be a distinct possibility.
Besides their operational and overhead expenses, BBY does not offer nearly the same variety of products that online retailers offer. For example, I needed a new headset for my computer this week and decided to give BBY an opportunity to have a satisfied customer. After two failed attempts to purchase a suitable headset from their limited offerings, I signed on to Amazon.com (NASDAQ:AMZN) and in a matter of minutes found the ideal headset, and had it within two days.
With Red-tag, Shop Savvy, or Amazon Price Check, customers can stroll into BBY, peruse their offerings and immediately find the same product at a cheaper price online. As a result, BBY's large and expensive stores simply serve as showrooms for online retailers. And for those who expressed the notion that Amazon or someone else may purchase BBY, that notion is ridiculous. Who would want to purchase a company with steadily declining and volatile earnings as well as an unsustainable infrastructure?
With the vague details revealed about the financing for this deal, more doubt is cast upon Schulze's proposal. Could this be a Carl Icahn type of proposal, where Schulze is simply trying to increase the value of his BBY holdings with no real intentions of acquiring the company? Perhaps some insiders would like to sell their stock before another, and perhaps final, leg down. It would be interesting to find out if any insiders sold stock when the stock gapped up on Monday morning. Since the opening print on Monday, the stock has fallen straight down and has come nowhere near the proposed $24-26 buyout offer. Obviously, Wall Street is as skeptical of this deal happening as I am.
Unless the proponents of this deal have a way to get out of ALL of their current leases or completely re-invent themselves, which is highly unlikely, it is doomed to failure. The brick and mortar business model for retailers that face stiff online competition is dead. Perhaps BBY should consider subleasing their stores to Amazon to use as warehouses for all of the products they sell to visitors of BBY stores. It would certainly be better than following the Circuit City or Comp USA alternative.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.