Friday, March 4, 2011

Is Best Buy (BBY) Becoming a Commodity Business?

Any business that competes on price alone becomes what is called a commodity, meaning there is no differentiation between them and their competitors, and the low price wins. That increasingly looks like where Best Buy (NYSE:BBY) is headed, which could be extremely detrimental to them.

That's not to say a company can't compete on selection and price; look at Wal-Mart (NYSE:WMT). They generate earnings by turning over their inventory far more times than competitors do, allowing them to compete on price while keeping a strong selection.

Taking into consideration the main rival of Best Buy, Circuit City, closed up shop several years ago, and they're still losing market share, says they could be in trouble.

No matter how much selection you have in a physical store, competitors like Amazon.com (NASDAQ:AMZN) are going to have more, even if you have some online presence.

Even price is hard to compete on because of the ability of shoppers to price check even while they're in a physical store to see if the prices are the best they can get.

The problem for Best Buy is they've shifted to a business model that is more price oriented, and even with its ability to offer hot products on the day of their release, and to provide the tech help they're known for, the company is going to struggle to keep market share from eroding for.

Best Buy probably isn't going to go away any time soon, if ever, as they still have 33 percent share of consumer electronics in the U.S., but they will have to come up with something other than price to differentiate or they're going to shrink a lot more before they finally stabilize.

Best Buy was trading at $32.76, down $0.27, or 0.82 percent, as of 11:35 AM EST.

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