VARs: Best Buy's Missteps Underscore Solutions Model

Best Buy's first-quarter misstep on Wall Street underscores the value of a solutions-based model at a time when the big-box retailer is scrambling to move beyond its products-only heritage with a channel program of its own, solution providers said.

Just a couple of weeks after stating its desire to work with solution providers, Best Buy earned only 39 cents per share in its first fiscal quarter, two cents per share less than analysts' estimates and eight cents per share less than the same period last year. The Minneapolis-based company also lowered its fiscal 2008 earnings forecast.

Best Buy's stock fell 5.5 percent to $45.38 per share, down $2.63, in Tuesday afternoon trading. The earnings won't accelerate or slow down the development of a channel partner program in which services leads are passed on to solution providers, said a Best Buy spokesperson.

Solution providers said the quicker that Best Buy can differentiate itself -- through a channel program or other means -- the more successful it will be.

"From a 100,000-foot view to the channel, anything that Best Buy can do, be it in the IT side, or the home theatre side, to increase their competitive advantage is obviously going to help. Their channel strategy is meant to do exactly that," said Zach Schuler, president and CEO at Cal Net Technology Group, Northridge, Calif. "If you look at least at the surface level, they're attempting to embrace the channel. Circuit City's not doing that. CompUSA's not doing that. Wal-Mart is not doing that. I think at the end of the day, that's why Best Buy will remain a successful company."

Best Buy's first-quarter results stem from the fact that it has a products-focused heritage, said Joe Balsarotti, president and CEO of Software to Go, a Clayton, Mo.-based solution provider.

"They're margins have eroded and they can't sell enough to keep Wall Street happy. They're the true commodity business," Balsarotti said. "Best Buy's numbers have been because of plasmas and LCD TVs for a long time. But the bottom dropped out of that market last holiday season. If you've got a hot commodity, which you're making money on, your mistakes get hidden. Now they've got no cover."

As an independent solution provider, Balsarotti isn't exactly rooting for Best Buy to rush into the services game to compete more squarely against him for small business customers, but he said he and other solution providers will have to adjust their model accordingly.

"On some stuff, the Geek Squad is coming up to our level of pricing. That helps to establish what the going rate is," Balsarotti said. "I'm sure some kids probably do a good job there. But will you get one of those? You can't request a tech and your chance of getting the same tech again are small."

On a conference call with analysts following its earnings, Best Buy executives stressed the fact that its business model is changing.

"When you're on this call next time, you'll hear this organization at heart is connected to relationships and a services experience," said one executive. "It's a four-quarter game where we're just going into the first quarter."