Best Buy announces new cost reduction campaign

In an effort to bolster profitability, Best Buy announced this week it would close stores and trim its staff.

The electronics giant has struggled mightily over the past few years as it faced mounting competition from both brick-and-mortar and online rivals. The Financial Times reports Best Buy will shutter 50 big box stores in the U.S. and reduce its workforce by 400 through its latest cost reduction initiative.

Best Buy's market share has continued to erode as Amazon and Wal-Mart, among other retailers, continue to eat into sales. Best Buy said the business cost reduction campaign could save as much as $800 million by 2015. The electronics purveyor is experiencing difficulty driving sales at its U.S. outposts that are at least one year old, as sales fell 2.2 percent at such stores in its latest fiscal quarter.

Consumers have increasingly sought out bargains in the wake of the worst economic contraction in nearly a century. The fundamental shift in spending habits has left retailers such as Best Buy scratching their heads over how, exactly, they can lure shoppers without sacrificing profits. Low-cost retail chains like Target have slashed prices in an effort to draw consumers to their stores, but Best Buy has experienced only middling results with its own initiatives.

Best Buy is working to completely overhaul its own business model as it endeavors to convince jittery investors it is capable of surviving amid mounting competition and a retraction in consumer spending. The electronics purveyor is fighting a difficult battle, analysts said, as shoppers are routinely testing electronics at brick-and-mortar stores and subsequently purchasing them online at significantly cheaper prices.

Brian Dunn, Best Buy's chief executive, said this week the cost reduction campaign resulted from the company's slow expansion. He said company executives are scrutinizing spend management and supply chain management in their cost reduction initiatives, asserting such strategic changes would likely drive future profit gains.

"I'm not satisfied with the pace or degree of improvement in our performance and transformation, especially given the opportunities we have in the marketplace," he said.

However, investors were less enthusiastic about how successful the business cost reduction campaign will be. Shares of the company were down 7 percent in New York on Thursday following the announcement. Analysts were also skeptical, as they expressed disappointment with the company's projection that sales would fall between 2 and 4 percent over the next 12 months.

Best Buy has already begun a broad restructuring of its business operations in the United Kingdom and Europe, according to the FT. Best Buy has moved to decrease the size of its brick-and-mortar stores throughout Europe. Moreover, it has shifted its product offerings, as it works to attract a younger, wider customer base by increasing its lineup of mobile communications services and devices.

Independent retail analyst Stacey Wildlitz said Best Buy has struggled for such an extended period of time that it is unlikely its latest business cost reduction plans will actually improve efficiency and fuel an uptick in profits over the coming years. With online companies continuing to encroach on the company's traditional bread-and-butter market, Best Buy could continue to shed customers and revenue over the next few years.

"Best Buy has gone through cost cutting motions before. However, this time around there is little reason to believe the top line will turn around after three years of [like-for-like sales] declines," she told the FT.

Best Buy and other retail chains are at a crossroads as they plan for future revenue and profit growth. With the internet continuing to democratize the ways in which shoppers search and pay for consumer items, big players could witness their market share erode even further over the coming decade, experts contend.