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In Hard Times, Is Best Buy's Best Good Enough?
source: New York Times

Amy Adoniz, at the center of the table, with her employees in the break room of the Best Buy store she manages in Manhattan.
Chester Higgins Jr./The New York Times

Published: December 6, 2008-- AMY ADONIZ, general manager at the Best Buy flagship store, knows what her staff wants for Christmas: a case of Red Bull.

Two weeks before Black Friday, Ms. Adoniz gave in to employees' requests and had a Red Bull vending machine installed at the store, at 62nd Street and Broadway in Manhattan. Many in the sales staff of 140 are drama students, opera singers and actors who may run themselves ragged selling electronics by day and performing at night. To keep them from getting hungry and cranky over the long Thanksgiving weekend, Ms. Adoniz let them wear slippers and Uggs boots to work, and had food delivered three times a day.

Employees aren't the only ones being tended to this shopping season. To lure customers, Ms. Adoniz waits for -- and on -- their dogs. "We have a doggie water bowl with filtered water, and treats for them as well," she says.

With unemployment rising sharply, and consumer spending plummeting, Best Buy managers are bending over backward to attract shoppers and are encouraged to put their personal stamp on the stores. For Ms. Adoniz, that means stoking employees with caffeine and carbohydrates and catering to customers' pets.

It's an extraordinarily tough time for retailers. "November is shaping up to be the worst month in retail since I've been here 30 years," says Edward Schmults, C.E.O. of FAO Schwarz, the toy chain. "Now I know how that little kid felt who misbehaved all year and then wondered if Santa was going to show up in December."

Next year could be even worse. Fitch Ratings forecasts that the United States economy will contract 1.2 percent in 2009, with consumer spending falling 1.6 percent. "The impact on retailers is almost tragic as the economy adjusts," Mr. Schmults says.

And Best Buy, to limit the damage, is not just cutting prices. It is trimming inventory and advertising, promoting higher-margin, private-label lines and pushing exclusive products, like the Blue Label series of notebook computers made for Best Buy by Hewlett-Packard and Toshiba. It's also adding new services and products that specifically aim at women.

If the stock market and consumer spending hadn't plunged so precipitously, Best Buy, the nation's biggest electronics retailer, with $44 billion in annual revenue, might not have had to bother stocking up on delectables for dogs. The chain's chief rival, Circuit City, recently filed for bankruptcy protection and is closing 155 stores. Tweeter, a high-end rival, shut down this week, and Sharper Image's stores, which sold more exotic electronics, are liquidating. CompUSA closed most of its stores last year.

But no retailer is immune from the drop in consumer confidence and spending, especially one that specializes in gadgets, not groceries. Sales at Best Buy stores open more than a year were down 7.8 percent in October, compared with the same month last year. The company will not release November figures until Dec. 16, but it's already clear that November was a brutal month for electronics retailers. According to a report MasterCard Advisors released last week, sales of electronics and appliances nationwide sank 25.2 percent in November, versus the same month last year.

Best Buy's stock price, which reached almost $54 in November 2007, closed Friday at $23.05, and its market capitalization has shrunk to $9.5 billion. Because of slumping sales, Fitch Ratings in mid-November downgraded the outlook on Best Buy's $2.7 billion in debt to negative, from stable.

Nevertheless, Karen Ghaffari, a managing director at Fitch, says she thinks Best Buy will weather the storm. Its longstanding reputation for high-quality service helped it grab market share this year when Circuit City laid off many of its highest-paid --and most experienced -- sales workers, and shuttered stores.

"Best Buy is a very strong operator," Ms. Ghaffari says, "and long-term they should benefit from the difficulties being experienced by the weaker competitors."

That may well be so. But consumers' reluctance to spend is making Best Buy's investors skittish. Though analysts expect revenue to grow slightly next year as the company expands overseas, profit margins will come under pressure from price-cutting, especially on televisions. "Given the circumstances and uncertainty in what's coming here in this market, we decline to comment," said a press officer at Gardner Lewis Asset Management, which owned almost four million shares of Best Buy in June.

In an interview, Best Buy's president, Brian Dunn, discussed the challenges the company faced. "The depth and speed with which the economy stumbled was extraordinary," said Mr. Dunn, who started as a salesman at the chain 23 years ago. "I've never seen anything like it. Our business was growing really nicely and then, all of a sudden, boom!"

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