Goodbye, Best Buy. Hello, specialty retail?

December 14, 2010: 5:35 PM ET

With the big box consumer gadget chain's revenues down, it seems shoppers are heading to specialty stores or online to get their goods.

Though holiday shopping has been surprisingly healthy so far, particularly online, Best Buy is feeling the pain associated with fickle consumer trends. For its third quarter ending November 27, Best Buy (BBY) reported revenues of $11.89 billion, less than the $12 billion the company pulled in the same time last year, and even less than the $12.45 billion analysts predicted.

In a year dominated by new gadgets like the iPhone 4, iPad, and Samsung Galaxy Tab, the news comes as a surprise to some, given the company's recent efforts to change up store layouts to showcase popular portable devices like smartphones, e-readers, and tablets. Games and game devices also play more prominent roles in-store as well -- many Best Buy locations now feature areas dedicated to Sony and Microsoft's (MSFT) gaming products like the Playstation Move and Xbox Kinect motion-based controllers.

In theory, these changes, which play up the year's most popular tech, should have bolstered the company's bottom line, but they didn't. So what happened? Sanford C. Bernstein analyst Colin McGranahan attributes the loss to a shift towards online sales in consumer electronics. But we're not sure if that's the whole story.

The scene

Most times of the year, Best Buy's foot traffic tends to be healthy -- the chain plants its stores in areas where heavy volumes of customers are not hard to find. But during the holiday shopping seasons, all bets are off as throngs of people line up despite frigid temps at 4 a.m and limited parking. Customers wheel out of the store hours later with multiple flat screen TVs, PCs, games and other electronic paraphernalia. In fact, some families actually gear their holiday shopping towards the Best Buy Black Friday experience.

My family -- all three of us -- used to be one of them, at least until four years ago. The days leading up to Black Friday, Dad and I would crawl through The Philadelphia Inquirer's wads of ad specials, pointing out bottom-dollar deals like DVDs for $2, DVD players for $50, and new videogame releases for some $20 off. If the latest summer blockbuster was available for one-third the original retail price, and we somehow got our frozen mitts on it, it was a score. Some fathers celebrated their sons winning a baseball game. My father gave me the proverbial pat on the back if I snatched the last copy of the Lord of the Rings (Extended Edition, of course) for $9.99.

It was both magical and painful. The adrenaline rush and deals seemed worthwhile. But waking up at 4 a.m.  and parking hundreds of yards away on the grass -- the parking lot was always full -- only to race against irate, pumped-up soccer moms for an extremely limited supply of in-stock products? Not so much.

Since then, our shopping habits have changed, as it seems have those of many other families, too. Regardless of the time of year, Best Buy isn't a must-visit for us, anymore. If we want specific items -- a new phone, a tablet, ereader -- we go directly to the source: an Apple (AAPL) store for a MacBook, an AT&T (T) store for most phones, or Amazon (AMZN) for the Kindle. While Best Buy did say their sales of newer gadgets like smartphones and tablets were doing well, it was weak television and laptop sales that actually brought their figures down. One could argue that even so, consumers choosing to shop elsewhere for a new television also deprived Best Buy of knock-on revenue from additional tablet and phone sales.

In some cases, the deals for gadgets simply aren't as competitive as Best Buy's, but oftentimes, they are. (Best Buy doesn't offer discounts on any Apple products, for instance.) I actually prefer going to the Apple store to Best Buy because, unless you're subjecting yourself to the madness of Apple's Fifth Avenue New York City location, the customer service is oftentimes superior. Employees usually know more about the products they're talking about because they're not responsible for stocking and overseeing hundreds of thousands of electronics that may include televisions, stereos, computers, games, vacuums and smaller tchotchkes. In a more specialized retail store, employees have a smaller product catalog to learn about, which likely enables a better understanding of the products, and a better customer experience.

Specialty company warranties are usually better, too. I bought my first desktop computer, a first-generation Mac Mini, with Best Buy back in 2005. When its hard drive died, I took it to Best Buy twice for repair. After more than a week of waiting it was returned to me unfixed. Both times. Obviously my experience isn't necessarily the rule, but Best Buy's "Geek Squad" repair service has long received poor reviews, so I'm not the only one who hasn't found much value in this value-added service, either.

All that might go a ways to explain why people are heading to specialty stores, either online or in person. Despite Apple's lackluster Black Friday deals -- $41 off the iPad, $100 off all MacBook and MacBook Pro models -- analysts dubbed the hardware and software maker a "big winner" this season with strong foot traffic and sales. Indeed, Apple shares have soared more than 50% this year. Meanwhile, AT&T, reported online traffic records for Black Friday, up more than 14% year-over-year, and Cyber Monday, up more than 22% year-over-year.

So does all this mean Best Buy's days of ruling the retail roost are over? Could it go the way of Circuit City, into bankruptcy and oblivion? Hardly. The business seems too well managed, and there are too many places in the country where specialty shops are scarce and big box stores are plentiful. But Best Buy's bad results do probably mean that consumers are getting a better idea of what tech gear they want, and a better idea of where and how they want to go about getting it.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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