September 19, 2011 – By Mark Potter and Dhanya Skariachan
LONDON/NEW YORK (Reuters) - Best Buy Co <BBY.N> is likely to abandon its British megastores next year, retreating from an overseas expansion plan that has been stymied by a global recession and cultural differences in how people like to shop.
Analysts said they expect the move to shutter the British big box stores to come in early 2012 as the company instead needs to focus on strengthening its mainstay U.S. business against cut-throat competition from discounters and online rivals.
Closing the 11 British stores would be the biggest admission of failure so far in the U.S. retailer's overseas expansion strategy.
It would also stem tens of millions of dollars in annual losses and raise hopes among investors that Best Buy will take steps to reset its business after the latest in a series of profit warnings this month.
The company did not respond to requests seeking comment.
"Given the challenges that Best Buy is currently facing ... I think investors would probably rather see the company focus on the changes they are trying to make domestically rather than investing a lot of money in Europe," said Anthony Chukumba, an analyst with BB&T Capital Markets. BB&T Capital Markets makes a market in the securities of Best Buy.
The company could also shrink other stores, reduce space in weak product categories like entertainment, speed up the expansion of a fast-growing mobile business and make a bigger push to sell online.
When Best Buy laid out plans to expand into Britain in 2008, it envisioned building a chain of around 100 megastores over five years that would act as a springboard for expansion elsewhere in Europe.
Three years on, things have proved very different.
Best Buy and British partner Carphone Warehouse Group Plc <CPW.L> have opened just 11 big box stores and in the process racked up 62 million pounds ($98 million) of losses in the year ended in March after losing 21 million the year before. In June they froze store openings and announced a strategic review of the chain.
"I can't see anything other than a market exit now. It'll be very much tail between their legs," said Greg Hodge, global retail director at consumer research firm Iconoculture.
Best Buy's foray into Britain ran into trouble even before it started, as the world plunged into recession and an initial plan to open stores in summer 2009 was put back to April 2010.
Now Britain is undergoing a fiscal squeeze as its government takes steps to rein in a yawning deficit.
With disposable incomes falling, shoppers have cut spending on discretionary items like electrical goods, triggering a plunge in sales and valuations across the sector.
Earlier this month Dixons Retail Plc <DXNS.L>, Britain's biggest electricals retailer, reported a 10 percent drop in quarterly sales from UK stores open over a year, while No. 2 Kesa Electricals Plc <KESA.L> said quarterly sales on the same basis at its British chain Comet plunged 22 percent.
Best Buy has also made mistakes, though. By announcing its expansion plans so openly, for example, it gave rivals the opportunity to respond.
Dixons did this in particular, opening a string of megastores -- often by combining its existing Currys and PC World outlets -- that not only mimicked Best Buy's plans but often did so just down the road from one of Best Buy's new stores.
The U.S. retailer also failed to adapt its store format to the British market and gave too much space to weaker performing entertainment products, analysts said.
"It was the wrong format, at the wrong time, in the wrong market," said Robert Gregory, research director at Planet Retail.
"U.S. retailers have a mediocre to bad track record of expanding their concepts into Europe," Chukumba said. "I think part of it is different cultures and part of it is the fact that U.S. brands aren't as readily known in Europe."
Also: "U.S. retailers tend to have large box stores and generally Europeans aren't used to shopping that way. They are used to shopping in smaller boxes," Chukumba added.
Borders Group Inc <BGPIQ.PK>, the bankrupt U.S. bookseller, in 2007 sold its U.K. stores, including 41 superstores, leading to a loss of $125.7 million. It had had a British presence for 10 years. Chains such as TJX Cos Inc <TJX.N> and Signet Jewelers Ltd <SIG.N> have also seen lackluster same-store sales in that market recently.
TO CLOSE OR NOT TO CLOSE
Closing Best Buy British megastores, which Bank of America-Merrill Lynch analysts think could cost more than 60 million pounds, is not a foregone conclusion.
Some analysts have suggested that Best Buy might wait to see what happens to Comet, which Kesa has put up for sale. Any downsizing of that loss-making business could take out a big chunk of capacity from the British electrical goods market.
However, Planet Retail's Gregory said prospects for the sector, which faces competition from online retailers like Amazon.com Inc <AMZN.O>, grocers such as Tesco Plc <TSCO.L> and department stores groups like John Lewis, were so grim that even Comet's demise would not make Britain an attractive investment.
Shutting its branded stores would not end Best Buy's links to Britain, as its joint venture with Carphone Warehouse includes the British firm's chain of mobile phone shops across Europe, as well as its newer Wireless World stores, which also include some electrical products like laptops and tablets.
($1 = 0.633 British Pounds)
(Reporting by Mark Potter in London and Dhanya Skariachan in New York; Additional reporting by Phil Wahba in New York; Editing by Gerald E. McCormick)