Best Buy Feels the Pressure of Rivals on the Web

At barely 10 a.m., holiday shopping was in full swing at a Best Buy on the Upper West Side. A harried father searched for a new Xbox for his children. A personal assistant picked up video game accessories for her boss’s twins. One young woman fiddled with a coffeemaker, while another paid for a DVD player.

Outside, parked along the curb, a Best Buy van displayed the slogan “to serve, install and repair.” Inside, one of Best Buy’s frontline salesmen, known as blue shirts for their uniforms, shouted to no one in particular across the vast showroom: “Anybody have any questions?” And moments later, to a couple trying out some laptops, he said: “You guys O.K.?”

At a time when the nation’s brick-and-mortar electronics retailers are increasingly feeling the squeeze from online sellers and discounters, the scene at the Best Buy store exemplified what the company hoped would keep customers pushing through its glass doors: the service support, the personal touch of its sales staff and the products on display that allow shoppers to see, touch and try.

Its strategy, however, has not worked as well as envisioned in a recovering economy. The challenges faced by electronics stores were highlighted this week when Best Buy, the world’s largest consumer electronics retailer in revenue, reported that third-quarter net income fell 4.4 percent, to $217 million, and sales fell 1.1 percent, to $11.9 billion. Sales at stores open for more than a year declined 5 percent.

The third-quarter results were below analysts’ forecasts and affected other stocks. Shares of Best Buy fell 18 percent during the day Tuesday, after the results were announced. That was the biggest decline since August 2002, and other retailers like Hhgregg and RadioShack followed suit.

For the week, Best Buy shares lost 18 percent, Hhgregg fell 14 percent, and RadioShack 5 percent.

“The market, which is already weak, is dramatically shifting away from stores and toward online,” said Colin A. McGranahan, a senior analyst at Sanford C. Bernstein & Company. “The online share of the market is now a critical mass, and the discount stores are also fierce competitors and willing to sell the product at very low prices to get that customer through the door.”

“You are also seeing another factor where people are going into Best Buy, getting advice on the product and then using smartphones to scan the Web for better deals,” he said.

With the shift toward online destinations, electronics retailers need to adapt to the changing landscape, analysts say, even as they continue to open storefronts. Online sales in the United States are forecast to account for 20 percent of total consumer electronics sales of $250 billion by the end of this year.

“Online has now gotten big enough to encroach on Best Buy,” Mr. McGranahan said.

Best Buy reported for the first time this year that it had started to lose market share. Sales of televisions, computers and video game software were weaker than expected, Brian J. Dunn, Best Buy’s chief executive, said this week.

Separately, in a e-mail he added that the company offered customers “a place where they can talk to knowledgeable, unbiased and engaged salespeople who demonstrate the art of what’s possible” and help them make choices.

Even so, new technology, like 3-D televisions that often need specialists to answer the questions of consumers, was not moving as briskly as hoped. Analysts said the company did not promote lower-tier products as aggressively as it should have. In general, sales were going to Amazon, Wal-Mart, Target, Costco and Sears.

“The results certainly signify how much competition consumer electronic retailers are facing from mass merchants and larger online retailers,” said R. J. Hottovy, director of consumer research at Morningstar. “It is tough to see what the company is going to do,” he said. “I think that a lot of the worries lingering out there were exacerbated by the results.”

Morningstar said it was reducing its fair value estimate for the stock, raising questions about Best Buy’s ability to defend market share from mass merchants, especially while major suppliers like Apple expanded their own outlets. “These factors support the viewpoint that Best Buy lacks an economic moat, in our view,” said the research note.

Analysts downgraded their expectations for the fiscal year.

“We whacked a billion in revenue out of our forecast,” down to $50.2 billion in global sales, Mr. McGranahan said, adding: “It was a pretty bad quarter. Sales declined more than we thought, and the outlook for the fourth is not great.”

And Best Buy said in its third-quarter earnings news release that it was lowering its per-share outlook for the year.

Even so, electronics and appliances retailers are still pressing ahead with new storefronts. Best Buy plans to open 50 to 55 stores by the end of February.