GOOD LUCK INDEED

Posted in Rants on April 5th, 2012 by Ed

I was forwarded an item from Forbes that is more remarkable for its tone than its content. Retail giant Best Buy is failing (largely because it is discovering that selling CDs and DVDs is not a growth industry, but also because electronics buyers are so willing to shop online rather than in big box stores) and it is attempting to turn things around by closing a bunch of stores. A commentator with Forbes, a name synonymous with a conservative take on business and financial news, points out that this is a silly strategy. It is not a difficult point to make. If the chain's fundamental problem is with its product offerings and retail model, having fewer stores selling the wrong thing the wrong way isn't going to help. The writer sums it all up in her title: Best Buy Cutting 50 Stores To Get Profitable. Good Luck With That.

An excerpt:

Best Buy is closing 50 superstores and focusing on mobile in an effort to reduce expenses. But since when is cost cutting to profitability a successful retail strategy?

Since never.

In so many ways, it feels like a shell game. The kind that companies use to deflect negative attention by waving their arms and yelling, ā€œlook over here!ā€ Changing things up, reducing its footprint and getting out of too large or otherwise unfavorable locations is important and probably needed to be done long ago. But these changes look more like an olive branch to the financial community: a restructuring to reduce costs.

Analysts believe Best Buy is doing the right thing. Right or wrong, at least Best Buy is doing something. Sometimes the bigger thing to do is go small, but a retailer still has to sell more stuff, not just jettison the people and locations that are supposed to help it do just that.

Now let's pause and consider how the great minds at Forbes can wrap their heads around this idea as a business strategy…but not as a public fiscal policy. True, the analogy between government and business is imperfect (yet infinitely more useful than the favorite right-wing trope of the government balance sheet as a household budget) but it takes some active denial to gloss over the broader implications of "You can't cost-cut your way to profitability." This is true, and obviously so. So why, one might wonder, can Congress or state legislatures spur economic growth by cutting spending? The fundamental problem of the business and the government is the same: not enough revenue coming in to meets its obligations. Firing people and shuttering stores is a knee jerk response that promises meager short term benefits at the cost of substantial long term losses.

Just a brief review: businesses that try to become profitable by cutting expenditures are on the road to ruin, but growth in the planet's largest economy will be spurred by the government cutting costs and taking in even less revenue. Yep. That's about the logical consistency I would expect from a publication with Steve Forbes' name on the masthead.