Best Buy (BBY) should be a slam dunk buy right now, right? When you consider that many of their competitors, like Circuit City, have been sent to bankruptcy when the economy tanked, their strong brand identity and Geek Squad service you’d think they’d be sitting in the center of pretty big economic moat. But that may not be the case any more.

As this article from Morningstar shows, there may be more dark clouds than silver linings on the horizon for Best Buy.

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4 threats to Best Buy’s economic moat.

Here is a brief outline of the 4 threats as presented in the article. If you find any of this interesting, I suggest that you read the full article.

The Looming Threat of Competition

As mentioned previously, one would think that competition wouldn’t be a threat with the demise of Circuit City, but as the article explains, the constant technological innovation and rapid product commoditization means that the defining differential between products is price. Furthermore, consumers have more brand loyalty than channel or store loyalty. All this means that consumers are free to shop around for the best deal on their preferred brand of consumer electronic. This has led to the emergence of new competition from the likes of Wal-Mart, Target, Costco and Amazon; retailers not often thought of as electronics stores.

Potential Shift in Electronics Distribution

In response to the dwindling channel loyalty, Morningstar sees an increase in manufacturer retail channels, like that of Apple. By having their own retail outlet, consumer electronics manufacturers can showcase their products without competition, which should in turn lead to greater brand loyalty. Moves like this essentially cut out the middle men, like Best Buy.

Threat of Digital Distribution

Best Buy has formed a partnership with digital distribution providers in the hopes of capitalizing on the digital delivery trend, but the folks at Morningstar are not sold that this will be enough to compete with established players like Netflix and Apple iTunes.

Services Provide Advantage but Can Be Replicated

Although Best Buy’s Geek Squad is a good brand, consumer electronics are more and more commoditized, making customers less loyal and less concerned with servicing. Once a consumer electronic becomes cheap enough, it’s easier and more cost effective to buy a replacement than pay to have it serviced.

Conclusion.

Don’t Be Fooled by Short-Term Improvements

Morningstar sees Best Buy as having much to recommend it for the short term, but sees those benefits diminishing as time progresses. But, much is unknown owing to the ever evolving nature of technology, so it is perhaps best to keep on eye on Best Buy. Also, stay abreast of possible silver linings like Best Buy’s international growth prospects and its partnership with Carphone Warehouse.

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