Best Buy Looks To Steamroll RadioShack With Small Store Shift

Best Buy (NYSE:BBY) has decided to shift its focus to operating small-format stores, even as it closes and shrinks big-box locations to reverse declining same-store sales. The number of small-format Best Buy stores is expected to reach 800 in the next three years from the current figure of 367. At these smaller stores, the electronics chain will focus on selling mobile phones, tablets, and services to help reverse declining sales. Best Buy’s new chief executive officer, Hubert Joly, said that the company would be targeting strip malls, which have vacant storefronts as a result of the economic downturn and the bankruptcy of chains such as Blockbuster. This move by Best Buy pits it squarely against RadioShack (NYSE:RSH), which also favors strip malls and is focusing on mobile devices and services. RadioShack is already struggling to revamp its image with customers and turnaround its flagging sales. Best Buy’s move might also lead to a clash with Verizon (NYSE:VZ) and AT&T (NYSE:T). ((Best Buy Takes on RadioShack in Mobile Strip-Mall Push: Retail, Bloomberg))

See our full analysis for Best Buy and for RSH stock here

Why Strip Malls And Mobile Devices?

There are two key reasons why Best Buy has opted for strip malls: lower rentals and stronger foot traffic. Rents tend to be roughly half as compared to those at conventional malls. Lower rentals will enable stores to break-even quicker as compared to conventional malls. According to the company, a lot of real estate is available in locations where more than 50,000 people drive by everyday. This allows for an even shorter payback period. ((Best Buy to open 800 small-format stores, SFGate))

We think that the decision to focus on mobile phones and tablets stems from the fact that sales for these are higher than for other gadgets. There has been a significant decline in TV and computer sales over the past couple of years as consumers are more inclined to buy smaller gadgets like mobile phones, tablets and e-readers. The proportion of mobile and computing in revenues in the domestic segment increased to 44% (from 40% in Q2 2012) whereas that of consumer electronics shrunk to 33% (from 36% in Q2 2012) for the company. According to IDC, a Framingham, Massachusetts-based research firm, shipments of tablets will rise 54% this year and those of smartphones by 26%. Also, these gadgets provide ample opportunities to generate fees from warranties, service contracts, and accessories. ((Best Buy Q2 Profits Decline As It Struggles With Competition And Economic Slowdown, Trefis))

Two-thirds of the Best Buy Mobile stores set to open before Thanksgiving are in strip malls, near big retailers like Target (NYSE:TGT) Corp., Home Depot (NYSE:HD) or supermarkets.

How Best Buy Plans To Gain An Edge Over RadioShack

RadioShack has, for long, concentrated on strip malls. It has 4,400 company-run stores, most of them free-standing or located in strip malls. However, it suffers from the problem of a dated image. Best Buy, in contrast, is keen on setting up modern stores and feels that this factor would help it in attracting leasing agents. It has trained its salesmen to be smart and to show customers how gadgets work together. We think that this could contribute to a better customer experience and will help Best Buy in gaining an upper hand over RadioShack.

There has been a drastic change in the way consumers shop today. Revenues of brick and mortar retailers like Best Buy and Target are being adversely affected as customers visit the stores to browse through products and eventually buy them at cheaper prices online — a phenomenon known as show rooming. In light of the above, we believe that there is ample scope for Best Buy to offer better consumer experience and after-sales service in the mobile devices segment, thus possibly mitigating the effects of consumers’ changed shopping preferences.

We think that this move to boost long-term growth couldn’t have come at a better time for Best Buy. Its revenues may decline by 2.6% to $49.4 billion this year, according to the average estimate of 20 analysts surveyed by Bloomberg.

We recently revised our price estimate for Best Buy to $25, which is at a premium to the market price.

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