Best Buy Continues to Add Stores-Within-a-Store For Better Space Utilization

After fending off tough market conditions in 2015, Best Buy (NYSE:BBY), while providing guidance for FY 2016, took a rather cautionary stance. The management expected to see aggressive pricing by competitors and declining demand for consumer electronics, which turned out to be true as the industry (for NPD-reported consumer electronics categories) declined 5.3% in Q1. However, Best Buy’s revenues from these categories saw only a 0.7% decline, driven by continued growth in the major appliances category, which has been a top priority at Best Buy.

Best Buy continues to build strength in major appliances through its store-within-a-store format and recently started the roll-out of dedicated spaces for Samsung appliances. This, being an area of differentiation for the company against online competitors such as Amazon, will play a key role in determining how Best Buy fares in the highly competitive market of electronics retail. Below, in this article, we will dig deeper into what this store format is about and how it translates into better results for the company.

Our price estimate for Best Buy currently stands at $34, which is almost at par with the current market price.

A Bit of Background on Stores-within-a-Store

A store-within-a-store is a defined portion of the floor plan that is allocated to the merchandise of just one vendor, often with dedicated sales support.  They have large product displays, dedicated checkout areas and trained employees (often of the respective companies) to assist customers’ purchase decisions. Major electronics manufacturers that Best Buy has partnered with include Apple, Samsung, Sony and HP. While this offers a simple and cheap alternative to building standalone retail stores for these electronics manufacturers, they also risk losing potential sales to competitors who might have a similar store-within-a-store only a few steps away. However, from Best Buy’s perspective, this format will result in better utilization of its store space.

How Does This Format Benefit Best Buy?

For Best Buy, not only does the rent paid by each of the brands act as an additional source of revenue, but also offers the possibility of driving traffic through the entire store. A study by the University of Pennsylvania and Carnegie Mellon ^[1] suggests the concept can boost sales of high-value products that require a degree of service.

Best Buy has been able to improve the revenue generated per square foot of its retail space from $780 in 2012 to $870 in 2014. While this cannot be completely attributed to the new store format, some credit also goes to other store space optimization methods that the company used (such as allocating more space and relocating areas occupied by key margin product categories).

While the capital intensive nature of this model (physical stores) serves as a barrier preventing new players from entering the market, it has also been a burden on Best Buy. With this store format, though, the company has been able to turn its weakness into a strength. Best Buy continues to expand aggressively in this format and Samsung’s appliance stores are the latest addition to the stores-within-a-store format. The company plans to open these appliance stores in 200 Best Buy locations by the end of this year.

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