Best Buy Continues To Diversify By Selling Geek Squad Services

Best Buy (NYSE:BBY), in a bid to open a new stream of revenues, has tied up with eBay and Target to offer their customers the services of its well-known Geek Squad personnel. eBay has added service plans on its website for customers wishing to avail of the Geek Squad’s services while trials are also being conducted at some Target stores in Denver and Minneapolis. ^[1]

This move is likely to make the Geek Squad a stand-alone brand in itself, and open up a new stream of revenues for Best Buy. The consumer electronics retailer has been struggling to compete with competitors following new-age business models. It is trying to develop technological capabilities and diversify beyond its legacy brick-and-mortar business model. If it has to survive, it needs to differentiate itself from the competition and leverage its strengths. This move seems to be a step in that direction.

See our full analysis for Best Buy

The Geek Squad

Geek Squad was founded 18 years ago by Robert Stephens, who rode around Minneapolis on his bicycle, helping people with technology problems. He sold the company to Best Buy in 2002, when he had 65 agents.

The Geek Squad, with its roughly 20,000 black-tied and white-shirted tech experts, is perhaps Best Buy’s most well-known and instantly recognizable brands. It has built a great reputation for itself among customers over the years by providing honest and unbiased advice, sometimes to the extent of upsetting Best Buy’s executives. The latter felt that the Geek Squad was not always promoting Best Buy’s business. However, according to Stephens, who still serves as a consultant to Best Buy, insisted that this would lead to erosion of trust among customers. It will be interesting to see how this plays out once they start working at Target stores and recommend customers to try Best Buy outlets.

How Will It Work?

eBay is offering customers around-the-clock Geek Squad support with service plans costing $29.99 for three months and $49.99 for six months. This service is available to everyone, regardless of whether they buy their electronic goods from eBay. Once they sign up, customers can get their Geek Squad help online, over the phone, and in Best Buy stores. Best Buy would surely welcome the additional footfalls to its stores, which it would then use to drive additional sales. Best Buy and eBay haven’t disclosed how they will split the fee paid by customers.

Best Buy is also rolling out the Geek Squad service at 28 Target stores in Denver and one in Minneapolis. The Target deal offers Best Buy a way to reach more women. A majority of the discounter’s female customers don’t regularly visit Best Buy, according to George Sherman, senior vice president of Best Buy’s services business group.

How We See The Big Picture

Customers are still using physical stores to check out products and gain hands-on experience with gadgets. However, a large number of them then proceed to buy these from online stores like Amazon at cheaper prices. This phenomenon of showrooming has hit business hard for companies like Best Buy.

To counter it, Best Buy is employing a mix of strategies.

It is trying hard to sell its products online and investing in building a strong internal IT team over the course of next 12 months. It plans to hire 200 professionals. Best Buy has also hired a new e-commerce chief, former Expedia Inc. President Scott Durchslag to lead this effort which shows its seriousness towards building capability in this space.

To make up for declining average selling price of TV’s, which constitute a major portion of its business, it is shifting to selling tablets and smartphones which provide opportunities for high margins on warranties, service contracts, and accessories. This strategy is being pursued in tandem with opening smaller-sized mobile stand-alone stores which increase average revenue per square feet, a key performance measure for this industry. It will also result in lower operating costs, enabling Best Buy to better compete with online retailers on prices. Further, many of these stores will be opened in strip malls which have lower rentals and higher visibility. ^[2]

Finally, Best Buy now looks to be capitalizing on its strength in the services segment. It is investing in employee training to make them smarter and more responsive to consumer needs. We think that the element of human interaction does play a role in consumer electronics retail. In-store services apart, a superior technical support team reassures a customer that any malfunctioning device would be taken care of by competent professionals. Having invested so much in building in-house technical capabilities, we think that it makes sense for Best Buy to generate additional revenue by exploiting the Geek Squad’s potential.

Best Buy boosted revenue from services in the U.S. business segment by 6% in Q2 2012, as comparable-store sales sank by 3.2%. There seems to be enough potential for services to constitute a bigger share of the overall revenue mix in the domestic segment from the present figure of roughly 7%.

We have a price estimate of around $25 for Best Buy which is at a premium to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Best Buy’s Geek Squad Expands to EBay Seeking Customers, Bloomberg [↩]
2. Best Buy Looks To Steamroll RadioShack With Small Store Shift, Trefis [↩]