Why We Think Best Buy’s FY’16 Bets Make a Lot More Sense

Best Buy’s (NYSE: BBY) just-ended fiscal year (with January) was marked by tough market conditions, high competition and management’s efforts to reinvent itself to thrive in an evolving industry. Towards the second half of the fiscal year, its turnaround efforts started paying off in the form of reduced costs and higher online revenues, which helped boost the company’s third quarter results. In spite of all the positives, the company took a rather cautionary stance while providing guidance, as the management expects to see aggressive pricing by competitors and a declining demand. With tablet sales on a decline and mobile sales becoming increasingly dependent on new product launches, Best Buy had to look at other avenues for growth. Below, we take a look how Best Buy plans to tackle these challenges in FY’16.

What tilts the balance in Best Buy’s favor is the fact that a lot of potential 4K TV buyers prefer to see and experience the product prior to a purchase, which is exactly where Best Buy excels. In a CEA study on consumer purchase decisions,the top 3 inhibitions to making a purchase were found to be that consumers wanted to see the product in a store or they wanted a demo or they wanted to talk to a salesperson about the product. With experience centers for different brands and its in-store expertise, Best Buy is better placed than most of its competitors to address each of these consumer needs. This should enable them capture a healthy share of the 4K TV market. Currently, Best Buy is the leader in consumer electronics with about 30% of market share. With all the above factors in Best Buy’s favor, this product category could be the much-needed boost to Best Buy’s top line in FY’16 and beyond.

The capital intensive nature of Best Buy’s model has been it’s Achilles heel, as online retailers such as Amazon are able to take away market share at much lower costs. However, it also serves as a competitive advantage as the high capital requirement makes it difficult for new players to enter the market. Recognizing the advantage that it possesses, Best Buy  decided to expand aggressively into categories which are growing and capital intensive, such as large appliances and connected home through its “store-within-a-store” concept.

These are spaces within a Best Buy store which popular brands occupy, similar to occupying separate stores in malls. They have large product displays, dedicated checkout areas and trained employees of respective companies to guide customers. 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 ^[2] says the concept can boost sales of high-value products that require a degree of service and can’t easily be found somewhere else in the store. This has been evident in the impressive comparable sales growth from Pacific Kitchen & Home, an upscale appliance chain purchased by Best Buy in 2006, which is now another store-within-a-store. Moreover, as the housing market continues to recover, Best Buy’s push into appliances is a good opportunity to target new home buyers or consumers who want to remodel their homes.

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In the last few years, since Best Buy’s Renew Blue program was rolled out, the company’s focus has been on providing products at lowest prices in the market and also increase its share of the online electronics sales. By choosing these focus areas, Best Buy has been competing on the core strengths of its rival, Amazon rather than leveraging their own. In contrast to his, all the above discussed growth initiatives that Best Buy plans to take up next fiscal do exactly that – capitalizing on its own strengths. Moreover, these are the company’s unique advantages and areas where its competitors are currently poorly positioned to win. While these plans make perfect sense in theory, it remains to be seen whether Best Buy will be able to convert them into higher top line figures.