Here’s What Best Buy Plans To Do In FY 2016

March 17th, 2015 by Trefis Team
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BBY: Best Buy Co logo
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Best Buy Co

Earlier during this month, Best Buy (NYSE: BBY) announced its earnings for the fourth quarter of FY 2015 as well as the full fiscal year. Renew Blue and a host of other initiatives helped the company continue the turnaround of its operations this fiscal. CEO Hubert Joly attributed the topline growth and margin improvements seen during the year to their investments in inventory availability, multi-channel execution and a more targeted marketing approach. However, industry and economic pressures that were seen in FY 2015 are expected to continue into the next fiscal year, which makes investments in delivery and cost control imperative for the company. In this regard, it announced a series of initiatives and also noted that these incremental investments will likely have a negative impact on margins during the first half of FY 2016. Below, we take a look at these initiatives, some of which have already been rolled out.

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Launch of The Second Phase of Renew Blue

The company has set itself a target of approximately $400 million in cost reductions and gross profit optimization, over the next three years. As these savings are expected to be driven by streamlined processes and operational efficiencies (which are structural in nature), they are not expected to begin until the latter half of fiscal 2016. However, these incremental savings are expected to be significantly offset by investments in other growth initiatives, which are expected to amount to approximately $100 million to $120 million. The focus of the effort will be on:  1) Customer experience improvements; 2) Information technology; and, 3) Marketing,   The company also expects to increase capital expenditure to approximately $650 million to $700 million in FY 2016 from $550 million in FY 2015 [1].

 

Focus On Merchandising, Both Online And In-Store

The company aims to create a compelling assortment online as well as in its stores with a superior end-to-end customer experience. It will focus on select product categories including ultra-high definition TV (to capitalize on the current product cycle) and growing categories with structural barriers to entry such as large appliances and mobile phones. To serve each of these product categories, it plans to open approximately 20 additional Magnolia Design Center stores-within-a-store and 50 additional Pacific Kitchen and Home stores-within-a-store.

As a part of this initiative, Best Buy recently added a wedding gift registry to its website to capitalize on the sizable newlywed market. It offers access to nearly Best Buy’s entire inventory, including brands such as Apple, GoPro, Beats, Sony and Samsung. The total amount spent buying presents at wedding gift registries is estimated to be $19 billion annually [2]. Considering that Best Buy is one of the very few retailers that offer consumer electronics via gift registry, it has relatively less competition in this market.

Increase Investments In Developing Mobile Technology

Best Buy plans to continue investing in the transformation of its e-commerce technology platform, with support from its new technology development center in Seattle. Similar to general industry trends, website traffic from mobile phones has been found to grow much faster than traditional desktop traffic. Accordingly, the company is increasing mobile investments to provide a streamlined access to essential product information during the discovery, research and check out processes.

For some perspective on the scale of online activity, Best Buy was the third most visited website in the U.S. during the most recent holiday season [3]. It clocked $10.1 billion in domestic sales during the 9-week holiday period, with $1.5 billion of that occurring online [4].

Integrating The Geek Squad Customer Experience Into Bestbuy.com

Through Geek Squad, Best Buy provides technical support to customers both in-store and on-site, and also provides 24-hour telephone and emergency on-site support. The company considers this a key advantage which enables it provide a better customer experience, helping it differentiate from competitors like Amazon or even other brick-and-mortar stores which sell electronics. In the last fiscal year, lower attach rates of traditional extended warranties and lower mobile revenue (largely due to the company’s success in decreasing claims severity and frequency) had a negative impact on the revenues. To help solve this issue, Best Buy plans to integrate the Geek Squad customer experience into bestbuy.com to provide an enhanced service experience to customers, which in turn is expected to increase online attach rates.

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Notes:
  1. Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, November 20, 2014 [↩]
  2. Wedding & Honeymoon Facts & Figures, About.com [↩]
  3. GeekWire report on Best Buy’s new technology development center [↩]
  4. Best Buy Reports Increase in Holiday Revenue, Best Buy News Release, January 15, 2015 [↩]