Best Buy And Macy’s Enter Into Partnership As Retailers Look To Improve Asset Utilization
Best Buy‘s (NYSE:BBY) model seems to be working so well that other retailers are considering following it themselves. We’re talking about the store-within-a-store model which has played a key role in Best Buy’s turnaround since 2012.
It is a way of maximizing utilization of store space by allocating a defined portion of space to merchandise of just one vendor or partner, often with dedicated sales support. By signing up leading brands in electronics for these stores, Best Buy has been able to improve its revenue generated per square foot of its retail space from $780 in 2012 to $870 in 2014. However, it looks like Best Buy might end up opening its own mini-stores inside other retailers’ stores.
Macy’s (NYSE:M), a chain of department stores with almost 800 stores in the U.S., recently announced that it would experiment with a similar model by opening Best Buy stores in 10 of its stores in undisclosed locations across the country [1]. The trial will start in early November, ahead of the busy holiday shopping season, and the stores will measure about 300 square feet, staffed by Best Buy employees. After testing it through the holiday season and into 2016, the company plans to decide on whether to implement the strategy on a larger scale. Though the trial is going to be conducted on a very small scale, Best Buy will benefit from an expanded footprint during the holiday season, when consumers often buy smartphones and other electronics.
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The Bigger Picture
This move comes at a time when retail sales in the U.S. have hit a soft patch, with growth in the last 6 months hovering around 2 percent [2]. As a result, brick-and-mortar retailers have shunned store expansion plans and are instead looking for newer ways to widen their reach.
Best Buy is one of the first to have solved this problem on a large scale and the results are evident from the improvement in the company’s fixed asset turnover, an indicator used to measure how well a company is utilizing its fixed assets to generate revenue. Since 2012, the amount of revenue that Best Buy generated increased from 13 times its fixed assets to almost 18 times. Considering the scale at which this method was implemented, it is enough proof for other retailers to take note and try it themselves.
For example, earlier this year, pharmacy retailer CVS Health (NYSE:CVS) bought all of Target’s (NYSE:TGT) more than 1600 pharmacy stores in an attempt to achieve larger scale without incurring a lot of capital expenditure. While this might sound like a different strategy, it is very similar to the Best Buy – Macy’s partnership, considering that the acquired drugstores will remain a part of existing Target stores, but will be operated by CVS.
Essentially, these retailers are trying to put existing real estate to better use, rather than investing more capital in it. And the store-within-a-store model, which is the common feature in all the above discussed examples, seems to be the new-found solution to improve asset utilization.
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