Two Key Factors Which Will Drive Best Buy’s Growth In Future
Best Buy (NYSE:BBY) launched a transformation program in 2012 on the back of declining margins and comparable sales. Several initiatives under this program have started showing results in terms of improving margins and sales. The company’s strategy to improve its capital turnover by introducing a “store within store” format seems to be paying off and we believe this will be a key driver for growth in future. To combat increasing customer preference to buy electronics online after a physical demonstration in the store, the company increased its focus on online sales and expanded its ship from store network. We believe innovations in the e-commerce space with faster delivery options and better in-stock availability will be another key driver for Best Buy’s growth in future.
Improving Asset Utilization – Store within store
Best Buy is transforming its stores into experience centers with a new store format where a dedicated space inside its stores is allocated to a single vendor. A “store-within-a-store” has a dedicated check out area, sales support and large product displays and cater to vendors such as Apple, Samsung and Sony. This model maximizes utilization of store space and Best Buy has been able to increase its revenue per square foot from $780 in 2010 to $870 in 2014, part of which can be attributed to the store-within-a-store format. The company’s fixed asset turnover (revenue generated per unit of fixed assets) increased from 13 times in 2012 to 18 times in 2015. The rent paid by the brands acts as an additional source of revenue for the company along with driving store traffic. This store strategy is working well for the company and we expect this strategy to drive its growth in future.
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Growing Online Sales
Online penetration in the retail market is increasing and Best Buy has been working towards growing its share of the e-commerce market. Computer and consumer electronics is the largest product category of retail e-commerce sales in the U.S. and is expected to reach $100 billion by 2018.
One of the goals of the company’s transformation program “Renew Blue” is to ramp up online sales. The company has extended its online sales distribution network with its ship-from-store concept, which it has now rolled out to 1,400 store locations. In May 2015, Best Buy Canada unveiled its “Marketplace” to sell other retailer’s products online, in addition to the company’s usual selection of electronics. The company is working towards price matching to ensure that customers who try the products in its showrooms do not purchase them from other online websites due to a lower price. Providing better clarity on expected delivery dates is another change the company is rolling out to enhance online customer experience.
While Best Buy was losing to the increasing trend of customers buying electronics online, its focus on this channel with ship from store, faster delivery and price matching will be a key driver for growth in future.
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