Why Is Best Buy Testing A New In-Home Consultation Service ?

Best Buy‘s (NYSE:BBY) sales are increasingly threatened by Amazon, which is poised to overtake it in the consumer electronics segment.  In  response, Best Buy is testing  a new in-home consultation service in three regions in the U.S. — Atlanta, San Antonio and Austin. Under this new free service, the company’s advisor will visit the consumer’s home to explain the benefits of potential upgrades to the various electronic devices they own.  The advisor will then provide a customized purchase plan that will include both product availability relative to local Best Buy stores and a price breakdown for the various devices. This personalized service could help in increasing the company’s sales as the convenience of an in-house consultation with detailed information on several products can enhance  a consumer’s experience. We believe that, as Best Buy tries to combat competition, especially from Amazon, these innovative techniques can enable the company to retain its consumer base.

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Retaining Its Market Share In The Consumer Electronics Segment

According to Deutsche Bank, Amazon accounted for 90% of the $ 5.6 billion increase in U.S. sales of consumer electronics in 2015.  As such, it is on its way to beat Best Buy in this segment.  For Best Buy to retain its top spot in this segment, innovative ways of attracting consumers and providing conveniences are critical. At present,  e-commerce forms only 10% of Best Buy’s total sales. Through this pilot in-home consultation program,  the company is exploring personalized services to increase sales. Given notable innovations in consumer electronics and the increasing prevalence of smart home devices, personalized consultation could well prove to be extremely useful for consumers. Such consultations are likely to foster online purchases, as Best Buy will have assisted in product selection. The company was already involved with in-home service through its Geek squad and Magnolia subsidiaries, which took care of repair and installation of devices.  Hence, expanding these services to consumers who are looking to upgrade their devices or need advice on purchasing new devices should not be logistically difficult for the company. However whether it will be able to recover the cost of these advisors through an increase in sales remains to be seen.

As per our estimates, U.S. stores account for more than 90% of Best Buy’s valuation and we expect revenue per square foot in these stores to decline from around $900 in 2016 to nearly $875 by the end of our forecast period.

Best Buy now struggles to retain market share in consumer electronics and faces a decline in same store sales. Innovative measures to counter the convenience and best price offered by Amazon are critical for its growth. While the in-house consultation is currently at a pilot phase in limited geographies, a larger roll out could be in the offing, based on its response. Given the frequent  launch of new smart consumer products, this service has the potential to boost Best Buy’s revenues in future.

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