Here’s How Best Buy Can Be Impacted By Samsung’s Reputation Loss

Three years ago,  Best Buy (NYSE:BBY) entered into a partnership with Samsung to open Samsung mini shops in its stores, so as to showcase the latter’s products.  Best Buy now rents a lot of space to Samsung for these experience shops.  Little did we know, though, that this excellent turnaround move might impact it negatively in future, given that Samsung is facing negative publicity after its Galaxy Note 7 fiasco.    Samsung is also  recalling 2.8 million washing machines in the U.S. for defects in the product. Given these factors, we believe these experience shops will see reduced traffic. As Samsung’s product woes increase and the company suffers from reputation loss, there will likely be a decline in the sale of its products.  In tandem, Best Buy will be impacted from this decline. Samsung is Best Buy’s largest supplier and, along with Apple, Sony, HP Inc and LG, accounts for 51% of all merchandise sold at Best Buy. However, given Best Buy’s allegiance with other brands, as consumer’s shift brand preferences, the total impact on Best Buy’s sales might not be very high. We believe Samsung’s reputation loss will impact Best Buy given the strong partnership between the two players.  However, this can be compensated with increase in sales of other brands and other innovative products such as VR (virtual reality) headsets which are being launched at Best Buy.

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Innovative Products, Wider Range Can Compensate Negative Impact

The Galaxy Note 7 impacted Samsung’s reputation negatively and it could have a lasting impact on its brand, leading customers to opt for other brands such as Google’s newly launched Pixel phone. We have yet to see the exact impact of shifting customer preferences, which will only become apparent in coming quarters.  Still, for Best Buy this could very well result in lower traffic through Samsung mini-shops in Best Buy stores, with a consequent decrease in purchases. This would translate into lower revenue per square foot for Best Buy, which is a key driver of its valuation.

However, Best Buy is acting to ensure that customers are attracted to its stores.  It manages its integrated channels ensure that, after product demos at its stores, customers make the actual purchase through its own online or offline channel. New products such as Virtual Reality (VR) headsets are a good example of the innovative merchandise which Best Buy can showcase to drive revenues for the company in the long term. The company is also partnering with start-ups to provide them shelf space in its stores for their cool consumer-focused gadgets. These innovative products should continue to drive traffic to its stores. Also, since Best Buy stocks several other brands in addition to Samsung, consumers shifting to other brands should continue to drive revenues for the store and not impact its overall sales.

We believe while the Samsung reputation loss will impact Best Buy to some extent – especially given their strong partnership.  That said, the impact should not be too severe.  The company’s growth initiatives should continue to drive revenues in the long term.

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