Many recent Best Buy (NYSE:BBY) articles speak to the valuation of the business. Buy! Sell! Well, that's not what I want to address here. Instead, in spite of the naysayers who say that big box retailers are bound to fail, I'm going to address three key strategic moves that I believe will boost value for Best Buy's shareholders.
Best Buy entered the movie business when it acquired interest in Cinemanow. However, this is just the start of expansion into the digital media space. Best Buy would do well to compete with the likes of iTunes, Wal-Mart and Amazon. Establishing itself as a consumer electronics retailer is only half true unless Best Buy adds this product line to its offerings.
The downside? Margins in the digital music space are very low. Best Buy's move into this space would be an a la carte strategy rather than profit-generating strategy per se. This focus would offer Best Buy customers more options - a way to see Best Buy as a one-stop-shop.
"Showrooming" is the concept of showcasing to consumers various products to convince said consumer that they really need that product. Best Buy's physical presence is based on the "showrooming" model. My recommendation is to enhance this unique characteristic, not shrink back in fear of low-cost competition from internet rivals.
As of its latest filing, Best Buy stopped the massive reduction of its real estate portion. Fearful of a fate similar to that of Blockbuster, Best Buy correctly reduced fixed costs by shuttering numerous stores around the United States. However, the key is not reducing the number of stores but diversifying store types. It is my recommendation that Best Buy follows the IKEA model here. With massive Best Buy outlets strategically placed in lower-cost areas (suburbs instead of cities), the company can maintain the showrooming effect while cutting fixed costs. Smaller-scale retail locations may still exist as some sort of presence in cities is advised.
The risk? The success of such a model cannot be tested until the strategy is implemented. This means significant upfront costs in order to test out a long-term strategy for the real estate portfolio. Nonetheless, this is a strategy I would still recommend.
Private Labels and Partnerships
Best Buy has a number of private brands including Dynex, Insignia and Rocketfish. While Best Buy does not release the profit margin figures for these private label brands or the percentage of net sales that these products make up, it is clear that Best Buy is better off (on a per unit basis) selling brands that it owns instead of solely focusing suppliers' products. The challenge with private label brands is that it ices relationships with major suppliers (e.g. Apple, Samsung, etc.) since these suppliers now compete directly with Best Buy's products when they are depending on Best Buy to advertise their products for them. Suppliers sometimes view this as a conflict of interest.
While this problem cannot be avoided completely, I would like to recommend a different type of relationship that will reduce the strain. Instead of focusing on the suppliers or private label brands, Best Buy should develop a platform and form a search committee to seek out new and upcoming products that need proper advertising, marketing and distribution channels. Best Buy can offer small product-based companies all of this in exchange for exclusive distribution rights of said products. Committed customers of these new products will need to go through Best Buy in order to purchase these products.
Where's the risk in this? Well, it doesn't completely eliminate the distributor-supplier relationship strain given that Best Buy will still offer products that directly compete with their suppliers' products. The upside is that the start-up costs for such a venture seem marginal as the only requirements would be advertising, creating a platform for product-based companies to showcase their products to Best Buy and the formation of an internal search committee.
I do not believe that Best Buy is destined for failure. The competitive landscape is shifting and the company needs to adjust its strategy accordingly. I've recommended three basic strategic moves that I believe will widen the economic moat around Best Buy though I'm sure there are many others. After all, revenues do stand at over $50 billion, clearly showing customer demand for the consumer electronics retailer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.