Best Buy (NYSE:BBY) had its analyst and investor day conference this week. While there were many important updates, one theme that I thought was particularly important was the company's intention to accelerate its multi-channel sales efforts. I say "multi-channel" rather than just "online" because Best Buy is focusing on servicing customers where they want, when they want, and leveraging the crossover capabilities of the channels as a competitive advantage. Best Buy's goal around online specifically is to grow at double the rate of the overall online market and at least double its online business over the next three to five years. I believe the company will likely achieve this goal at the early end of this range.
To understand how Best Buy will achieve this, it's important to know where the company is coming from. Currently, online sales make up only 5% of Best Buy's total sales, including 5.4% domestically and 3.8% internationally. To begin with, this is a low percentage of sales for many industries and the CE market overall. By its own admission, the company has not been as serious about online growth in the past as it is now, but I believe there are reasons for this.
The biggest issue by far has been price, which tends to be lower online for many products than you will find in stores. In fact, the company estimates about 31% of customers who end up not buying from it after visiting the BBY site do so because of price (including taxes). However, the industry is changing and Best Buy is adapting in a way to allow greater growth.
First, the price gap between online and in-store prices is closing as the playing field is leveled and states force online-only retailers to collect sales tax. To be sure, this is not a done deal, but state legislatures are beginning to go after this loophole to help close budget deficits.
According to the Best Buy presentation, five states enacted "e-fairness" laws in recent years, three more so far in 2011 and 20 have discussions underway, including the important states of CA, FL and TX. CEO Brian Dunn also suggested legislation at a federal level was going to be introduced shortly, which would certainly accelerate the trend if made law. Taxing all online sites equally would be a major, but not complete, closure in the pricing difference. It will also significantly hurt small, online retailers that compete completely on price.
Online Only Assortment
Best Buy is also significantly expanding its online assortment with SKUs that it won't be carrying in its stores. In the past, the company had gone to great lengths to simplify the process for consumers by making sure it carried only the best items in its stores. This process largely carried over to its website, which was causing a significant number of customers to leave without making a purchase (21% of non-conversion website traffic is due to BBY not having what the customer is looking for, not available in-store, store pickup, or a "no shipping to customer" policy).
The company now recognizes it needs to reverse this strategy. There is no reason Best Buy can't carry virtually all SKUs rather than turn away customers or, in some cases, never even get the traffic. As the company will not carry these products in its stores, Best Buy can be as sharp or sharper than the competition with its pricing.
While details were thin, Best Buy is apparently going to launch an online marketplace this fall that will allow vendors and other retailers to sell on BBY.com. Vendors and retailers get to take advantage of BBY's significant website traffic and BBY, one would assume, is getting some type of commission for the sale.
The expanded assortment online also allows the company to take advantage of opportunistic end-of-cycle or other inventory buys. When Best Buy purchases inventory for its stores, it can only buy in lots large enough to accommodate its 1,000+ stores. However, if it is selling something only online, Best Buy can now make special purchases at attractive prices that the company can essentially blow out online at a low price and still make its margin. Some retailers build their business around this model (Rex Stores used to, but that business moved largely online). For Best Buy, it's just another part of the online market it didn't previously operate in.
During the analyst day, a question was asked about Best Buy's dual brand strategy in Canada and why the company couldn't apply that tactic to online sales in the US. The answer was that BBY can and may very well do that. It's something that it's considered, but the tax issue has been a prohibiting factor. Any online retailer BBY bought would lose significant value as soon as BBY acquired it, since it would have to collect state sales tax. However, with tax laws now changing in many states, the potential for an acquisition of an online retailer looks to have more merit.
Unique Abilities of Multi-Channel Retailing
The last five points have been about external changes or areas that Best Buy has not traditionally competed in. These changes alone should drive stronger sales for Best Buy, but there are several reasons why I believe Best Buy should be able to grow its share in online substantially. Specifically, Best Buy has clear, distinct advantages over many competitors that have accrued because of its strong Main Street presence:
- Strong Brand in CE: According to the company's research, Best Buy is top-of-mind for consumer electronics at 65%, with a wide margin over competitors like Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT), with only 4% mind share each. Best Buy was also the preferred brand for CE purchases with 42% share compared to only 16% for Wal-Mart and 21% for Amazon. A strong brand is a big advantage when consumers are searching for CE online, especially as the company expands its offering and sharpens its prices.
- Buy Online, Pick Up in Store: Over 40% of online purchases are picked up in the store, up from 35%. Best Buy has enhanced this ability by allowing others to pick items for you as well (i.e., buy online for your college son/daughter, who pick it up themselves). The service is particularly popular with large-screen TVs, where many consumers don't want to worry about when its delivered.
- Returns: Online purchases can be returned through the mail or returned/exchanged in stores (depending on the item).
- Services: Best Buy can offer a whole host of services, which are generally higher margin. This includes extended warranties, buyback protection, home installation, geek squad PC and other services, connected services and financing.
In summary, I think Best Buy is finally going after online sales in a big way. I think its strategy will be successful over time and provide incremental growth in the coming years. This move should also alleviate fears of Best Buy's long term relevancy, which should in turn help expand the multiple from its current extremely low 9x 2011 estimated EPS.
Disclosure: I am long BBY.