Here's How Best Buy Can Benefit From Partnering With Start-Ups

| About: Best Buy (BBY)

Summary

The convenience of shopping for standard electronic products online with fast and sometimes free shipping options drive consumers to an e-commerce site, reducing store traffic for Best Buy. However, for new product launches, consumers prefer to experience a product before the actual purchase, which prompts a store visit. As a result, the company has been able to attract consumers in this segment.

Through a stronger partnership with start-ups, the company can ensure that its store always has "new" and "cool" gadgets which consumers would like to experience before a purchase. This can attract customers regularly to its stores, driving store traffic and, consequently, revenues.

We believe this strategy can provide Best Buy with a competitive edge and drive store traffic and revenues over the long term.

Recently, Best Buy (NYSE:BBY) partnered with PCH International to offer hardware start-ups shelf space in its retail stores. Termed as the "Ignite Program", under this partnership, a newly opened Best Buy store will have dedicated space for start-up hardware products such as Muzik Spotify-enabled headphones, the Noke smart lock and the Zuli smartplug. While the company has been working with start-ups in the past, this program is expected to make it easier and faster for customers to view new products launched by start-ups. We believe that as e-commerce witnesses rapid growth and consumers prefer the convenience of shopping for standard electronics online, Best Buy can benefit from bringing innovative products to its store. Customers should be drawn to its brick-and-mortar stores to try out the cool new gadgets displayed by the company. Such gadgets, we note, are less likely to be purchased online without a demo or test. While this is still a pilot plan, we believe this strategy can provide Best Buy with a competitive edge and drive store traffic and revenues over the long term.

Driving Store Traffic

Amazon (NASDAQ:AMZN) is a strong competitor for Best Buy, as consumer electronics form a significant portion of its gross merchandise value. The convenience of shopping for standard electronic products online with fast and sometimes free shipping options drive consumers to an e-commerce site, reducing store traffic for Best Buy. However, for new product launches, consumers prefer to experience a product before the actual purchase, which prompts a store visit. As a result, the company has been able to attract consumers in this segment. For instance, for virtual reality headsets, Best Buy was a preferred store by manufacturers, and consumers flocked its stores to see a live demo of the product. The company has been augmenting its online channel to ensure that after an in-store product experience, if the purchase happens online, consumers use Best Buy's e-commerce platform.

Through a stronger partnership with start-ups, the company can ensure that its store always has "new" and "cool" gadgets which consumers would like to experience before a purchase. This can attract customers regularly to its stores, driving store traffic and, consequently, revenues.

According to our estimates, revenue per square feet for Best Buy's U.S. stores will decline gradually from $904 in 2016 to $868 by the end of our forecast period.

We expect this decline as the company reaches a saturation point in terms of store efficiency. However, measures to increase multi-channel sales can arrest this decline and impact Best Buy's valuation positively.

Using innovation to attract customers to its stores is critical for the company's future growth. We believe the initiative to bring interesting products from start-ups to its stores can drive store traffic. If this pilot is successful, it can drive growth for Best Buy over the long term.

Disclosure: No positions.