3 Key Initiatives for Best Buy (NYSE:BBY)
The Best Buy management team has seen a shaky past six months - and with big news yesterday comes big questions. Where will Joley take Best Buy from here? This juncture will likely mark a turning point for the fate of Best Buy. Over the past 5 years we have seen the death of the big box category killer (sad to see you go Borders and CompUSA) and unless sizable and sweeping changes are made, Best Buy will be an online shadow of its former self. Best Buy needs to focus on 3 things to bring itself from the brink. Best Buy needs to embrace showrooming, build its owned brands, and reincarnate the in store culture.
Embrace the showroom
Best Buy management and analysts alike have acknowledged the fact that Best Buy is "showrooming" products for buyers to buy online. Rather than try to limit this, Best Buy needs to capitalize on it and integrate it into its strategy in a two pronged approach - embrace the showroom and promote the website.
Many retailers spend millions to drive in store traffic. Best Buy already has prime locations and plenty of in-store traffic. It needs to use this to its advantage, while reducing its physical footprint in non-strategic areas. Best Buy needs to revise its store layout and display products by brand rather than by category. It should utilize brand showcase vignettes - expensive products like large screen TVs and cutting edge mobile devices will create excitement and bring consumers in. Employing brand vignettes will allow Best Buy to reformulate and realign its vendor relationships as well as provide an opportunity for Best Buy to collect vendor income in turn for showrooming these products. This vendor income will help offset the significant fixed cost of showrooming all of these products - it is a partnership in earnest. Further, Best Buy needs to be the place to come to see the latest and greatest products. Best Buy needs to partner with their vendors in order to form exclusive and bundled offers to drive excitement in stores. Best Buy should focus on being The Electronics Showroom. Further, Best Buy needs to revamp its online identity. For many years, its customers were confident that shopping at Best Buy would yield the best prices. Best Buy needs to build trust and ensure to its online customers that Best Buy online has the best prices and selection.
One of the greatest opportunities for a retailer to promote margin growth is owned brands. They have the knowledge of the high margin items as well as a pulse of the market that manufacturers do not necessarily have. As such, Best Buy should continue its focus on its owned brands. Magnolia is well intentioned, but the execution is only mediocre. It has recognition neither at the high end nor the low end. Best Buy needs to provide something that adds to the reputation if they are at the high end. For instance, since Best Buy is one of the last standing brick and mortar electronics retailers, they have a significant advantage in service offerings. One option to bolster the value of their in-house brands would be an included service package or warranty depending on the product. Best Buy continues to have these as talking points but nowhere is there any evidence of significant investment or resource allocation in this area. This ability to drop in high margin products over time is what will provide sustainable margin improvements year over year.
You Say You Want A Revolution
Consumers have roundly acknowledged that the store staff at Best Buy are not knowledgeable and have been known to be pushy. This worked when Best Buy was indeed the best buy in town. However, Best Buy finds itself at a precipice: are they a low cost retailer or a high service retailer? They simply cannot compete on price with Amazon with their cost structure so they need to leverage their physical locations in order to provide better service. As such, Best Buy needs a cultural revolution at the store level. Currently, the staff is sales oriented rather than education oriented. Times have changed, many customers have done their research before coming to the store and they may just want to touch and feel the product. Or, they cannot find the answer to their question online. Or maybe, they want to come to the store to see what to buy, then price shop online. No matter the case, high pressure sales tactics will not cut it. Additionally, in order to build a strong brand around Best Buy and its owned brands, store staff need to be seen as a resource, an extension of the brands. In order to do this, store staff need to have extensive training and be seen as a resource to learn more about the products.
A Best Buy?
Without these three strategic changes Best Buy will fade away. Expect a statement on what the new plan is in upcoming weeks. And, unless Joley explicitly announces strategic vendor partnerships that will subsidize store costs, real investment in owned brands, and a serious commitment to reincarnate in store culture, I would recommend selling Best Buy stock. Best Buy cannot compete on price as a big box category killer and will continue its fall if these issues are not addressed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.