Best Buy Co., Inc. (NYSE:BBY) was the one-time market leader in selling consumer electronics. It was growing bigger and better and benefiting from opening big stores in prime locations. But then along came Amazon.com, Inc. (NASDAQ:AMZN), trampling on everything that Best Buy Co., Inc. (NYSE:BBY) had created.
Since then the company has suffered continuous losses – on the profitability front as well as reputation front. However, the company is seeing the light of the day as Richard Schulze has finally given up on taking Best Buy Co., Inc. (NYSE:BBY) private. The company posted positive same-store sales of 0.9% in the US after two years of decline. Further, the company is on track to get its business model right and is trying to capitalize on the benefits of scale and location.
Price-matching policy
After continuous decline with its showrooming, Best Buy finally acknowledged that it was a factor that was eating into its sales. During the recent holiday season, it announced a price-matching policy. It worked. It announced better-than-expected results and reported a 11% increase in its online sales in its fourth quarter.
Going forward, it has decided to make its holiday price-matching policy permanent, thereby aiming to end the showrooming practice. Further, it also entered into a partnership with Red Laser, a mobile app that enables Best Buy to push coupons and also suggests one-click ordering for its customers before they decide to flee the store.
Looking at the big-ticket items like TVs, computers, etc., there isn’t much disparity between prices. This is what the company is trying to achieve. The company is trying hard to break the perception that Best Buy’s prices are higher than Amazon.com, Inc. (NASDAQ:AMZN)’s.
The holiday matching-price policy has paid off for the company, and I wouldn’t be surprised if going forward Best Buy resorts to an all-out pricing war to increase its market share.
The Samsung experience
Best Buy was consistently working with its suppliers to give its customers a compelling reason to visit the store. On the other hand, Samsung Electronics, the world’s largest consumer electronics maker, was looking to beef up its retail presence. This resulted in Best Buy’s next move to end showrooming – opening Samsung stores within Best Buy stores. Samsung plans to open mini-stores, called Samsung Experience Shops, within Best Buy’s 1,400 stores, which will be devoted to showcasing only its products.
This is not the first time that Best Buy has entered into such an arrangement. In 2007, it set up similar stores for Apple Inc. (NASDAQ:AAPL) product as well. However, Best Buy faced tough competition from Apple Inc. (NASDAQ:AAPL)‘s own brick-and-mortar stores, leaving very little profitability from the arrangement. Further, as Samsung increasingly encroaches on Apple’s market share it only seems right that the company doubled up its relationship with Samsung.
Apart from the monetary benefit from Samsung (which was not disclosed due to confidentiality), Best Buy will benefit from this structure by shifting the cost and risk of showrooming to the manufacturers. Further, it will also benefit from the increased traffic and better utilization of its Geek squad, which can provide installation services to customers who buy TVs and other accessories. If other consumer-electronics manufacturers follow suit, Best Buy can definitely turn this into a profitable franchise.
Exiting Europe
Best Buy decided to exit its joint venture Best Buy Europe with Carphone Warehouse Group PLC (LON:CPW), the biggest independent mobile-phone seller in Europe. It will sell its 50% interest back to Carphone Warehouse Group PLC (LON:CPW), in most likely a cash deal of $775 million.
The sale marked the end of an unsuccessful and unprofitable venture, which the company embarked on in 2008. The venture was looked upon as a growth vehicle enabling Best Buy to open stores in Europe and Carphone Warehouse to build its chain of mobile stores in U.S. However, both companies found it difficult to implement plans during the recession and Best Buy aborted its plans for big box Europe stores in 2011. Though the sale will be considered a casualty, it will definitely help the company to tread along its recovery track more smoothly.
As a result of the transaction, Best Buy will take an asset impairment charge of $200 million. It will also pay $45 million related to other existing agreements that will be terminated. According to CEO Hubert Joly, the transaction would help to simplify its business, improve its return on invested capital and strengthen its balance sheet. For Carphone Warehouse, it means a simpler ownership structure that will help to streamline its management decision-making.
Competition
It goes without saying that Best Buy’s strongest competitor is Amazon. Amazon has proved to be a nightmare to many, from book publishers to shoe retailers. The company posted strong first-quarter results with strong growth in North America. It is making heavy investments in order to improve its business reach and as a result its gross margins are taking a hit. However, this not considered as a major threat for Amazon as these investments will lead the company to future growth. Besides its traditional retail operations, the company is also investing in other profitable avenues like cloud computing, advertising, etc.
But Best Buy is ready to take on Amazon, as can be seen from its above initiatives. As mentioned earlier, Best Buy is slowly matching its prices and at the same time Amazon’s prices are increasing as it has started charging sales tax in a few states.
RadioShack Corporation (NYSE:RSH) is sailing in the same boat as Best Buy. Like Best Buy, it failed to keep pace with the increasing online competition. But unlike Best Buy, the company is not doing enough to transform itself or to cater to the younger shoppers. It recently posted a larger than expected first-quarter loss, highlighting the challenges its management is facing as it tries to turnaround the company. Its net loss widened from $8 million last year to $43 million this year. Further, the company operates with a challenged business model due to its reliance on the slow-moving wireless category and limited opportunity for cost cuts after sharp reductions in the recent years. However, CEO Joseph Magnacca is confident that he will turn around the company as he continues to invest in branding and advertising.
Conclusion
Best Buy seems to have a promising future with management actions providing the required catalysts. The man of the moment is CEO Hubert Joly, who is doing his bit in getting the company out of the shackles of continued losses and declining comparable same-store sales. As seen above, the company is making a concerted effort to change its business model toward having a more realistic pricing approach. Best Buy has a long journey ahead but it is definitely moving along the right track.
The article Best Buy on the Right Track originally appeared on Fool.com and is written by Shas Dey.
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