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Best Buy Beefing Up Web, Downsizing Stores

4/04/2011 12:01:00 AM Eastern

MINNEAPOLIS – Best Buy is rebalancing its
channel strategy to address market share gains
by online retailers, including Amazon.com.

In the process, the company is dramatically
expanding its online-only assortment, is promising
to price those products aggressively, and
has begun shrinking the footprint of some of its
big-box stores as they come off lease.

The chain has also not ruled out the possibility
of closing some of its larger locations outright.

In a fourth-quarter earnings call last month,
co-Americas president Mike Vitelli said Best
Buy will offer “very aggressive” pricing on a
much broader online-only assortment to improve
its price perception with customers. The
move is designed to help counter mobile price-comparison
technologies, which can put in-store stock at a disadvantage
because price checks don’t reflect value-added
promotions like extended financing, loyalty program discounts
and bundled offers, he said.

The low web pricing will be achieved through a combination
of supplier fulfillment, two-step distribution and
Best Buy-owned inventory, he said.

Still, CEO Brian Dunn stressed the importance of maintaining
a brick-and-mortar presence to differentiate Best
Buy from online-only competitors. Stores allow in-person
consultations, provide a convenient pickup option for ecommerce
orders, and will give the company a competitive
advantage should tax policy favoring e-tail-only merchants
change.

Indeed, in-store pickups represent over 40 percent of
all BestBuy.com purchases, he noted, and that figure doubles
to nearly 80 percent for big-screen TVs.

At the same time, Dunn acknowledged, “We are very
carefully looking at our square-footage requirements” and
are “redefining the optimal big-box store footprint.”

Co-Americas president Shari Ballard noted that the
company is presently reducing the footprint of existing
big-box stores as lease renewals come up, and is applying
lessons in space utilization that it has gleaned from more
than two-dozen “connected store” prototypes in the Las
Vegas and Pittsburgh markets.

“We’re still a little bit early, but we like what
we’re seeing in the connected stores right now
in terms of our ability to handle the traffic [and]
to show customers better Connected World
and multichannel value propositions in less
space,” she said. “The largest opportunity is in
better returns in existing locations using smaller
square footage.”

Best Buy is also reallocating floor space
and labor to three low market-share categories
where it sees the greatest opportunities for
growth: mobile, appliances and gaming. According
to Vitelli, the company’s mobile share
still only stands at about 6 percent, and Best
Buy plans to change that by adding more accessories
to in-store departments, opening an
additional 150 Best Buy Mobile small-format
stores this year for a total of 325, and increasing awareness
through advertising and smart-phone promotions
like the chain’s popular Free Phone Fridays events.

The retailer will also leverage Best Buy Mobile’s successful
labor, training and compensation operating model,
developed with European partner Carphone Warehouse,
to drive the emerging tablet PC business, Vitelli said.

In major appliances, where the chain commands 5
percent of U.S. sales and is ranked fourth behind Sears,
Lowe’s and Home Depot, Best Buy is hoping to get a better
return on department real estate by incorporating key
elements from its Pacific Sales appliance chain subsidiary.
The company is currently testing eight in-store Pac
Sales concept shops on the West Coast, which have benefitted
from “a better value proposition and labor model,”
CFO Jim Muehlbauer said.

Vitelli also pointed to opportunities in the $20 billion
gaming category, where Best Buy is No. 2 in hardware
and no. 3 in software. To improve its position and help
drive store traffic, the retailer is rolling out trade-in and
pre-order services and is investing in dedicated gaming
personnel and higher-margin digital content.

Room for the department expansions will come from declining
categories like CDs, whose floor space has been
cut by half. In addition to improved space utilization, the
changes to Best Buy’s business model will also help attract
new customers, the executives said.

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