Best Buy is pinning its brick-andmortar hopes on reducing its big-box real estate, building out its small-format Mobile chain, and converting its remaining flagship locations to its new connectedstore design.
The No. 1 CE chain said it also plans to trim staff, improve efficiencies and close 50 stores this year to realize $800 million in savings by 2015.
The announced strategy was detailed after the retailer reported a $1.7 billion loss in its fiscal fourth quarter. The loss stemmed entirely from one-time charges including the buyout of its mobile business from European partner Carphone Warehouse and the closing of a handful of failed British stores, but Wall Street’s dour consensus still sent shares lower in the hours following the earnings release.
CEO Brian Dunn described the new moves as “major actions” that will help lower the company’s overall cost structure. Some of the cost savings will be invested in improving the customer experience and lowering prices to drive revenue, he said on an earnings call, while some of the savings will eventually fall to the bottom line as increased operating margins.
The changes will take time to bear fruit, he noted, and for the near term the company still faces an uncertain consumer environment and another year of weak sales of “traditional CE,” including TV, digital imaging and entertainment.
But “flat innovation cycles are temporal and not permanent,” he said, and “I am very enthusiastic about the future.”
At least one analyst, Credit Suisse’s Gary Balter, concurred. Admittedly a lone voice among a growing chorus of naysayers, he cited in a research note a litany of factors working in Best Buy’s favor including its strong cash flow; its reinvestment in its stores; its service model; margin relief from new vendor pricing policies and a potential across-the-board e-commerce tax; and its plans to cut costs and incentivize associates.
The cost-cutting plan includes the closure of 50 of Best Buy’s 1,100 big-box stores this year; the loss of about 400 corporate and support positions; a reduction in outside consultant services; savings from improved supply-chain efficiencies and lower return rates; and lower non-merchandise procurement costs.
About $250 million in cuts would be made this year alone, the company said.
On the store front the chain will convert all of its bigbox stores in Minneapolis-St. Paul and San Antonio, Texas, to its connected store format before the 2012 holiday season, and will open another 100 Best Buy Mobile stores for a total of 405 locations this year. The company is still projecting upwards of 800 freestanding mobile locations by 2015.
The connected stores are focused on wireless and broadband subscriptions and provide what Dunn described as “a multichannel experience through a total transformation of the big-box store.” Among other features, the format combines tablets with mobile, moves the Geek Squad stations up front, adds in-store pick up at checkout and, borrowing a page from Apple, provides a Genius Bar-like “Central Knowledge Desk.”
Prototypes in Las Vegas are outperforming the rest of chain in profit per square foot, are showing a “significant” lift in sales and margin, and are generating an internal rate of return of over 20 percent, Dunn said. He cited one of the test stores, a 19-year-old location, that went from “an old and tired footprint” to “performing like it’s new again.”
Best Buy expects total big-box square footage in the targeted Texas and Minnesota markets to be reduced by almost 20 percent by closing stores and trimming instore space by subletting it or returning it to landlords. Depending on the outcome of the two regional pilots, 20 percent could be a benchmark for future real estate reductions Dunn suggested, while “points of presence” including standalone mobile stores will increase by more than the same amount. The approach, he said, will result in “more doors and less square footage.”
Dunn stressed that the store-format changes are about more than “brick” alone, and are designed to help migrate customers across all of Best Buy’s distribution channels, including the web.
Elsewhere, the chain will also continue to roll out its in-store Pacific Kitchen & Bath and Magnolia Design Center concepts. The former is outpacing comp sales in its standard appliance departments two to one, while the latter, which features home automation solutions, has similarly been outselling Best Buy’s regular Magnolia Home Theater areas, Dunn said.
The chain will also bring a new labor model to all big-box stores starting this summer that will provide a 40 percent increase in training for new employees and an enhanced compensation plan. Based on Best Buy Mobile, the plan provides team encouragement and introduces financial incentives for delivering on customer service and sales goals.
In addition, Best Buy will provide improved benefits to members of its Reward Zone Silver loyalty program, which include a significant percentage of its most profitable customers, Dunn said. The new benefits will include free expedited shipping, a free annual house call from Geek Squad, and a 60-day return and pricematch policy.
Overseas, the company plans to open 50 Five Star stores in China this year, including 14 new mobile store-within-a-store shops that it will launch with Carphone Warehouse.