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Best Buy Sees Big Payoff In Supply-Chain Savings

Minneapolis — Best Buy is anticipating a big payoff from better supply-chain processes and floor-space utilization, which will offset huge investments in lower pricing and multichannel sales.

On an earnings call this morning after reporting a first-quarter loss, president/CEO Hubert Joly and chief financial officer Sharon McCollam said they will continue to cut costs and improve operational efficiencies, which have resulted in annualized savings of $325 million to date.

McCollam identified reverse logistics in particular as a No. 1 priority. The handling of returns “received virtually no attention as the company grew,” she noted, and the outdated processes cost the retailer some $400 million in losses each year.

She said another overlooked area is the company’s supply-chain vendor base, which is currently being culled.

The chain is also working to reduce and shorten truck trips by consolidating freight, and is re-allocating inventory so that shipments are sent from the distribution centers nearest their destinations.

The efforts so far have shaved $30 million off Best Buy’s cost of selling goods, and the company has identified another $295 million in potential savings.

In stores, Best Buy is working to garner greater sales productivity from its floor space by deploying the new Samsung Experience Shops and replacing its CD and DVD departments with more profitable categories like mobile, majaps and accessories, Joly said.

Additional branded vendor shops may also be in the works, he suggested.

The changeover, which will also include dedicated clearance zones in select stores, is expected to be completed this summer, although the attendant disruptions could impact second-quarter earnings, McCollam warned.

Still, the savings realized from the initiatives will offset “a significantly greater investment” in competitive pricing and increased spending on multichannel selling, she said.

 Joly acknowledged that “price competitiveness is very important to attract and keep customers,” and that it has a bigger bottom-line impact than the company’s two-month-old price-match policy, which is infrequently employed to help close sales.

Online, Best Buy is redesigning its website with improved navigation, an enhanced search engine, richer content, an expanded assortment, and increased product and services recommendations to boost attachment sales, both at checkout and at in-store pick-ups. The company is also working to create a more consistent multichannel shopping experience across its web and mobile platforms, will allow customers to purchase in-store clearance items online regardless of the location, and is revamping its search engine optimization tools to ensure that Best Buy appears on lead search pages.

The chain is also piloting a “ship from store” program in 50 locations in which the stores serve as fulfillment centers for online orders. Joly noted that it fails to close 2 percent to 4 percent of online shoppers because the item they want is out of stock on, even though it may be available in nearby stores.

Joly recognized that many of the online fixes “may sound like just basic functionality upgrades, [but] they’re actually game changing when an online retailer of our size has historically underinvested in the online channel.” will also benefit from a more level playing field by next February, when half the U.S. population will be paying state sales tax on purchases, he said.

Joly also lauded the company’s better-than-expected sales and earnings results for the first quarter, which exceeded Wall Street’s earnings forecasts despite multiple hurdles including late smartphone deliveries, a dearth of new product introductions, and the impact of its pending sale of Best Buy Europe.

Elsewhere, the company has put the brakes on new big-box stores as it continues to examine current prototypes, but has moved forward with its Best Buy Mobile format, opening 10 more boutiques in the first quarter with two more planned for later this year.

Joly also extended the company’s sympathy and prayers to Oklahoma’s tornado victims, and noted that not all of Best Buy’s area employees had yet been accounted for.