Best Buy's Bombshells: And You Think You Had A Busy Week? - Twice

Best Buy's Bombshells: And You Think You Had A Busy Week?

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Best Buy was the center of attention last month when in quick succession it projected flat sales for the year, pulled the plug on its third-party marketplace, confirmed headquarters headcount reductions and described an historic initiative at the No. 1 CE chain.

First the sales outlook: Absent a resurgence in mobile, the retailer is anticipating flat revenue this year as gains in appliances, home automation and home theater will likely be offset by continuing weakness in legacy CE categories.

Commenting on the company’s fourth-quarter and full-year performance, chief financial officer Sharon McCollam said revenue will also see-saw this year, with revenue falling for the first six months and growth returning in the back half of 2016.

The product outlook continues a trend that took shape in the fourth quarter. Its U.S. sales slipped 1.5 percent to $12.5 billion and comps declined 1.7 percent for the three months, ended Jan. 30, as increases in health and wearables, home theater and majaps were more than offset by what Best Buy described as “significant declines” in mobile phones, tablets and digital imaging, contributing to a 9 percent decline in net earnings, to $477 million.

“We believe that the softness that we saw in the NPD-tracked categories and mobile phones will continue” in Q1, McCollam said.

The retailer noted, however, that full-year domestic revenue was up nearly 1 percent, to $36.4 billion, and had grown by more than $500 million over the past two years.

On an earnings call, chairman/CEO Hubert Joly attributed the slump in wireless to high smartphone penetration and low demand for the current crop of handsets. Help should arrive in subsequent quarters though, as a rash of “more compelling phone launches,” including, ostensibly, new signature flagship models from Apple, Samsung and LG, hit the market.

Despite the soft top line, McCollam projected “flattish” operating income for the full year thanks to ongoing cost reductions and “gross profit optimization initiatives.” In a statement, Joly said the company is entering the next phase of its Renew Blue revitalization strategy, which calls for:

• “[building] on our strong industry position and multi-channel capabilities to drive the existing business”;

• “[driving] cost reduction and efficiencies”; and

• “[advancing] key initiatives to drive future growth and differentiation.”

Indeed, digital proved to be a fourth-quarter bright spot for Best Buy, as higher conversion rates sent online revenue up 13.7 percent to nearly $2 billion, raising e-tail’s share of total domestic revenue to 15.6 percent, up from 13.6 percent last year.

Joly added that the initiatives — which include curated, solution-based merchandise and an enhanced services portfolio to support it — are expected over time to help “accelerate revenue and operating income growth by taking advantage of opportunities provided by ongoing technology innovation and the need customers have for help.”

Bye-Bye Best Buy Marketplace

A more tightly edited assortment also meant the end of the company’s five-year-old online Marketplace, which it discontinued due to product overlap, customer confusion, and minimal revenue contribution.

In an email to its approximately 100 third-party sellers obtained by TWICE, Best Buy e-commerce president Mary Lou Kelley said the platform would be shut and all listings removed, effective Feb. 24. “We believe we can continue to provide a positive customer experience on our site through other product sourcing methods,” she wrote.

Best Buy spokesman Jeff Haydock told TWICE that the Marketplace accounted for only “a tiny fraction of 1 percent of domestic revenue,” and created confusion among some consumers who believed they could return third-party merchandise to the chain’s stores.

There was also a 70 percent overlap in Marketplace items, he said, and “we want to provide a curated list of products we sell.”

Best Buy sellers have variously included such retailers as Beach Camera, Cameta Camera, DataVision, Electronic Express, Electronics Expo, ListenUp, Plessers, Rakuten, Stereo Advantage, Wayfair, Walt’s TV and World Wide Stereo, and such brands as Griffin, Monoprice and Rosewill (Newegg).

At the time of its launch, then-CEO Brian Dunn described the Marketplace as “a key development to our multichannel platform.” The approach has also been embraced by full-line and specialty merchants like Amazon, Jet, Newegg, Sears, Rakuten (formerly Buy.com) and Walmart, and by eager retailers who see it as an important sales adjunct in the e-commerce age.

For Amazon, which charges its sellers a 10 percent sales commission and provides them with profitable fulfillment services, marketplace merchandise accounted for 47 percent of all unit volume in the fourth quarter of 2015 and nearly 60 percent of total sales dollar value, ChannelAdvisor showed.

Haydock noted that the Marketplace reassessment was part of a routine review of all Best Buy businesses, which allows the retailer to free up resources for investment in other areas of the company.

Tweaking HQ Ranks

Along those lines, Best Buy has shed several dozen corporate posts but is looking to add about 90 new headquarters staffers, the hometown Star Tribune reported last month. The CE specialty chain employs several thousand workers at its corporate offices in the Minneapolis suburb of Richfield, Minn.

The layoffs, which took place over recent weeks, follow a hard-fought holiday season, as reflected in the quarter’s ho-hum net and comp-store sales.

In 2013 Joly cut 400 headquarters jobs as part of his Renew Blue turnaround plan, on top of another 400 corporate and support positions that were culled the year before by his predecessor Brian Dunn in an effort to trim costs.

The new headquarters jobs included over two dozen “corporate career” posts that ranged from web design and cyber security to Geek Squad services development and strategic planning.

Game Changer

Meanwhile, on the earnings call, McCollam described a recent supply-chain initiative that’s giving new purpose to the big-box store format as one for the company’s history books.

The retailer’s ship-from-store program, in which showroom inventory is used to fulfill local online orders, “will go down in our history at Best Buy as one of the most important and strategic decisions that we made,” she told analysts.

McCollam, previously chief financial officer and COO at Williams Sonoma, said the effort allows the chain to use both its online and retail inventories to serve its etail customers, and has helped propel its e-commerce business to more than $4 billion annually, representing more than 15.6 percent of total domestic revenue in Q4.

“What ship-from-store is allowing us to do is be able to on a consistent basis make marketing promises to customers about speed of delivery,” she added.

The program, championed by Joly, was first piloted in 50 stores in 2013 and has since been expanded to all 1,037 locations. Joly noted that it was designed to address Best Buy’s failure to close as many as 4 percent of online customers because the item they wanted was out of stock.

Elsewhere during the call:

• Joly implied that the showrooms had maxed out the opportunity for further vendor shops, and that going forward the chain and its store-in-store partners, including Apple, AT&T, Microsoft, Samsung, Sony and Verizon, would focus on providing additional support, services and education for customers.

• McCollam promised another $400 million in cost savings as the company refines certain supply chain and logistical procedures that were essentially jerry-rigged during a period of hyper-growth, when 50 stores and $2 billion in revenue were being added each year.

• McCollam confirmed that 13 stores were closed last year and well over 100 store leases are expiring, although no widespread shutdowns are expected as “the stores that remain in our portfolio … are performing” and have no geographic overlap.

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