Best Buy Beefing Up Web, Downsizing Stores



Best Buy is rebalancing its channel strategy to address market share gains by online retailers, including


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

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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