BEST BUY – relative to Amazon/Whole Foods – HOW TO COPE? – IT CAN BE DONE!!!

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All participants and observers of the current restaurant and retail landscape, especially with Amazon about to make an aggressive entry (through Whole Foods) in the food away from home industry, are wondering how best to cope. We present Best Buy as an example of an again prosperous survivor in a brutally competitive consumer market segment. At the end of calendar 2012, Best Buy was suffering with declining sales, margins and stock price (at $10.00/share). The broad consensus was that Best Buy was nothing but a showroom for Amazon and other online retailers. A short four years later,  Best Buy’s earnings have almost doubled and the stock is up 5-6x. The question is: what can we learn from the Best Buy performance? What portion of their strategies can apply to the restaurant/retail landscape today? We don’t expect to find all the answers here, and the “walk” is always tougher than the “talk”, but we can’t afford to ignore this unexpected success story. As we have written the description below, we have inserted editorial commentary, boldfaced. Since the capital markets are always indiscriminate in the takedown, and valuations are getting decimated, we are searching for those participants that can best differentiate their commodity, build market share, and create value for all stakeholders. We would be happy to discuss with any of our readers various aspects of our presentation.

BBY: Dealt a Poor Hand, Playing it Well (2016 10-K)

Best Buy retails consumer electronics products, appliances and services with sales of nearly $39.6M in its stores and on line. As of its 18Q1 it operated 1,562 stores (1,350 in the US, 212 in Canada and 25 in Mexico). Of the revenues 90% were generated in the US, with the balance internationally.

The company can be considered the poster child of the havoc wreaked on retail by the internet. Less than a decade ago it was the disrupter, dominating consumer electronics and leaving the ruins of retail competitors such as Circuit City in its wake. Its edge was its massive selection; generous terms and product allocations by vendors, given its volume; its extensive store footprint supported by superior site selection and its success in managing the turbulence of consumer product cycles.

We needn’t retell the familiar account of how Best Buy’s stores functioned as a showroom for products purchased at better prices online, particularly at Instead, our interest here is a case study of how the company has fought back and anything the fight can tell us about the prospects for brick and mortar retailers, especially those, like BBY, that currently trade in something approaching a commodity product.

We suggest up front that it’s a mixed picture. On the one hand, there is a future for bricks and mortar retailers that identify and exploit whatever advantages they have over pure-play internet competitors. On the other, the old retail model, especially unheeded by historical lessons, is permanently impaired and the best that can be hoped for (besides survival) are lower (even if satisfactory) margins, returns on capital and free cash flows . In BBY’s case that has meant establishing price authority vs internet rivals while also establishing its superiority in assisting customers deal with the mushrooming complexity of their appliances and devices. (Figure out how to differentiate your “commodity” and best exceed customer expectations.)

Company Strategy

In FY13 (ended Jan 2013), the company had been struggling with declining revenues and margins for several years (see chart below). The company’s responses, the most significant of which were sales promotions and major cost reductions, were largely ineffective in halting the sales declines, though for a while they forestalled a precipitous decline in margins. (Should sound historically familiar to most restaurant/retail analysts, especially with lower commodity prices recently providing some “cover”.) By FY13, the situation turned urgent and the company launched an aggressive new turnaround strategy called Renew Blue. The plan’s main focus was stabilizing and improving same store sales, increasing profitability, both domestically and internationally, and making Best Buy the preferred authority and destination for consumer technology products and services (Now comes the challenge, making your operation an “authority” of sorts). Specifically the company invested heavily in online growth. It overhauled its platform, expanding customer service options from home delivery to store pickup & returns. It introduced loyalty programs and credit options. To establish its price authority it installed robust price disciplines (can’t overcharge), including matching any better price offered by a legitimate competitor. This aggressive pricing policy pressured gross margins. This has been especially true for online sales which have a lower attach rate, particularly with higher margin products such as warranties. (Online sales, takeway, and delivery are “different businesses” to a degree.) However the company offset these pressures with COG savings by improved partnerships with vendors, including “store within stores” for Microsoft and Samsung products, among others. It also offset pricing with a new round of savings and efficiency initiatives with a 4-year total target of $400M (for restaurants and retailers, further G&A efficiency, franchising of non-core markets, targeted marketing, etc.). The targeted savings came from more strategic cost cutting than the previous round. These included optimizing its domestic retail footprint and closing down operations in China and Europe, with only Canada and Mexico its remaining international operations.

At the end of FY17 the company announced that Renew Blue was completed. It had stabilized comps and driven a recovery in EBIT margins from barely positive to 4.5%, EPS CAGR of 9% from $2.54 to $3.56, an increase in ROIC from negative territory to 20.1% and an increase in TTM FCF from $75M to $1.7B in 18Q1. The company also announced a new campaign, Best Buy 2020: Building a New Blue, to build on and sustain the progress made in the past 4 years. The new plan also seeks to grow the top line with aggressive pricing and seeking ongoing cost savings to offset inflation and finance investments in price. It will also step up its focus on its international operations. The plan continues to seek strengthen its bond with customers (in addition to pricing competitiveness) with service enhancements. It sees the ever increasing product complexity, both in installation and inter-connectivity, as an opportunity to differentiate itself from its online rivals. To this end it plans to further exploit its Geek squad but is also rolling out its In-Home Advisor (IHA) program. The IHA program provides free in-home consultation to identify needs and design personalized solutions. In testing the program has resulted in larger tickets and also high customer satisfaction scores. The new cost savings target is $600M by FY21. (Most of this can apply to restaurants/retail operators of today as they attempt to build “relationships”, not just customers or even “guests”.


As summarized at the beginning of this piece, clearly, the numbers confirm the company’s turnaround.   Sales have stabilized (though they’re still 20% below their earlier peak) and margins have recovered to nearly their earlier levels.  The questions now turn to sustainability and growth.  BBY’s strongest differentiating advantage is helping customers deal with the product complexity (or uniquness in the case of restaurants).  But, for BBY, and other retailers today, the biggest challenge is to “scale” the elements of differentiation.  Moreover, unlike the Geek Squad and warranties, the new (IHA) – In Home Advisor – program is not yet a profit center (and even then the revenue generating services only constitute about 5% of the sales mix). (Restaurants may provide the equivalent with community marketing reps, group sales and catering salespeople). It may be hard to measure the result of these auxiliary services, some of which may not be revenue generating in and of themselves, but the relationship building aspect may be worth the effort.  In terms of price competition, BBY has proven it can so far compete effectively with online rivals on price, but has financing the policy with administrative cost savings which will likely not be replicable in the long term. While chain restaurant operators are also limited in terms of administrative savings, their customers have to eat most days, while Best Buy’s customers aren’t required to buy an appliance or electronic device on such a regular basis. In any event, many of the strategies implemented by Best Buy have, at the very least, bought quite a bit of time. Considering the dramatic improvement of the prospects for Best Buy over the last four years, many of the “learnings” (as analysts like to call it these days) are no doubt applicable to the current restaurant/retail landscape.