Best Buy Expanding Online Assortment, Reducing Size of Stores

Best Buy is expanding the assortment of products it carries online while reducing the size of brick-and-mortar stores in the face of growing Internet competition, company officials told analysts in a conference call.

The push to increase the product assortment at BestBuy.com began in second half 2010, said Michael Vitelli, executive vice president of the Americas. In TVs, a standard Best Buy store sells 100 models, whereas BestBuy.com has 300 more, Vitelli said. Best Buy’s online sales rose 11 percent in Q4 ended Feb. 26.

"Now we have over 400 televisions online, of which 300 will be online only, and that allows us to be very aggressive in the online-only pricing because we have a similar operating model there to compete effectively in the channel,” Vitelli said. “The other 300 TVs are selling, but we just weren’t selling them. Now we are going to aggressively do that."

The new strategy for selling TVs comes after Best Buy suffered a low double-digit decline in Q4 same-store sales in the category because consumer demand for new TV technologies including 3D and Internet-capable models “had not emerged as a significant revenue driver” in Q4, the company said. “The TV market was down significantly last year, caused in large part by demand for IPTV and 3DTV that did not materialize as the industry had anticipated,” CEO Brian Dunn said.

Best Buy also is slowing store expansion. Square footage is expected to increase less than 1 percent this year, Dunn said. In some lease renewals, Best Buy is taking a smaller space, said Shari Ballard, executive vice president of retail channel management. Best Buy stores average about 38,000 square feet, and operating earnings per square foot shrunk to $38.50 in 2010 from $39.88 in 2009, analysts said. With Circuit City gone, Best Buy is finding itself competing with retailers that require less square footage -- or none at all in the case of Amazon, analysts said. Best Buy began scaling back expansion in 2010 (CED March 26 p1), after growing 8-10 percent annually for several years.

"As renewals come up, we can and are making some of the larger stores smaller,” Ballard said. “We think the biggest and best near-term opportunity is” in reducing “square footage at existing locations. The largest opportunity is in better returns in existing locations, using smaller square footage."

It isn’t clear how many stores Best Buy will open in the U.S. this year. It added 46 stores in 2010. Best Buy officials weren’t available for comment. But it appears likely to expand a test of adding Pacific Sales Kitchen and Bath Centers into some locations. Best Buy, which acquired Pacific Sales and its 14 stores in 2006, has added the store-within-a-store format to eight outlets, presumably in California, where Pacific Sales is based. Best Buy has previously weighed expanding Pacific Sales nationally (CED Feb 28/07 p1). Best Buy employed a similar strategy in launching in 2005 a Magnolia Home Theater format that has since spread across the chain and spawned 4,000-square-foot Magnolia Design Centers in Chicago and five locations in California (CED Nov 17 p1).

Best Buy also is planning to add 150 standalone Best Buy Mobile locations, to end the fiscal year with 325, building on a concept that mixes in-store with standalone locations. Best Buy Mobile is in 1,099 Best Buy stores. The space allocated to the format has increased at some Best Buy locations to 1,400 square feet from 1,000 (CED Jan 19 p3). Best Buy has a 6 percent share of the U.S. mobile phone market, company officials said. The chain also is increasing space dedicated to videogames, adding kiosks for preordering titles throughout the chain and “investing in dedicated gaming labels,” Vitelli said. Best Buy also will step up promotion of prerelease and preordering of games, he said.

The retailer will add 40-50 Jiangsu Five Star Appliance stores in China, up from 10-15 last year, in expanding a chain acquired in 2006. But the company is closing nine Best Buy stores in China and two in Turkey, taking a $198 million charge against Q4 earnings (CED Feb 23 p1). Best Buy will “conservatively” expand in Mexico and the U.K. where it has five and six stores, respectively, Dunn said. The expansion will come as Best Buy budgets $800 million for fiscal 2011 capital spending, down slightly from the previous year, Chief Financial Officer Jim Muehlbauer said.

Best Buy’s Q4 net income declined to $651 million from $779 million as revenue fell to $16.2 billion from $16.55 billion on a 4.6 decline in same-store sales. U.S. sales dropped 4 percent to $12.1 billion on a 5.5 percent decline in same-store sales. The downturn was driven by a “low double-digit” decreased entertainment hardware and software, including TVs as “current consumer demand in new TV technologies had not yet emerged as a significant revenue driver,” the company said. Overall gross margins increased to 24.3 percent from 23.9 percent, and those in the U.S. jumped to 24.4 percent from 23.5 percent, the company said. In mobile PCs, Best Buy recorded a mid-single digit percentage decline in same-store sales decline, because growth in tablets wasn’t enough to offset a tough comparison with year-earlier sales of Windows 7-equipped notebook PCs, the company said. Best Buy’s mobile phone business posted a low double-digit increase in same-store sales, driven by smartphones and a high single-digit rise in services, it said. Online sales rose 11 percent, it said.

In the international division, revenue increased 4 percent to $4.1 billion driven by new stores and despite a 1.3 percent decrease in same-store sales. In Canada, Q4 same-store sales dropped in the low single digits because of softening in entertainment hardware and software products. Five Star in China and Best Buy Europe each posted single digit declines in same-store sales.

The chain is forecasting 1-4 percent growth in fiscal 2011 sales to $51-$52.5 billion despite a flat to 3 percent decline in same-store sales, Muehlbauer said. Gross margins will increase at a “more modest rate,” he said.