Kudos to Best Buy Co., Inc. (NYSE:BBY)‘s management for leaving no stone unturned in revamping the company’s operations. The world’s largest consumer electronics retailer has been struggling in the face of growing competitive pressure from online retailers and big discount stores.
But, with the new management infusing life into the business with operation “Renew Blue,” the story is changing, and it’s having an impact on the stock price as well. The stock has grown by an incredible 123% since the start of the year and is still cheap, assuming the turnaround continues. Let us look at Best Buy’s biggest bets.
Forming strategic alliances
One of the foundation stones of Best Buy Co., Inc. (NYSE:BBY)’s turnaround plan is to provide more space to fast-selling, high-margin products. So, the retailer’s store-within-a-store concept gives exclusive selling space to key brands.
Apple Inc. (NASDAQ:AAPL) has had its ‘shops’ within Best Buy for years now. Recently, there have been two important deals, one with Samsung toward end April and one few days back with Microsoft Corporation (NASDAQ:MSFT).
The Samsung shops will be featured in over 1,400 Best Buy stores. Roll-out is already complete in 525 large-format stores and 390 standalone mobile stores. The rest should be up and running by the end of summer.
These shops will sell all kinds of Samsung gadgets from phones, to laptops, to tablets and accessories, and there will be Samsung consultants to help shoppers in making their purchase decisions. Best Buy Co., Inc. (NYSE:BBY) may allocate as much as 460 square feet in a single store toward these shops.
The recent Microsoft deal is even bigger. As part of this, ‘Windows Stores’ will be rolled out in 500 U.S. stores and 100 Canadian stores. The size of these shops would vary from 1,500 to 2,200 square feet. They will sell Microsoft hardware and software, and as many as 1,200 new staff members will be hired by Best Buy and trained by Microsoft to support the initiative.
It is not just Best Buy Co., Inc. (NYSE:BBY) alone that is benefiting from these alliances. Microsoft, for example, has an equally large stake in this venture. The world’s largest software maker is challenged by falling PC sales, which slipped 14% during the first quarter, according to researcher IDC, amid growing popularity of smartphones and tablets.
The sales of newly launched Windows 8 have also been tepid. During the first quarter, excluding the impact of sales from past quarters, Windows sales were flat. This is where the Best Buy deal can help Microsoft improve its visibility to customers and help it showcase its products, including the recently-launched Surface tablet.
End of ‘showrooming’
For ages, Best Buy Co., Inc. (NYSE:BBY) has been a victim of what is known as ‘showrooming,’ where people would go to stores to check out products, use their smartphones to compare prices at online stores like Amazon.com, Inc. (NASDAQ:AMZN), and ultimately complete their purchases online. But, not any more.
Since March of this year, the company has started matching prices of not only local retailers, but also that of 19 online retailers, including Amazon. This definitely has had an effect on gross margins, which slipped to 23.1% in the first quarter from 24.9% last year. This move was much needed.
The company can make up on the profits front through cost-cutting, providing more selling space to high-margin products, and other strategies, but for business lost there is no compensation.
It is also significant that rival, Target Corporation (NYSE:TGT), matches prices for only five online retailers. Although those five include the two that matter most, Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT), this gives Best Buy more competitive advantage. So, if consumers want to match prices with Apple.com or HomeDepot.com, the destination would be Best Buy, not Target.