Best Buy Co., Inc. (BBY) Is Becoming a Tech Mall

The new Best Buy

This is the second such deal CEO Hubert Joly has made since taking over the role late last year. In April, Best Buy Co., Inc. (NYSE:BBY) agreed to open 1400 Samsung Experience shops inside its stores to showcase Samsung’s broad range of products. Similarly, Apple has long had a footprint, albeit a small one, inside of Best Buy Co., Inc. (NYSE:BBY)’s stores to show off its latest generation of gadgets.

The deal with Microsoft Corporation (NASDAQ:MSFT) to overhaul the stores’ entire PC department cements the company’s new strategy. Microsoft’s presence may influence a company like Sony or LG to pursue a similar deal. These mini-stores are an effective way for Best Buy to monetize its retail space as it shifts the costs and risks of show-rooming to the manufacturers.

Battling Amazon

Since Amazon started selling consumer electronics, Best Buy has suffered from a phenomena called show-rooming, in which potential buyers come into stores to see the products in person before purchasing them online. As a result, Best Buy’s revenue, profits, and stock price all tumbled over the latter half of last decade.

Under Joly, the company has enacted an aggressive price-match strategy to mitigate the effect of Amazon’s cut-throat pricing. Also, the pressure from states to collect sales tax from online retailers will help make Best Buy’s store prices closer to online outlets.

Still, show-rooming is a major challenge for Best Buy and big box retailers to overcome. The tech-mall strategy at Best Buy is the next step to overcome the effects of Amazon.

Manufacturers will pay lots of money to redesign and manage parts of Best Buy’s stores – much more than what they pay for end-cap displays. That helps reduce the costs of owning real estate.

More importantly, stores-within-a-store allow for a better shopping experience. Microsoft has an opportunity to improve its messaging, showcase how its products all work together, and better inform shoppers through superior store associates. Those benefits are much more difficult through an online retailer like Amazon. All of its hard work directly benefits Best Buy. Meanwhile, Best Buy still maintains most of the control making it less likely mini-stores will hurt the company’s brand.