By Neil Saunders
Best Buy’s robust results serve as a reminder that with focus and effort it is possible for any retailer to succeed against Amazon and other online players. The actions Best Buy has taken over the past few years and the changes it continues to make have put it in a strong competitive position.
At the heart of Best Buy’s strategy is a view that it can use its assets to help enrich people’s lives through technology. While the statement may sound grandiose, it is based on a common-sense view that many consumers want help and advice in navigating the multitude of technology products, devices, and solutions that exist today. This happens to be something that is often most effectively done in-person at physical locations, which Best Buy can leverage.
This approach is one reason Best Buy has remained relevant and is firmly on the consumer radar for all sorts of technology purchases. Indeed, the 6.3% uplift in domestic sales means that Best Buy continues to grow its market share, even in a highly competitive marketplace.
The actual underlying performance is stronger than the total numbers suggest, as the overall figure is dragged down by store closures. On a comparable basis, domestic sales grew by 7.1% over the prior quarter.
As good as they are, these numbers come with a couple of caveats. The first is that they come off the back of soft prior-year comparatives. Last year, total sales grew by just 1% and domestic sales by a similarly sluggish 1.1%. The second is the benefit of tax cuts and bonuses, which fueled technology-related purchases. Our data show that around 38% of consumers who received some benefit from the tax changes spent at least some of the windfall on technology. This provided a nice fillip to the overall market and to Best Buy.
Neither of these dynamics is likely to be as helpful going forward. From the second quarter onward, Best Buy starts to lap much tougher prior-year numbers. Moreover, while the tax benefits will remain for some time, they will likely become less pronounced as the year progresses – especially so now that gas prices are on the rise.
Given these forward dynamics, Best Buy will need to continue evolving and adapting and must find new ways to serve the customer and drive sales. From what we have heard so far, we are not disappointed.
Initiatives like the Total Tech subscription program—which gives consumers unlimited Geek Squad support and services for an annual $199 subscription—is a smart way of both serving and building relationships with consumers. We see this as part of a wider push into services by Best Buy, a move that could open up several new revenue streams.
As well as larger changes, we are also encouraged by some of the smaller steps Best Buy is taking to make life easier for shoppers. Mobile functionality that alerts stores when a customer is on the way to pick up a large item so that they can have it ready to load into their vehicle is a smart solution that saves the customer time.
Investments and the price pressure in the market have the potential to impact the bottom line. However, we are satisfied that Best Buy’s cost-cutting and productivity programs will help mitigate this. As such, despite inevitable future pressures, we maintain our view that Best Buy will more than hold its own.
Neil Saunders is managing director of research firm GlobalData Retail.