By Neil Saunders
The first quarter was always going to be tough for Best Buy, partly because of high comparatives from the prior year, when tax cuts and bonuses allowed shoppers to engage in a mini-spending spree on electronics. In contrast, this year offered no such fillip to consumer finances. If anything, modestly lower tax refunds and higher domestic expenses moderated demand for big-ticket items. On top of this, the technology pipeline has been fairly weak with a lack of any big-hitter mobile and computing devices.
This challenging backdrop is one reason sales growth was a modest 0.8% on a domestic basis. The number for the core business is somewhat worse, as the revenue figures include a contribution from GreatCall, the connected health company that Best Buy acquired in the third quarter of last year. Comparable sales rose by a healthier 1.1%, largely because they don’t take into account the closure of a raft of Best Buy Mobile stores and a handful of larger format shops.
In context, the results from Best Buy are solid. The levelling off of growth is more a function of the direction of the market than of any strategic misstep by the company. And performance was better in categories such as wearables and connected home, which have higher levels of consumer interest. Best Buy is still a highly relevant retailer holding its own against the competition.
Given its reliance on technology companies to develop compelling products, Best Buy’s future performance will always, at least in part, be subject to factors outside its control. On this front, the outlook is not good. Many mainstream consumer technology firms are focusing on incremental improvements, which are inconsequential to consumers and unlikely to generate significant interest. Against this backdrop, Best Buy needs to pull out all the stops to secure the little growth that is generated, as well as pivot to parts of the market that offer better prospects. Fortunately, we are optimistic about the company’s ability to do both.
Best Buy has been quick to pivot to new areas. Stores have strong offerings of growth categories like wearables and smart home, and they offer a high standard of customer service to help guide consumers through the offerings. This is taking the edge off declines in traditional segments like mobile devices. But Best Buy is also thinking beyond products by moving into technology services. This major part of the company’s future plans increases our optimism for medium- to longer-term performance.
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. This goes beyond selling them products. In light of this, the recent acquisition of GreatCall is a logical evolution. It gives Best Buy a relevant service, driven by technology, that it can offer to consumers. It also helps counterbalance the pressure on both sales growth and margins of electronics products.
Overall, despite some negative headwinds in the consumer economy and the electronics sector, we remain positive about Best Buy’s prospects. The company is well managed and has a clear vision around how it will connect with and sell to consumers over the next few years.
Neil Saunders is managing director of research firm GlobalData Retail.