Product Innovation In Appliances And Consumer Electronics Will Drive Top Line Growth At Best Buy
Best Buy’s (NYSE:BBY) US revenues have been under pressure for the last few years as online retailers took away market share. After falling 10% to about $32 billion in 2012, the company’s Renew Blue strategy helped stabilize the sales up to a certain extent. By 2014, US revenue had partially recovered to a level of $35 billion, but has remained stable since then. Going forward, we expect the number to decline at a low single-digit rate until the end of our forecast period as growth in the broader market for consumer electronics remains soft.
However, it is important to note what Best Buy is achieving in particular categories such as Appliances and Consumer Electronics, which are expected to grow at a compounded average rate of 8.0% and 4% over our forecast period, respectively. Pockets of strength such as this category are expected to partially offset the weakness seen in other major categories such as computing and mobile phones.
To help gain a deeper insight into the trends affecting Best Buy’s US revenue growth, below, we break down the company’s average US revenue per square foot based on the categories it operates in. (You can see the model here)
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Strength In Consumer Electronics & Appliances To Offset Weakness In Computing & Mobile
In the last one year, conditions in the consumer electronics market presented a tough operating environment for Best Buy. Despite a decline in industry sales in consumer electronics (-2% to -5%), Best Buy managed to maintain positive comps growth (0% to 3%) for the most part, which led to share gains. Similarly, the company has also shown strength in the appliances category, with growth averaging about 15% during FY 2015. Both these trends could be attributed to Best Buy’s focus on improving the in-store experience for customers by investing in its store-within-a-store format.
So far this fiscal year, Best Buy rolled out 59 Pacific Kitchen & Home stores-within-a-stores, taking the total to 176. It also expanded the number of dedicated experience centers for Samsung’s line of home appliances, named “Samsung Open House”, to 225. As a whole, 1,100 stores-within-a-stores were added on top of the 3,700 stores that were present a year ago [1].
Going forward, the growth momentum in these categories is only expected to become stronger. In the consumer electronics category, innovation in virtual reality products and wearable tech spaces will be the primary driver of sales growth. At the same time, improvements in technology will also drive innovation in the smart homes and appliances categories as devices become increasingly connected. We believe Best Buy’s competitive advantage in these categories will help the company gain market share in the next few years as customer preferences shift more towards in-store shopping than online.
Source: Trefis Forecast
Continued Weakness In Computing And Mobile Phones & Other Categories
On the other side of the scale are categories such as computing and mobile phones, entertainment, etc. Industry sales in these markets have been falling and Best Buy, being at a disadvantage to e-commerce rivals such as Amazon, could not fend off a sales decline. For the last two years, sales of tablets and mobile phones have been weak as growth ranged between 0% and -5%.
The nature of these categories is such that customers prefer to make purchases online versus visiting a store. While Best Buy is investing in its e-commerce capabilities, it is still an uphill battle against the likes of Amazon. Going forward, we expect the weakness in these segments to continue as wearable tech devices become the new favorite among consumers, replacing mobile phones.
Fortunately, though, overall growth in revenue per square foot is still expected to be positive. We expect the metric to increase from the current level of $880 million per square foot to about $910 million by the end of our forecast period.
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