Best Buy: E-commerce vice tightens even as multichannel moves show promise

Best Buy has improved operations, grown online sales and improved its Net Promoter Score. But traffic to brick and mortar stores continues to fall.

Best Buy CEO Hubert Joly said the company has to grow its online business and give such a differentiated experience across its sales channels that customers become promoters of the brand.

Following decidedly mixed second quarter results, Joly noted "traffic to our brick and mortar stores continued to decline" and added that Best Buy "will be intensifying our investments in customer-facing initiatives."

The effort is part of Best Buy's Renew Blue plan, which revolves around growing online sales---up 22 percent in the second quarter---enhance the in-store experience and leverage the company's multichannel presence.

Here's the catch: Best Buy is making real progress on the Renew Blue plan, has leveraged in-store inventory and distribution online and improved operations, but consumers will buy online. Meanwhile, consumer electronics sales are falling and mobile device sales are soft ahead of product launches such as Apple's iPhone 6. Best Buy expects same store sales to continue to decline in the low-single digits.

Best Buy's results in the second quarter reflect the moving parts. The company reported non-GAAP second quarter earnings of 44 cents a share on revenue of $8.9 billion, down from $9.27 billion a year ago. Same store sales fell 2.7 percent in the second quarter. Wall Street was looking for non-GAAP second quarter earnings of 31 cents a share on revenue of $8.98 billion.



The retailer's plan looks solid and there has been gains. For instance, Best Buy has been leveraging its store inventory online and giving its reps visibility into products across its distribution center. In addition, Best Buy has been able to sell returned goods online and focus on enforcing its policies. Renew Blue has led to annualized cost reductions of $900 million so far.

Simply put, Best Buy is becoming more efficient. The shopping experience also appears to have improved based on Net Promoter Scores. Nevertheless, Best Buy is in quite a bind. Consider the moving parts:

The product cycle in technology doesn't give anyone a reason to visit Best Buy. Smartphones have matured. Tablets are saturated. And PCs are on the typical installed base replacement cycle. There's no vroom in consumer electronics. Without a must have device, there's no reason to rush to get a gadget.

Growing online sales is worthwhile, but there's a transition and focus issue. Best Buy is growing its online sales, but to move the needle on overall revenue the retailer needs to do more. Can Best Buy really compete with Amazon? Execs said they will have some "online investments that are highly competitive" but wouldn't elaborate.

There are too many Best Buy stores. In the long run, Best Buy is going to have a real estate problem. In fact, all of retail will have a real estate issue. As distribution and fulfillment improve and delivery times shorten, the gap between physical and e-commerce almost disappears. Best Buy along with other retailers will need to cut costs by reducing the store footprint.

Joly said:

We are seeing a continued and rapid shift in consumer behavior, in researching and then buying online. If not buying online, (they are) studying the research process online before going to the stores. It reduces the number of trips to the store because you come to the store very well equipped and you complete it. This is not new but this is continuing and very significant.

Are stores within stores successful? Best Buy has Samsung, Microsoft and Apple experience areas. Now it has Sony and Samsung home theater experiences. Best Buy also has appliance experience areas. These experience zones do replace the square footage that used to highlight music, but the jury is out on whether they're effective.