We’ve discussed the challenges facing consumer electronics retailers a few times this year, including the pull-forward in consumer electronics demand during 2020-2021 (as consumers enhanced their home offices during the pandemic) and the current quiet period in between product cycles across multiple consumer electronics categories. A few weeks ago, we said that it might be 2024 before we see sustained improvement in this retail category as we start to hit a replacement cycle for many consumer electronics purchased during the pandemic (the average consumer product life cycles is 3-7 years, depending on the category–lower-end mobile phones, computing, and home theater likely to be the most active replacement categories) and more nascent technology trends (including cloud, augmented reality, AI, and expansion of broadband access) stimulate demand.
Despite these pressures, Best Buy appears to have had a strong Black Friday period. Below, we’ve presented the October-November 2023 visit trendline for Best Buy versus an index of other consumer electronics retailers (including Apple, GameStop, Microsoft’s retail stores, among others). Best Buy is the largest retailer in this category, and our data suggests that they saw about the same amount of visits as the next eight largest players combined during the month of October and the first half of November (note: we did not include Walmart, Target, or other superstores in this analysis). However, during Black Friday last week, our data indicates that Best Buy saw almost 5 times as many visits as the rest of our consumer electronics retail index.
Why did Best Buy see such a strong lift in visits? As discussed above, we think it comes down to having the best deals. Best Buy CFO Matt Bilunas offered some commentary on the chain’s promotional activity this holiday season: “I think we've done a really good job of managing our promotional plan overall. I think the promotions in terms of the discounts and mix of promotions are up versus last year, and in many cases, up compared to where they were pre-pandemic…[I]t hasn't necessarily manifested in our pressure on our product margin rates because we're still receiving a good amount of funding from our vendors to help stimulate the sales that you would expect us to want to do. I think as you look about the holiday season, I think we are expecting the holiday to be a very sales-driven event. Consumers are looking for deals, and they're looking for value. And because of that, we believe it'll look probably more closely to like it was pre-pandemic, where people are gravitating towards the big sale events around Thanksgiving and Cyber Monday and a couple of weeks before Christmas.”
We’ve also discussed how Best Buy has been able to offset some of its recent weakness in consumer electronic product demand through an expanded assortment of services, including membership programs, in-home delivery, in-store services and remote support. Below, we’ve included Best Buy’s physical store revenue per visit since the Q1 2021 (fiscal Q1 2022 using Best Buy’s reporting calendar) and grouped the results by quarter to reflect seasonality. Despite visit price deflation in several consumer electronics categories (televisions in particular), this metric continues on a positive trend, and we expect these trends to continue over the foreseeable future.
Best Buy also continues to reinvent its store portfolio. This year, the company remodeled eight 35,000 square foot stores to “experiential” format (ending the year with 54 experiential stores). In addition, the company will end the year with 23 outlet stores. During its recent quarterly update, Best Buy noted that it plans to implement a minimal number of remodels and outlets next year. However, looking ahead to 2024, the chain plans to open smaller footprint stores to “keep learning and testing our hypothesis that physical points of presence matter, and we need less selling square footage and more fulfillment and inventory holding space” (while also testing the impact of adding new locations and geographies where they have no prior physical presence and our omni-channel sales penetration is low). We’ve been intrigued by Best Buy’s outlet and experience store models in the past, and our data continues to show that both store concepts are attracting new unique customers. As management has previously pointed out, its outlet stores (backed by ship-to-home fulfillment capabilities) offers the chain a way to refurbish inventory while attracting a deal-seeking consumer, something that could work well against the current macro backdrop. Below, we've presented trade area overlap data between a Best Buy Outlet and a traditional Best Buy location in Eden Prairie, MN. While there is some visitation overlap between the two stores, we see that the outlet store is also generating unique visits not visiting the traditional store.
The company also plans to close existing traditional stores as leases come up for renewal. Over the past five years, Best Buy has closed approximately 100 stores, which is a 10% decline in store count during that timeframe. Management expects to close roughly 15-20 stores per year in the near term.
