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Consumer Electronics: Best Buy's Blueprint to Navigate Structural Changes

RJ Hottovy
Dec 16, 2022
Consumer Electronics: Best Buy's Blueprint to Navigate Structural Changes

Looking back at the past 30 years in the retail industry, it’s almost a given that a consumer electronics product was prominently featured at the top of the must-have items for the holidays. Yet, that doesn’t seem to be the case in 2022, as consumer electronics retailers are dealing with a perfect storm of pulled-forward demand as consumers built home offices during the pandemic, a lack of new product cycles for smartphones, tablets, and gaming consoles, and an increase in smart home products being sold across other channels.  Not surprising, consumer electronics has been one of the weakest categories among consumer discretionary retail during 2H22 (below).

Looking at the question about whether we’re seeing a pull-forward in demand versus structural changes across the consumer electronics retail category, the answer is both. Looking back between 2017-2019, consumer electronics retail represented roughly 1% of all visitations across chain retailers according to our data. This number fell to 0.77% in 2020, which isn’t terribly surprising given that Best Buy and other consumer electronics retailers tended to be more cautious in terms of re-opening their physical stores (largely because of the investments they had made in one- and two-day online retail fulfillment the past several years). We did see a bit of the pull-forward in 2021 as many consumer upgraded their home offices during periods of extended work from home, but thus far have seen the consumer electronics retail category dip back below 2020 levels as a percentage of retail visitations this year (0.71%).

Admittedly, the consumer electronics category has seen a fair amount of challenges this year, ranging from macro pressures impacting the entire retail category (inflation and its impact on discretionary spending power), a rise in promotional activity to clear excess inventory, product shortages in some categories, and the lack of a new major product cycle to spur consumer interest. At the same time, concerns like equipment manufacturers distributing their products directly to consumers (via their own physical and online stores) and the shift to digital distribution for video games and other content continue to linger.

Where does that leave the consumer electronics retail sector heading into 2023? Ultimately, we believe Best Buy has laid out a path to navigating the changing landscape of the consumer electronics retail space, including a better monetizing of physical store visits with service offerings, developing new experiential formats, and better aligning store formats with consumer need states.

  • Make each physical store visit count. Best Buy continues to better monetize its physical store visits through subscription platforms like Totaltech (a membership program that includes unlimited Geek Squad technical support on all electronics, 24 months of product protection on most purchases, free delivery and standard installation, a 60-day extended return window and free shipping of online orders) as well as healthcare/virtual care offerings. We’ve updated our physical store revenue per visit chart from previous analyses below (which excludes all digital channel sales). While there is some degree of price inflation embedded in these figures number, the continued growth from 2021 to 2022 also suggests that Best Buy’s service offerings continue to gain traction with consumers, especially with the company reporting that 30%-50% of consumers that make technology purchases for COVID-related reasons (largely work-from-home) already plan to upgrade or replace these items. When paired with 20% higher incremental spend among TotalTech customers, we expect physical store revenue per visit trends to continue on an upward trajectory in the years to come and offer other retailers a blueprint for more effectively using their physical stores.

  • Develop experiential formats to create engagement. Over the past several years, Best Buy has taken steps to optimize its store base, including closing several locations (the retailer had 977 domestic stores across all banners as of the most recent quarter, down from its peak of 1,500 domestic units a decade ago), allocating more square footage at smaller format stores (around 15,000 square feet) for fulfillment, and converting legacy stores into experiential formats (which offers a greater number experiential store-in-store partnerships with brands like Samsung, Oculus, and Lego in addition to existing partnerships with Apple, Microsoft, and Amazon), The company plans to remodel roughly 45 stores with its experiential layout this year and has set a target of 300 experiential remodels by 2024. The primary Experiential Stores format is roughly 35,000 square feet, and management notes that its Houston and Charlotte experiential remodels are seeing stronger sales, increased customer penetration and higher Net Promoter Scores.
  • Utilize alternative store formats to better service customer needs. In addition to Best Buy’s experiential stores, the company has also opened 19 outlet stores as of the most recent quarter. According to management, these locations are "open box, clearance, end-of-life and otherwise distressed large-product inventory in major appliances and televisions that might otherwise be liquidated at significantly lower recovery rates" and that it sees "twice the recovery rate of our cost of goods sold…at our outlets versus alternative channels." From a customer acquisition standpoint, these locations can attract new and re-engaged customers. data corroborates that outlet stores are attracting new customers (comparing Best Buy Outlet stores and nearby legacy Best Buy stores. Visitation trends for Best Buy Outlet stores have been encouraging (below), likely helped consumers looking for bargains and expanding the assortment beyond major appliances and large TVs (including computing, gaming and mobile phones).

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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