Is Best Buy making a big mistake?
Sales of consumer electronics, home office equipment and appliances helped best buy (ABY -1.15%) be able to weather the pandemic, but now that many are increasingly looking at the COVID outbreak in the rear view mirror, the home electronics superstore needs to convince shoppers there’s a reason to return to its stores.
It thinks it’s found one by expanding its product offerings to include categories like healthcare, beauty care, patio furniture, and mobility devices like e-bikes and scooters. And while we knew that was the path Best Buy took after it acquired British telehealth start-up Current Health and outdoor furniture retailer Yardbirds last year, it still marks a serious departure from in relation to its core competence.
The detour brings back memories of other times when he went beyond his comfort zone, such as when he bought a chain of record stores, acquired the peer-to-peer download site Napster and launched on mobile phones.
While there is at least a consumer electronics connection for some of these companies, that advantage doesn’t really exist in the new direction Best Buy is taking. The retailer could make another big mistake that once again diverts resources from what it does best.
Go on a tangent
Best Buy sees the strong winds whipped by the coronavirus die down. Revenues are expected to fall about 3% this year, while profits are expected to fall 10% from last year. Comparable store sales, which jumped more than 10% last year on top of a nearly 10% gain the previous year, are now expected to fall between 1% and 4% in the coming year. Reviving growth is an absolute priority.
To do this, Best Buy will essentially label all of its new companies “technology” and say that it has experience in this area. On last quarter’s earnings conference call, Best Buy Health President Deborah DiSanzo pointed to several statistics showing that healthcare is penetrating more into the home, saying, “Best Buy has long proven that we are a trusted advisor for home technology.
But like the old Esurance (owned by Allstate) commercial says, “That’s not how it works. That’s not how it works.” While consumers can trust Best Buy’s Geek Squad for advice on hooking up their big-screen TV to their surround-sound system, it won’t be possible to ask the electronics retailer’s staff for answers on health problems.
Companies that are solely dedicated to telehealth, such as Teladoc, find navigating these choppy waters at best, so the idea of a consumer electronics company making a dent seems unlikely. He also points out that there is no shortage of competition in any of these areas, and from larger, more service- or product-oriented companies.
stay in lane
There are certainly avenues to explore in these areas, even in the field of health. Blood pressure cuffs, personal emergency response devices and even fall protection devices are ancillary products that could find a place in its stores and online, as they are a natural extension of its core business, as are some of the beauty care gadgets it sells, such as light therapy devices for wrinkle reduction.
Likewise, Best Buy’s partnerships with grilling and outdoor cooking brands WeberOoni and Traeger can easily be seen as an extension of its home appliance business, of which it is the third largest distributor behind Lowe’s and Home deposit with a share of 12%.
But then Best Buy starts thinking about how patio furniture can allow them to expand their reach beyond the living room, kitchen and home office into a consumer’s backyard, and it Suddenly there’s a bunch of straws just out of reach for the retailer to grab.
Because Yardbirds is an online-only business, you won’t see patio tables and umbrellas in Best Buy stores, but it’s still a diversion of time, attention, and resources away from what the business knows best.
Focus on customer service
Perhaps Best Buy’s greatest potential lies in its Totaltech membership program, which promises to be a headwind to profitability initially but should pay dividends down the road. Rather than a selection of a la carte options, Best Buy offers all services for one price (the a la carte option is still available to non-members).
It appears to be proving popular as Best Buy has added over a million new members since its launch last October, and Totaltech could become a major growth center for it. Because the company is not a nickel-and-diming member, it takes a hit initially, but should see that offset by volume growth over time.
Focusing on the customer has always been a strong point of Best Buy, and it’s at least a better option than just labeling everything ‘tech’ and thinking it allows it to participate in places far removed from strengths of the consumer electronics retailer.