Give credit to Best Buy (NYSE:BBY) – the company is not going down without a fight. While there are still ample concerns about whether there's life in big-box electronics and appliance retailing, Best Buy is trying to find ways to rejuvenate the stores. Even in the absence of a buyout led by founder Richard Schulze, the stock has rallied back to a 52-week high on optimism about these moves.
The latest move is an interesting one for the company – the launch of a “store within a store” concept with Samsung, the other 800-lb gorilla of the smartphone and tablet market. Although these mini-stores are unlikely to significantly improve overall sales for Best Buy, they could be good for margins and could point to a new direction in big-box retailing.
Collecting Details Here And There
Although Best Buy has not issued a formal press release as of the time of this writing, broadly matching details have popped up in numerous financial news sources.
In essence, the two companies are going to be cooperating to create “Samsung Experience Shops”. These will be small (450 square foot) “mini-stores” within existing Best Buy stores. These areas will feature a broad assortment of Samsung products (including phones, tablets, and presumably TVs) and will be staffed by dedicated associates. There have been some discrepancies as to the details of the staffing – whether they will be Best Buy employees “loaned” to Samsung or Samsung employees outright.
Likewise, there are no official details on the economics of this partnership at this point. Typically, store-within-a-store deals see the manufacturing partner lease out space from the retailer, with payment taking the form of a fixed rent plus some percentage of revenue (which is how many retail leases are structured anyway). So while Best Buy may lose out on Samsung revenue (as these mini-stores will have Samsung-only checkouts), that is counterbalanced by the potential of higher overall sales volume, better margins, less sales risk, and potentially better store traffic (customers may come in looking for Samsung products and buy other products as well).
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Makes Sense For Samsung, But Probably Not Much Threat To Apple
It seems that the two companies are focused on starting with a sizable number of stores (in the neighborhood of 500) and then branching out to all 1,400 or so Best Buy and Best Buy Mobile locations.
Given the prominent placement of these mini-stores (near the front), this seems like a solid low-risk move. Plenty of OUS companies have established a retail presence in the U.S. through similar partnerships, and it certainly de-risks a company's retail strategy. At the same time, a dedicated sales force will have more incentive (and training) to help encourage customers to try and buy and Samsung products, and there's a chance that Samsung may be able to establish a similar sort of report as Apple (Nasdaq:AAPL) has achieved with its dedicated retail stores.
At the same time, I hardly think Apple is quaking in fear over this move. While it is true that Apple has over 700 kiosks in Best Buy stores (focused on Macs and iPads), it is unlikely that Samsung's stores will shake the near-fanatical loyalty of dedicated Apple customers. Although there is some risk that Samsung can use well-positioned stores to capture new smartphone customers and bring them into the Samsung camp, the reality is that traffic patterns haven't been all that good at Best Buy for some time and smartphone shoppers are probably going to go to both the Samsung kiosk/store and an Apple store before making their decision.
To that end, if anybody has something to lose, it would likely be other phone companies like Nokia (NYSE:NOK) and BlackBerry (Nasdaq:BBRY). Assuming that these Samsung stores are adequately supplied and staffed, the ability to talk to trained reps and physically experiment with the devices is likely to be a big advantage for Samsung and Apple relative to these other manufacturers.
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The Bottom Line
I like this move for Best Buy. For some time now, one of the key issues for the company has been that its stores are simply too large for the level of business they generate. If Best Buy can essentially sublet to manufacturers like Samsung, though, the model can start to make sense again. It's a strategy that has worked pretty well for other retailers like Dick's (NYSE:DKS) and Macy's (NYSE:M), so at a bare minimum it's worth a shot to see if electronics retailing can reap similar benefits.
As far as Best Buy's stock goes, the doubling from the 52-week low has certainly taken easy money off the table. While a valuation in the teens implies no growth at all (ever again), here in the mid-$20s the company at least has to deliver low single-digit growth. While I believe turnaround/deep value investors can still hold Best Buy here, it's clear that the market has no longer left this name for dead.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.