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Revenues - US (Billions)
Source: Best Buy 10K Reports; Consumer Expenditure Survey; Walter S. Bialas
Productivity per square foot is a different story, though. From a corporate standpoint, total revenues have been flat. According to company 10K reports, FY2011 came in at $865 per square foot. Slightly down from 2010, this metric has shown limited growth over the last few years. Domestic store performance has shown a similar trend, however, the overall rate is much higher coming in at $1,151 per square foot in FY2011. This per square foot rate is also close to the companys best number it has ever put on the boards and reflects a decent rebound in domestic revenues per square foot since the downturn, given the broad economic challenges we have all faced. What the US benchmark also demonstrates is the magnitude of the drag international operations have had on sales, despite increasing revenues. Same store sales are down slightly and some note that growth is being driven more by new store openings. While this is true, it must be recognized that consistent, high same store sales gains are difficult to achieve in a mature format like Best Buy. The chart below highlights longterm space growth and productivity gains for US operations and shows an inflection point where revenues have flattened in the face of continued store growth.
Revenues / SF - US
Another observation from this longer-term perspective is that Best Buy successfully rode the wave of the consumer electronics revolution. It is easy to forget that over this period the face of home entertainment changed. It was only in the mid-1990s that home theaters came into vogue and many upgraded to larger TVs (remember the giant 36 inchers) and related sound systems. By the late 1990s, VHS players were being scrapped for the new DVD format (test marketed in the US in 1997). And, over the last several years, the price decline of the high definition flat screens and Blue Ray disks (introduced in 2006) fueled revenue and market share increases. The challenge today is that there is no discernible consumer electronics revolution on the horizon that matches the magnitude of these changes, or a housing boom to fuel appliance sales. While 3D flat screens are being offered at reasonable prices and OLEDs are just now being introduced at the Consumer Electronics Show in Las Vegas, these are refinements and will not entice consumers to upgrade their hardware across the board.
For Best Buy, the question is how they reinvent their established brand in an era where consumers are spending more conservatively and where limited new products or technologies (even after accounting for smartphones and tablets) will be driving shoppers into their stores. Perhaps just as important is the fact that this sector has evolved into a commodity, where the lowest price (and availability) wins the sale. In this environment, ease of shopping and shipping drive the purchase. This forces Best Buy to compete with both bricks & mortar and online alternatives. While they are well positioned to do battle as evidenced by the companys solid domestic revenues and market share, consumer loyalty to a defined brand appears to be less relevant in todays online world where immediate fulfillment is the key. It is easy to argue for more downsized stores to maximize sales productivity, but that will also impact inventory choices for shoppers. While Best Buy has taken several knocks, gross and operating profits for their domestic operations have been stable. It is reasonable to assume that this stability will be pressured over the foreseeable future as Best Buy addresses consumer preferences and deals with their large inventory of physical store space. In any event, it seems premature to begin anticipating a wind down anytime soon. Best Buy looks to have the foundation in place to remain relevant, even though the companys selling space may look different in the years ahead and challenge shopping center owners to adapt to the companys changing needs.
Gross Proft
Operating Profit
Walter Bialas has more than 25 years of real estate advisory experience in consulting, banking, and development. He has served as chair of ICSCs North American Research Task Force and is an active member of ULIs Advisory Services program. He can be reached at 703-919-8553 or by email at wbialas@verizon.net.
January 2012