Best Buy To Benefit From Increasing Online Sales
Best Buy ( BBY ), the largest specialty retailer in the U.S., has witnessed eroding top line growth in the last few years on account of growing competition from online retail giants such as Amazon ( AMZN ) and online auction sites like eBay ( EBAY ). Showrooming, a phenomenon where customers use physical stores to check out products and gain hands-on experience with gadgets but use online stores to make purchases, has negatively impacted the sales of traditional brick-and-mortar retailers such as Best Buy.
Thus, accelerating growth in its online segment remains one of the main focus for Best Buy, as it aims to update its website to get on par with Amazon and other competitors. Best Buy's online sales, which currently account for approximately 13% of its total sales, grew 12%, 25% and 20% in fiscal 2012, 2013 and 2014, respectively. Among bricks-and-mortar competitors, Best Buy has 18% market share in its categories, but among e-retailers its share is only 7%. The company aims to get its market share among e-retailers at least at par with its share among bricks-and-motor stores in the next few years.
Best Buy has over 1 billion annual online visitors, but only 1 in every 100 visitors makes a purchase on its website, according to UBS AG. In addition to increasing web traffic, Best Buy is aiming to increase its web conversion rates. In this article, we discuss some steps that Best Buy has taken recently to accelerate online sales.
Our price estimate of $26.38 for the company is at an approximate 10% discount to the current market price.
Best Buy claims that 2% to 4% of its online traffic does not result in a purchase because it does not have the inventory in its distribution centers, but around 80% of the time the stock is available in one or more of its retail centers. To better tackle the situation, the company initiated a pilot ship-from-store approach (in 50 stores) last year which enables all its distribution centers, and not just the ones previously allocated to e-commerce, to handle online orders. It has now rolled out ship-from-store to over 1,400 stores, in addition to eight strategically located distribution centers, which allows the company to deliver goods two days faster than in the past.
The ship-from-store initiative helps Best Buy achieve higher margins on clearance and end-of-life inventory that is trapped in its stores. It also enables the company to improve its online conversion and net promoter score by meaningfully reducing the out-of-stock messages.
In Q1 2015, domestic online revenue increased 29.2% on a comparable basis due to substantially to improved inventory availability. Key contributors here include: 1) the chain-wide roll-out of the ship-from-store capability; 2) a higher average order value; 3) increased traffic driven by greater investment in online digital marketing; and, 4) a higher number of online orders placed in its retail stores.
Transformation of the E-Commerce Platform
Best Buy has considerably improved its website in the last few years and is planning to introduce many new search elements, including an optimized search engine, tools, recommendations and product price information. The new tools will enable customers to easily find products they want to purchase. Best Buy intends to enhance the shopping experience on its website by implementing an improved home-based design, a more robust and streamlined wish list, significantly richer visual and editorial content and enhanced search and navigation capabilities. In the future, Best Buy aims to shift more of its marketing spending from print and television to online channels.
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