By Thomas Lee Star Tribune (Minneapolis)
When Best Buy Co. Inc. CEO Hubert Joly visited stores during his first week on the job in September, he quickly noticed something was amiss. Why, he asked, did some locations relegate some appliances to the back of the store when they should be more up front and center?
After all, Joly correctly noted, appliances both large (refrigerators, cooking ranges, washing machines) and small (blenders, toaster ovens) have been hot items recently, one of the few growth categories that Best Buy has only begun to tap.
The company apparently got the message. Encouraged by nine consecutive quarters of same-store sales increases in appliances, Best Buy is poised to expand aggressively into this category. The Richfield, Minn.-based consumer electronics retailer plans this year to open 18 to 25 of its high-end Pacific Kitchen stores, a store-within-a-store concept. Best Buy also plans to shift more of its existing retail floor space away from CDs and DVDs toward higher-growth areas like smartphones, tablets and appliances.
At a time when Best Buy has struggled to grow same-store sales, appliances have performed very well. Since the fourth quarter of 2011, Best Buy has averaged a quarterly same-store sales gain of 10.3 percent.
As the housing market continues to recover, Best Buy’s push into appliances is a “superb strategic move,” said Burt Flickinger, managing director of the Strategic Resources retail consulting firm in New York. “It’s a good opportunity to target new home buyers or consumers who want to remodel their homes.”
Selling large products like stoves and dryers also will help Best Buy pull away from Amazon, since people are reluctant to purchase such big-ticket items online, Flickinger said.
It might strike people as odd that Best Buy should wade into appliances. Consumers normally associate the brand with televisions, computers, and sound systems, not dishwashers and vacuum cleaners.
Even Best Buy didn’t really fashion itself as an appliance retailer. In fiscal 2012, appliances made up only 6.3 percent of the company’s $50 billion in revenue. Officials declined to give a target for revenue growth this year.
“This was a business that we weren’t really serious about,” said Liz Haesler, vice president of appliances. “We were not on top of the latest and greatest trends.”
As a whole, the category is not bursting with growth. Last November, year-to-date shipments of major appliances fell 2.1 percent compared with the same period in 2011, according to the Association of Home Appliance Manufacturers.
But then Best Buy took note of how traditional retailers like Sears and Home Depot built successful appliance businesses. Sears, in fact, spun off its appliance operations last fall into a separate publicly traded company called Sears Hometown and Outlet Stores Inc. in a deal worth $446 million.
Best Buy discovered that, with a little effort, it too could grab its share of appliance sales.
“It was truly a reinvention,” Haesler said. “When you have not gotten any growth, people are not that excited about your business. We really took a step back and looked at our assortment and our true strengths.”
One of those strengths is technology. Best Buy has always prided itself on selling and explaining the latest electronics. As it so happened, appliances have enjoyed a burst of innovation that has turned boring “white boxes” into oversized, tricked-out Internet devices. For example, Best Buy carries state-of-the-art refrigerators, washing machines and dishwashers from LG and Samsung that consumers can control with their smartphone. These appliances can use water and electricity as needed, communicate with one another, and track grocery needs.
Such “smart appliances” still represent a relatively small market, but Pike Research estimates that smart appliance sales will hit $35 billion in 2020, up from $2 billion today.
Appliances play a key role in Best Buy’s next-generation “Connected Stores.” The smaller-format stores feature Pacific Kitchen &Home, a mid- to high-end appliance retailer Best Buy acquired in 2006. The chain is known for its skilled sales staff and expensive brands like Viking, Wolf and Miele.
Some experts think that a beefed-up appliance section will help Best Buy reach a customer base that has so far proven elusive to the retailer: women.
“Women buy appliances,” said Lynn Switanowski, founding partner of Creative Business Consulting Group in Boston. “It’s a good strategy to build loyalty among women and then expand (that appeal) to other products” in the store.
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Within the Connected Stores, it’s no accident that Best Buy has positioned Pacific right next to Magnolia Center, another luxury brand Best Buy purchased to sell premium home theater setups. Best Buy hopes Magnolia and Pacific Kitchen will provide much-needed support to the company’s profit margins as the retailer spends its cash on matching competitors’ prices and remodeling stores.
In fiscal 2012, appliance sales totaled $3.2 billion compared to $2.5 billion two years ago. In that same time period, Best Buy’s core consumer electronics sales fell to $16.2 billion from $17 billion.
“The first priority is to increase revenue and gross profit per square foot through enhanced store space optimization and merchandising,” Joly told analysts recently. “This year we will reduce space allocated to the negative growth and low-margin categories and replace it with higher-gross categories like mobile, appliances and accessories. To support these expanded categories, we will deepen the product assortment, increase Blue Shirt (staff) training and re-prioritize marketing investments.”
Aside from circulars, catalogs, and newspaper ads, Best Buy has yet to pull the trigger on a full-scale mass marketing campaign, including TV and radio commercials. Haesler said the company is still developing its marketing plans.
“It will be a challenge for consumers to think of Best Buy as a destination for appliances,” Flickinger, the retail consultant, said. “But it will be an easy task as long as Best Buy invests in its marketing.”