December 14, 2011, 5:13 PM
Blogger

So goes Best Buy online, so goes chain retailing

Mark Brohan

Research Director

There’s an old saying first coined during the Civil War: “So goes Maine, so goes the nation.” To update that phrase for e-commerce: “So goes Best Buy online, so goes chain retailing.”

Best Buy, No. 11 in the Internet Retailer Top 500 Guide, reported its third quarter earnings yesterday and the results mirrored what’s happening with lots of chains these days: web sales are rising sharply, total revenue is up modestly, and, as more consumers shift their shopping to online from stores, bricks-and-mortar locations are being closed.

What’s happening with Best Buy and the e-commerce update CEO Brian Dunn gave to Wall Street analysts on the company’s third quarter earnings call, is a harbinger of what’s to come in 2012 for a lot of other chains—big and otherwise.

Yesterday Dunn told analysts that in order to remain competitive Best Buy in the third quarter took a $150 million pre-tax restructuring charge to close 11 full-scale stores in the United Kingdom. That’s on top of a previously announced 10% reduction in floor space for its network of 1,425 U.S. stores, a move that will eventually save Best Buy up to $80 million annually.

But at the same time Best Buy is reducing its physical space, online sales in the third quarter were up by 20%, and 30% for November, although Dunn didn’t break out sales in dollars. “We have a target to double our online business in the next three to five years, and our third quarter online sales were a significant driver of the quarter's total comp growth,” Dunn told analysts.

Dunn’s comments reflect the fact the web is now the most important channel going forward for chain retailers. Best Buy is a prime example of how retail chains run by corporate managers that rose through the ranks based on their ability to successfully manage stores are coming to grips with the reality that more of their future sales are beginning—and ending—online. What that means as the New Year approaches is this: There are going to be a lot more chains closing stores and looking to grow their e-commerce channel.

I single out Best Buy because they are moving faster than many other chains to build their web sales. They also are being very prudent in what they are doing to grow their online channel—and use the web to drive better store sales.

Consider these facts Dunn disclosed yesterday:

  • “We've more than doubled our online-only SKU count to approximately 50,000 products since last year. We continue to be pleased with our growing assortment. In our online-only SKUs, we're already having a material impact on our revenue in this channel.”
  • “More than 1.4 million customers chose to pick up their online orders at the store location this quarter, representing approximately 40% growth versus the prior year, a testament to the importance of our multichannel approach.”

Best Buy sees the future and it’s clearly online—the company has an aggressive goal of becoming a $4 billion web merchant within five years from about $2.5 billion in 2010. So if Best Buy is successful in closing underperforming stores, prudent in how it runs and manages Best Buy Mobile—a network of 263 smaller specialty stores that sell only mobile phones or other devices, plans and accessories—and growing e-commerce, it will successfully make the leap from a store-driven to an Internet-driven organization.

If a big chain like Best Buy can make the transition other chains will follow. If they don’t, look for more bankruptcy filings among the ranks of chain retailers and a lot more “space available” signs coming to malls and strip centers near you.

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