Best Buy and Retail’s Long Road Back

Best Buy and Retail’s Long Road Back

The Wall Street Journal ran a headline recently that read “Best Buy Defies Slump in Retail”. After years of stumbling in response to e-commerce competition, the electronics retailer reported a quarterly revenue increase and was rewarded with a 21% jump in its stock price. Like the proverbial canary in a coal mine, Best Buy’s experience foretells much for retail supply chains in the age of digital demand.

Graph showing an increase in Best Buy's stock price from 2013 to May 2017. Source: Yahoo! Finance.

Merchants Master Manufacturing

Retail’s traditional merchant mentality has an operational flaw: it essentially ignores the supply chain. Historically, store operations, merchandising and logistics were managed as distinct functions. These silos obscured the fact that product flowing into and through the store is pulled by demand, but constrained by supply. The business model depends on big price markups for a selection of items bought way in advance, largely irrespective of their various cost drivers, lead times and availability.

This worked fine so long as shopping was limited to brick and mortar stores. The de facto monopoly of the physical store bred a kind of laziness about where everything comes from and how consumers want to get it. Amazon broke that tradition by bringing lean principles to retail, which work backward from orders through fulfillment centers and ultimately to manufacturers.

Best Buy’s success with vendor brands operating within its stores is a winner not only because companies like Samsung, Microsoft and Verizon pay rent, but because they are a direct link back to factories, new product launch plans and technical support. The demand flow in such cases sends a much clearer signal upstream to supply.

Photo of Microsoft's store-within-a-store at Best Buy in Delham, MA, USA.

This shouldn’t come as a surprise considering the success of other vertically integrated retail supply chains like Apple, Inditex, IKEA and Burberry. The key is to view retail supply chains as an integral part of the extended value chain so that less stuff is sold on markdown and more attention is focused on net margin than gross margin.

Face to Face

Another key to Best Buy’s example is its success with expert sales assistance. CEO Hubert Joly says of the stores: “They’re a great asset from the standpoint of the customer experience on the more complex categories”. In other words, things like speakers, refrigerators and televisions merit more than a web search, however extensive. Knowledge matters, as do picture sharpness, sound quality and ergonomics. These are after all consumer durables, which means you’ll have them for a while.

This doesn’t mean you can charge more than competitors offer online, but it does create the opportunity to build loyalty and “assist” the shopper to a larger basket. REI, for instance, does a brilliant job with this when a customer comes in looking for hiking boots and walks away with five other things they must have for their trip to Nepal. Best Buy extends its face-to-face experience similarly by offering customers expert electronics support through its Geek Squad.

The principle is well established in retail, but it demands a different mentality about labor. There will be fewer associates, with higher salaries, more decision-making power and much better information tools going forward. How else can you expect to out-service Alexa?

The Zip Code Edge

The final factor in Best Buy’s story is its embrace of omnichannel fulfillment. Joly cites this factor as well saying: “[The stores are] a great asset from a shipping and logistics standpoint.” The Wall Street Journal reports that around half of the company’s online orders are either shipped from or picked up in stores, and with 1,600 doors in North America, this means proximity to many consumers.

Store operations must obviously add capabilities to make this happen and inventory visibility has to be nearly perfect. But once it’s figured out, direct-to-consumer delivery draws on 10 times as many nodes as even Amazon. Total cost to deliver is an increasingly complex equation, but with ship-to locations sometimes only a few miles away, the choices for customers multiply quickly, including sharing economy options like Instacart and UberRUSH.

Winning with the Store

Stores can beat online, if only because they serve all five senses. Add in some local love, a bit of customer loyalty and an awareness of the supply chain back upstream and Best Buy’s story could be yours.

Author Kevin O'Marah

Chief Content Officer, SCM World

More posts by Kevin O'Marah