Best Buy Swot Analysis

In this post, we have conducted a swot analysis of Best Buy, one of the leading US-based retailers, based on its past year’s performance and market position.

Best Buy: An Introduction

Best Buy is one of the leading retailers based in the United States. It was incorporated in Minnesota in 1966. The company sells products and services in six categories mainly. Best Buy operates mainly in the United States market. It has a limited international presence compared to several large retail brands. Best Buy has been operating in Canada and Mexico, apart from the United States. However, it decided to exit the Mexican market during the pandemic.

The US-based retailer of consumer electronics and cellphones experienced a solid improvement in its online sales in the US market during the pandemic. Its heavy investments in technology over the past several years paid off as COVID-19 wreaked havoc across the US, causing a sharp rise in unemployment and destabilizing business throughout the market.

With a 144% surge in its online revenues (US market) during fiscal 2021, the company has survived the impact of the pandemic quite well. In the coming years, digital channels are expected to remain a major source of revenue for the brand. The pandemic accelerated the digital transformation of the retail industry. However, people’s dependence on digital channels for shopping is expected to remain high in the future. Best Buy must continue focusing on offering a superior online shopping experience to its customers to maintain its growth momentum.

The US retail industry has grown highly competitive, and Best Buy has faced a challenging environment in 2020. The pandemic has brought the focus on technology, customer experience, and supply chain management. However, Best Buy’s performance in the past year showed that the company is on track for faster growth and cemented its position in the US retail sector amid several new challenges.

In this post, we will analyze Best Buy’s key strengths, its weaknesses, the opportunities Best Buy can exploit, and the threats it faces.

Company Name	Best Buy Inc. (NYSE: BBY)
Industry	Retail (Computing, consumer electronics and appliances)
Incorporated	1966 Minnesota
Revenues (fiscal 2021)	$47,262 million
Net Income (fiscal 2021)	$1,798 million
Total Stores (end 2020)	1,159
US Stores (end 2020)	991
Employees	102,000
CEO	Corie Barry
ROI (Non GAAP)	19.1%

STRENGTHS:

Strong position in the US market:

Best Buy is among the leading players in the US market. The number of Best Buy stores is much lower than the largest player Walmart, but it has still maintained a strong presence in the United States. The company has a strong reputation in the US market and enjoys strong customer loyalty driven by product quality and customer service. The United States is the largest market for Best Buy.

Growth in online sales:

Best Buy has been strategically investing in digital technology over the previous several years. Its e-commerce growth accelerated during the pandemic. While its e-commerce business had kept growing steadily over the past five years, the company experienced a sharp rise in online sales during the pandemic. Its sales grew by 144% compared to the previous year. In 2021 also, the company enjoyed a moderate growth over the previous year in the first quarter. Traffic on its digital sales channels has increased sharply. The company generated $18.7 billion from online sales in the United States during fiscal 2021 compared to $7.64 billion in the previous fiscal. In fiscal 2022, the company generated $3.6 billion in the first quarter from online sales in the US compared to $3.34 billion during the previous fiscal year.

Large range of merchandise:

Best Buy offers a large range of merchandise. It has categorized the products and services it sells into six main categories. The largest category of merchandise sold by Best Buy is computing and mobile phones. Apart from that, Best Buy also deals in a large range of consumer electronics and appliances. Insignia is its private label brand under which the company sells fridges, televisions, and other appliances and accessories. Best Buy also sells entertainment products and services.

Strong free cash flow:

Best Buy’s strong free cash flow is also a source of competitive advantage for the brand.  Free cash flow represents the cash available for a company to repay creditors or pay dividends and interests to investors (Investopedia). Best Buy’s strong free cash flow (FCF) supports the firm’s growing dividend payments. The retailer generated a cumulative $7.3 billion in Free Cash Flow while paying $2.4 billion in dividends from fiscal 2016 to fiscal 2020. 

Supply chain:

Best Buy has managed a strong supply chain. The company mainly relies on some leading computing, cellphone, and consumer electronics brands. In fiscal 2021, around 20 suppliers accounted for 80% of the company’s entire merchandise (Best Buy Annual Report fiscal 2021). Apart from it, five leading suppliers together accounted for 57% of the merchandise the company sourced in fiscal 2021. The five leading suppliers of the company included Apple, Samsung, LG, HP, and SONY. Best Buy also has a global sourcing operation to design, develop, test, and contract-manufacture the company’s exclusive brands products.

Strategic acquisitions for business expansion and growth:

Best Buy has also made several acquisitions in its history to strengthen its core business and find faster growth.  Some of the key acquisitions made by the company include Geek Squad, Magnolia Hifi, Pacific Sales Kitchen and Bath Centers, Great Call, Signal technologies, and some more. These acquisitions have helped it cement its position as a retailer in the United States market.

Improving ROI:

Best Buy’s NonGAAP ROI improved in fiscal 2021 compared to the previous year rising to 29.1% from 22.4%. Its ROA also improved slightly in fiscal 2021 compared to the previous fiscal. ROA remained 9.8% compared to 9.7% in the previous fiscal according to its annual report.

Weaknesses:

Limited presence in the international markets:

Compared to Walmart or Costco, Best Buy’s international footprint is much smaller. It has been operating in only two overseas markets, including Mexico and Canada. In fiscal 2021, the company decided to exit the Mexican market. This leaves the company heavily dependent on the US market. Best Buy can expand into European markets and emerging markets like India for more growth. 

A smaller number of stores in the US compared to leading retailers:

While the company has strategically opened stores in key locations throughout the US, its footprint is much smaller than the other leading retailers. While Walmart had more than 5000 stores operational in the US in 2020, Best Buy had just a little above a thousand. It had 1126 small format and 33 large format stores operational overall in 2021.

Mainly dependent on computers and consumer electronics:

Computers, cell phones, and consumer electronics are the main sources of revenue for Best Buy. The company heavily depends on these products for sales and revenues. Together they accounted for around 89% of the company’s net revenues in 2021. The other retail brands in the United States, including Walmart, Costco, Target, and other retailers, deal in a much wider range of merchandise. Several of them sell a vast range of private label brands like Walmart’s Sam’s Club and Costco’s Kirkland. Target also offers a vast range of private label brands. These brands also sell fashion and food products. Compared to them, Best Buy deals in a narrow range of merchandise. While till now, it has not hurt the company’s performance, expanding its product range could help it grow its competitive strength.

Opportunities:

Digital sales and marketing:-

The pandemic has accelerated digital transformation across the retail sector. The focus is now higher on digital sales and marketing. While retail companies rely on digital tools for sales and marketing more than ever, customers worldwide use smartphones and online shopping apps in larger numbers. Increased use of digital channels and social media for marketing, sales, and customer engagement can help the company achieve more growth.

HR management:

HR management should be a key focus area for the retailer brand. Best Buy must invest in its human capital and the satisfaction of its employees to reduce turnover and drive higher employee performance. The company has been investing in the use of digital technology for HR management. However, the focus must be on making it a part of its culture to drive superior performance, higher worker satisfaction, efficiency improvement, and controlling costs. 

International expansion:

Best Buy has a limited international footprint as compared to the leading retailers in the United States. The company has decided to exit its Mexico operations which implies that Canada will be its only remaining overseas market. Best Buy can expand its business into European and Asian markets and the emerging markets to grow its sales and revenues. Emerging markets like India offer a major opportunity to grow sales and revenues. Apart from a large base of middle-class customers, the market also offers a superb opportunity to establish a market presence with little competition from any leading retailer.

Private label brands:

While Best Buy also offers a nice range of private label brands and products, including Insignia, Geek Squad, and Rocket Fish, the company’s range of private label brands is much limited compared to the range offered by leading retailers like Walmart and Costco. Sam’s Club and Kirkland are among the big winners in this segment. Apart from expanding its range of private label brands and products, Best Buy must focus on the quality of private label products and marketing.

Threats:

Competitive threat: 

Overall, the level of competitive threat in the US retail industry is very high. Not just the brick and mortar players who have invested heavily in building digital capabilities over the past several years, the e-commerce players like Amazon are also posing a more serious competitive threat to Best Buy’s business. Retailers have adopted an omnichannel strategy to drive higher sales. Since digital channels play an increasingly important role in sales and revenues, the line between e-commerce and physical retail has started blurring. Best Buy will need to focus heavily on digital sales and marketing to strengthen its competitive edge. 

It will also have to invest in digital supply chain capabilities to build growth momentum. Particularly, Amazon has emerged as a major threat for physical retailers in the United States. Its competitive pricing, huge product range, unmatched technological capabilities, and strong market presence pose a solid threat to other retail players. The e-commerce giant is also investing heavily in its private label products to cannibalize other retailers’ sales in the United States. Increased competition also means a need for higher investment in marketing, R&D, and customer retention. The price competition in the US retail industry is also making the environment challenging for Best Buy. 

Regulatory pressures:

Government regulation of the retail sector is also among the leading challenges facing the US retail industry.  With time, the regulation of the retail sector has only increased. All the retailers are affected by the minimum wage labor laws. FTC and DOL are two important bodies in terms of the regulation of the retail industry. 

Higher regulatory pressures increase operating costs for retail companies. It is believed that the retail brands pay the highest corporate tax rates because of no obvious tax loopholes. Higher regulation also becomes a challenge to faster growth.

Entertainment products segment facing new challenges:

The rise of online streaming brands like Netflix and Prime Video has brought a new set of challenges before Bets Buy. Its sales of entertainment products including movies declined over the past many years. However, the sales of gaming hardware picked up during the pandemic. The company will need to reconsider its mix of entertainment products to maintain sales and beat the growing challenge from online entertainment products and services.

A few last words:

The past years’ performance highlighted a few important things about Best Buy. Despite its limited presence compared to the leading retailers like Walmart and Costco, the company is performing well and holds a strong position in the US market. Digital technology primarily drove faster growth of the brand during the pandemic. Best Buy had been investing in digital and cloud technologies over the previous several years. the company benefitted from the transformation during the pandemic as it went from largely physical to largely digital. Its heavy focus on customer service and customer experience has also helped the brand gain higher customer loyalty. However, the company has reduced its international footprint and decided to exit the Mexican market. During the pandemic, Best Buy improved its delivery and pick-up processes for higher customer convenience.

The pandemic brought a new set of challenges before the US-based retailer. Best Buy tackled these challenges well and is enjoying superior sales and revenues. There are more challenges before the brand but the pandemic also proved the resilience of its business model. The company must focus on technological innovation to maintain its growth momentum and competitive edge. It must also expand its range of private label brands and products to find more growth in sales and revenues. Diversification and expanding its footprint across the US and new markets could also help the brand achieve superior growth.

The retail industry has changed a lot with the pandemic. The COVID-19 pandemic has brought changes to how customers shopped and things will not become the same again. The post-pandemic world is going to be a lot different from the pre-pandemic world. While some challenges are clear, some new ones might arise in the coming years. Best Buy will need to focus on emerging trends to understand how it can maintain its performance in the coming years after the pandemic.