Sept. 11 (Bloomberg) -- Even before starting work as Best Buy Co.’s new chief executive officer, Hubert Joly zeroed in on the chain’s strategy to open smaller stores dedicated to selling mobile phones, e-readers and tablets.
Six days before his Sept. 4 debut, Joly met with the mobility chief, Shawn Score, and ordered him to find “new runways for growth,” Score said in a phone interview.
In the next three years, Best Buy will more than double the number of mobile stores to as many as 800 even as it closes and shrinks big-box locations to reverse declining same-store sales. Score told Joly he was targeting strip malls, pocked with vacant storefronts in the wake of the downturn and the bankruptcies of such chains as Blockbuster. The move pits Best Buy against RadioShack Corp., which also favors strip malls and is focusing on mobile devices and services.
The logic of opening in strip malls is twofold: cheaper rent and strong foot traffic, Score said.
“There is a lot of real estate around in places where 50,000 people drive by every day,” he said. “We are finding great locations. The payback is quicker than at malls.”
The clock is ticking. The Richfield, Minnesota-based chain’s revenue may decline 2.6 percent to $49.4 billion this year, according to the average estimate of 20 analysts surveyed by Bloomberg.
“The situation requires urgent action, not because there is a fire but because this is a very competitive world,” Joly said in a telephone interview last week.
Best Buy fell 0.3 percent yesterday to $18.18 in New York. The shares have slid 22 percent this year and are on course for their fourth annual decline in five years. On a price-to-earnings basis, the stock trades at a 77 percent discount to the Standard & Poor’s 500 Retailing Index. In July, the discount reached 78 percent, the lowest since at least 1993, according to data compiled by Bloomberg.
Best Buy began opening smaller stores to sell mobile phones in 2006 and has trained its salesmen to show customers how gadgets work together. Best Buy is focusing on mobile to generate fees from warranties, service contracts and accessories. U.S. shipments of tablets will rise 54 percent this year and smartphones 26 percent, according to IDC, a Framingham, Massachusetts-based research firm.
“It makes a lot of sense for Best Buy to migrate down this path,” said Matt Arnold, a Des Peres, Missouri-based analyst for Edward Jones & Co. “Profitability in these smaller locations is not as big a challenge. It signals intensifying competition for RadioShack in a very competitive market.”
While RadioShack has 4,400 company-run stores, most of them free-standing or located in strip centers, the Fort Worth, Texas-based chain suffers from a dated image. Best Buy, meanwhile, is moving in with modern stores.
Best Buy “is an emerging player in this space,” said Bruce Bishop, a spokesman for RadioShack. “I don’t think anybody really competes with the presence that we have.”
While Best Buy is also competing with stores operated by Verizon Communications Inc. and AT&T Inc., selling tablet computers, e-readers and other devices gives Best Buy “an advantage over the carrier stores that aren’t psyched about selling beyond mobile phones,” said Stephen Baker, a Reston, Virginia-based analyst for NPD Group.
Initially, Score focused on indoor malls, where Best Buy operates most of its 367 small-format stores. With good mall space getting scarce, he began looking at strip centers, where rents are half what they are at indoor shopping centers, Score said.
Two thirds of the 32 mobile stores Score plans to open before Thanksgiving are in strip centers in such cities as San Antonio, Spokane, Washington and Fort Lauderdale, Florida. He’s eyeing vacant spots near big-draw stores, including Target Corp., Home Depot Inc. and supermarket chains.
In Florida, local managers of Best Buy mobile stores are cross-marketing with other tenants in shopping centers. In Miami, a store is redeeming receipts from an adjacent Papa John’s International Inc. restaurant for a discount on phone upgrades, Score said. A second Miami store has a similar relationship with a nearby bank.
Best Buy says it has boosted its share of the U.S. mobile-phone market over the past six years while its total market share has remained flat. As such, the mobile unit has emerged as “a success story,” Joly said.
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