Best Buy Believes Time Is Ripe To Double Up On Outlets

Best Buy
BBY
is moving forward with its plan to double the number of outlet stores it operates over the next year.

The consumer electronics retailer said it is opening four new outlets this summer and fall in Chicago, Houston, Manassas, VA, and Phoenix. The stores, which feature clearance and open-box items at discounted prices, will be added to 16 existing outlets that the chain operates.

The stores in Chicago, Manassas and Phoenix are remodels of existing Best Buy locations. The Houston outlet store is being relocated to a new space that is three times bigger than its current home.

Best Buy is expanding the product selection at its outlets, adding gaming products, laptops, mobile phones and tablets to the mix. The retailer is not skimping on service, even though it is selling marked down products. Every new outlet will have a Geek Squad area where customers can get technical support.

In an online discussion last week about Best Buy’s outlet expansion, a number of the experts on the RetailWire BrainTrust saw this move as the right strategy for the right time.

“Store returns of high priced, bulky products has been a pain point for Best Buy and these new outlets will certainly alleviate some of this burden and allow the chain to claw back some revenue on opened items,” wrote David Spear, senior partner, industry consulting, retail, CPG and hospitality at Teradata
TDC
. “If there were a perfect time to open these outlets it’s now, given the inflationary effects consumers are dealing with.”

“Outlet stores will help Best Buy deal with excess, open box or returned goods while keeping that revenue in house, promoting the sale of services like installation, and controlling the brand messaging end to end,” wrote DeAnn Campbell, chief strategy officer at Hoobil8. “Outlet stores are a strong strategy for minimizing risk during economic uncertainty when consumer spending is more focused on value spending.”

The chain is integrating outlets into its digital operations, as well. Shoppers can go to bestbuy.com/outlet to check out what’s available at their local store. They can also place an order for any product and choose to pick it up at a nearby outlet.

Best Buy’s outlets also offer same-day delivery of online orders. The retailer uses third-party service providers including Bungii and Dolly to make deliveries.

The outlet stores serve a number of functions for Best Buy.

Damien Harmon, executive vice president, omnichannel at Best Buy, in March on the retailer’s fourth quarter earnings call said, “These outlets unlock value by alleviating space and capacity from our core stores, and they are an important element of our circular economy strategy by providing a second opportunity for products to be resold instead of ending up in the landfill. In FY ’22, gross liquidation recovery rate is almost two times higher than alternative channels.”

“This sounds like a ‘best use of space’ strategy as much as, if not more than, an ‘outlet store’ strategy,” wrote Jeff Sward, founding partner at Merchandising Metrics. “If Best Buy needs more space in existing prime stores to sell full margin product and maximize gross margin dollars then this sounds great.”

The outlets also help Best Buy attract new customers and engage with others who have not recently shopped from the chain. Mr. Harmon said that 16 percent of customers shopping at Best Buy’s outlets are new to the chain and 37 percent are “re-engaged.”

“In an economy facing inflationary headwinds, expansion of the outlet channel should be a winning strategy – and in offering same-day delivery, BOPIS, a convenient way to check inventory online and an in-store Geek Squad, Best Buy isn’t cutting corners, which will easily differentiate it from other outlets,” wrote Jeff Hall, president of Second to None. “The biggest benefit may come from the potential of converting the impressive 16 percent of customers new to Best Buy into traditional Best Buy store customers.”

Some who saw potential upside to the strategy, however, cautioned about where it could lead.

“Outlet stores can also put a brand on a slippery slope,” wrote Mr. Sward. “Of course customers love outlet stores. That’s a well learned lesson. The problem is when they start visiting outlets instead of regular price stores. Which means this is also a geographic strategy as well.”

“The key is not to dilute core store performance or lose pricing discipline in what is not a high margin business to start with,” wrote Phil Rubin, founder of Grey Space Matters.

And at least one BrainTrust member did not see the outlet model coming into fashion in the electronics space.

“On the surface this sounds great, but what really differentiates an outlet?” wrote consultant Ken Lonyai. “What are the average cost savings? Are shoppers expected to shop regular stores and outlet stores as if this was a fashion retailer? If the answer to the last question is yes, markdowns have to be substantial and real as opposed to fashion where the markdowns are often substantially lower than list price but not so much real prices. Tech is a completely different model, so I’m skeptical that this has a big growth trajectory.”