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Best Buy’s Business Model.

About Best Buy: An Introduction

Best Buy (NYSE: BBY) is among the leading names in the US retail sector.

Unlike Walmart, which deals in a  vast range of merchandise across several categories and sells globally, Best Buy has focused on a few select categories of products and operates in only one market outside the US (since fiscal 2021).

The number of Best Buy stores is also much lower than Walmart, and its focus on lower pricing is also considerably less aggressive.

As of the end of 2020, the company had 1,159 stores operational worldwide.

991 of its stores were operational in the United States and 168 overseas. Its largest overseas market is Canada and now its only remaining overseas market as well.

The company decided to exit the Mexican market in 2020.
Incorporated in 1966 in Minnesota, Best Buy is among the leading retail brands in the United States, operating in a fiercely competitive industry environment.

The company has invested in its digital transformation over the past many years to strengthen its competitive position.

Its resilient business model survived the impact of the pandemic because of the intense focus on digitalization.

Digital channels accounted for a significant portion of the company’s sales in fiscal 2021.

The company experienced sharp growth in its digital revenue (144% compared to fiscal 2020) during the pandemic.

In this post, we will discuss how Best Buy makes money, the key factors that have made it a popular brand, and its competitive position against other leading retailers in the United States.

How does Best Buy make money?

Best Buy does not deal in an extensive range of products like Walmart.

Its business model differs from Walmart, Costco, or Target corporation.

Best Buy depends on a limited product range.

The main products the company sells include computing and smartphone products, consumer appliances, and electronics.

Its largest source of revenue are computing products and smartphones.

The company makes around half of its money from the sales of computing products and mobile phones.

Consumer electronics and appliances also account for a sizable part of its revenue (accounting together for 43% of its revenues in fiscal 2021). Around 10 to 11% of its net revenue comes from entertainment products and a limited range of services.

In the latest fiscal (fiscal 2021 – ending Jan 30, 2021), the company generated higher revenue compared to the previous year, driven primarily by increased sales across digital channels.

Business Segments and structure of Best Buy

Best Buy has restructured its business during the pandemic.

The company has organized its business on a geographical basis mainly. Its main market is the US market, which accounts for a substantial part of its net revenues.

Its international business segment included Mexico and Canada.

However, the company decided to exit the Mexican market in 2020.

Apart from adopting a largely digital operating model that catered to the customers’ needs using digital channels mainly, it decided to shut down its Mexican operations and close its stores in the US during the pandemic.

Now, Canada is the only remaining overseas market of Best Buy.

In 2020, the total number of Best Buy stores was 1,159. 991 of its stores were operating in the United States and 168 were operating in the overseas markets.

You can see that Best Buy does not have an expansive international presence like Walmart.

Even Costco has a huge international presence. 

Mexico represented the smallest market of Best Buy.

The company decided to scale back during the pandemic and therefore shut down its Mexican operations.

It will have taken the final steps in 2021.

The United States is the company’s largest market and generated 91% of its net revenues in fiscal 2021.

Its US operations generated $43.3 billion in net revenues out of a total of $47.3 billion in fiscal 2021. The Canadian market, Best Buy’s second-largest market, generated $3.6 billion in fiscal 2021.

While its US sales have increased $3.18 billion in fiscal 2021, its Canada sales grew by $475 million in 2021 compared to the previous fiscal.

The company has also divided its business into various segments based on products and services.

The table below shows the products/services the company sells and their share in the net revenues in fiscal 2021 (ended Jan 30, 2021).

Products/ServicesPercent share
Computing and mobile phones 47%
Consumer electronics30%
Entertainment 8%
Best Buy’s Revenue Mix (share of products/services) Source: Best Buy Annual Report.

As you can see in the above table Best Buy’s largest share of revenues comes from computing and mobile phone products.

In fiscal 2021, the company generated 47% of its revenues from computing products and mobile phones, followed by Consumer electronics (30%) and Appliances (10%).

Compare it with Walmart or Costco, and you will see that Best Buy’s product portfolio is not as vast.

It mainly depends on the first three product groups for revenues. In the entertainment products segment, the share of movies has continued to decline because of the growth in demand for online streaming services.

On the contrary, the sales of gaming hardware picked up last year at Best Buy.

While Walmart sells everything, Best Buy mainly sells PCs, laptops, computing accessories, and consumer electronics.

It also sells some private labels, but they are not as well known as Sam’s Club or Costco’s Kirkland.

Its range of private label products is also comparatively much smaller.

Best Buy features as a leading name in customers’ minds when buying a television or a laptop.

According to a comparison of the leading retailers of consumer electronics and smartphones in the US, Best Buy is just next to Walmart in terms of sales volume of consumer electronics but the leading brand in terms of dollar share.

Again in terms of smartphone sales, Best Buy is behind Walmart in terms of sales volume but ahead in terms of dollar share.

Overall, Best Buy has been able to cement its position in the US retail sector by focusing on a few key product categories. 

Best Buy’s Digital Transformation :

Digital technology is driving a sector-wide transformation in the US retail sector.

All the leading retail brands, including Walmart, Costco, Target, and Best Buy, have invested heavily in building digital capabilities over the past many years. It has finally proved useful for the retailers during the pandemic.

Best Buy’s digital transformation was not complete until the pandemic.

However, the company made major changes to its operating model to switch from its physical retail to a completely online experience.

As the pandemic led to shutdowns and stores remained closed, the retail brands served their customers through digital channels. 

Best Buy voluntarily closed its business to customers during the pandemic and went fully online, fulfilling orders via delivery or curbside pickup.

The company had not done curbside pickup on a large scale before the pandemic.

However, it transitioned to a purely online model within just 48 hours. It took the company an incredible amount of hard work.

Best Buy had made strategic investments in this area over the past several years, and now it was ready to move to an online model.

The company had also innovated over the past several years to build a powerful and flexible supply chain, which played a critical role during the pandemic.

Best Buy is leveraging cloud technology to strengthen its digital capabilities and provide its customers a superior omnichannel experience. Google Cloud CEO Thomas Kurian said,

“Using Google Cloud‘s scalable and secure infrastructure, and leading data and analytics solutions, Best Buy will be able create new insights from their data, enabling them to innovate now and into the future.”

Thomas Kurian, Google Cloud CEO.

In 2020, Best Buy announced that Google Cloud was the cloud provider for Best Buy’s Enterprise Data Platform.

Best Buy’s partnership with Google Cloud aims to power its data-driven retail strategy to deliver new and personalized online shopping experiences.

The company is also trying to strengthen its customer relationships, discover new insights, and bring new services for its customers with the help of Google Cloud.  

Their partnership is built on two main pillars:

Unifying data sources:

Best Buy’s leading purpose behind using Google’s cloud capabilities to enable its digital transformation was to execute its data-driven strategy.

Google Cloud will help the company to unify its data sources across legacy platforms.

Then, Best Buy will use Google’s cloud resources to run machine learning and AI models against the data for building more personalized offers and recommendations for buyers.

Building new experiences:

Best Buy’s partnership with Google Cloud will also help the company develop new products and experiences.

Once Google Cloud has unified Best Buy’s data into its Enterprise Data Platform, the company will experiment with new products for customers, including unique services across channels, tailored rewards, and other experiences.

Since these innovations are based on cloud technology that offers superb flexibility, rapid iteration of ideas will also be possible for Best Buy at a larger scale.

Google Cloud is helping Best Buy develop new digital capabilities and bring about its total digital transformation faster by accelerating its digital strategy.

Overall, Best Buy’s digital transformation was not complete in a day. However, what the company had achieved over the past several years has proved highly useful during the pandemic.

Best Buy’s digital transformation has helped the company achieve extra growth amid a highly challenging situation.

It has also strengthened the retailer’s competitive edge.

The company is operating in a highly competitive industry environment where brands like Walmart, Costco and Target aggressively invest in digital to win customers.

Amazon’s dominating presence in the US market is already making the situation challenging for the physical retailers.

In such a scenario, taking a different approach would have proved costly for the brand.

Down the line, the company will continue to innovate its digital model and improve its digital capabilities to generate superior results and engage customers better.

The company will continue to reap the benefits of its digital-first approach in the coming years even after the pandemic.

A few last words about Best Buy’s Business Model:

Best Buy despite being a much smaller retailer compared to Walmart enjoys a strong position in the US retail sector.

The company has continued to strengthen its business model and competitive advantage through continuous investment in technology, strategic acquisitions, and focusing on customer experience.

Digital technology is driving important changes industrywide.

Best Buy started building digital capabilities some years ago.

However, during the pandemic, it took a major step and converted its physical retail business into an online business.

The results were amazing as the company’s e-commerce revenues climbed to $18.7 billion from $7.6 billion during the previous fiscal.

The company’s digital sales gained 144% in fiscal 2021 compared to the previous fiscal.

The pandemic tested the retail businesses and their capabilities.

However, the companies that had built a strong digital presence already performed well even during the pandemic.

Best Buy had also been investing in digitalizing and strengthening its supply chain capabilities.

Its flexible supply chain proved to be a key support during the pandemic. The future will be heavily data-driven.

To further strengthen its business model, the company will need to maintain its focus on innovation and customer experience along all channels including digital and physical.