Best Buy's online conundrum: Nailing e-commerce

The electronics giant's biggest challenge--doubling down on online sales--is a common issue for most conventional retailers. Welcome to the mad e-commerce rush.

Best Buy's fiscal third quarter wasn't stellar and heavy promotions took a toll on profit margins. The company's biggest challenge may be doubling down on online sales as it tries to fend off Amazon, which is a big electronics threat.

The focus on e-commerce was evident on Best Buy's earnings conference call. Best Buy CEO Brian Dunn portrayed a company that's transitioning to a multichannel strategy.

Dunn said:

As I mentioned earlier, we took a number of actions to drive our business including--running effective promotions across multiple channels; significantly expanding our online assortment; and ensuring we are competitively priced...

BestBuy.com was the third most visited U.S. retail Web site on Black Friday, up from fourth last year. Our multi-channel strategy clearly paid dividends in the quarter. As you know, we have a target to double our online business in the next three to five years and our third-quarter online sales were a significant driver of the quarter's total comp growth. Our domestic online comp was up 20 percent for the quarter compared to online growth of 13 percent for the first half of the year. For November our online business was up over 30 percent, which was double the online growth of the overall industry according to ComScore.

There were several important factors driving this performance. We had a strong and deliberate online plan to reach customers, drive traffic and improve conversion, all of which we plan to execute throughout the season and beyond. We've delivered a meaningful increase in our online conversion rate on top of higher customer traffic. We offered free shipping for all items during the holiday season and were early to the market with this powerful value message. And we continue to enhance our own online assortment. We've more than doubled our online only SKU count to approximately 50,000 products since last year. We continue to be pleased with our growing assortment and our online only SKUs are already having a material impact on our revenue in this channel. It is also important to note that more than 1.4 million customers chose to pick up their online orders at a store location this quarter, representing approximately 40 percent growth versus the prior year.

The problem: Best Buy is more bricks than clicks. It's a common problem for conventional retailers and Target, Wal-Mart and a bevy of others are scrambling to become e-commerce giants. Best Buy has to get people to walk through the stores so it has to ramp the promotions while balancing online sales. The company is also looking to bet on tablets and mobile devices to drive foot traffic.

Overall, Best Buy is facing a lot of consumer cross currents. Best Buy missed estimates with third quarter non-GAAP earnings of 47 cents a share (42 cents a share GAAP) on revenue of $12.1 billion. Wall Street was looking for 51 cents a share on revenue of $12.14 billion. Same store sales in the quarter were down 3.3 percent.

This story was originally published at ZDNet's Between the Lines as "Best Buy's biggest challenge: Nailing that e-commerce."

About the author

    Larry Dignan is editor in chief of ZDNet and editorial director of CNET's TechRepublic. He has covered the technology and financial-services industries since 1995.

     

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