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Inside Best Buy's Bold Move to Attract Customers

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Best Buy's (NYSE: BBY  ) new partnership with Samsung Electronics is yet another attempt by the big box retailer to attract customers to its stores. Under the arrangement, Best Buy will open up space inside its U.S. stores for Samsung to set up shop. The Samsung-branded stores will hit Best Buy locations as soon as next month, with plans to open 1,400 mini-stores by the end of June.

Shares of Best Buy climbed 12% on the news, continuing an impressive run for the stock so far this year. However, I think the market is overly optimistic about what this means for the struggling retailer.

Same story, new face
This isn't a new strategy for Best Buy. The store-within-a-store concept is something that Best Buy has been experimenting with since 2011, when the company cut a deal with Apple to open Apple mini-stores inside select Best Buy locations. Unfortunately, even one of the strongest brands in the world wasn't enough to spare Best Buy from declining revenue and sliding same-store sales figures.

Why would Samsung's entrance be any different for Best Buy? While the so-called "Samsung Experience Shops" should help pull more customers through Best Buy's doors, it's not likely to have a significant impact on the retailer's broader turnaround efforts.

The real winner, in fact, is Samsung. The company's mobile devices propelled Samsung to become the world's biggest smartphone seller. However, Apple's iPhone devices still rein supreme in the U.S. market. This could change thanks to Samsung's new deal with Best Buy. To be sure, Samsung plans to roll out 1,400 shop-in-shop destinations this year, whereas Apple currently has only 740 mini-stores within select Best Buy locations.

Importantly, Samsung's mini-stores are not only bigger than Apple's small format stores, but also allow customers to skip the main checkout lines, and instead, pay at Samsung specific checkouts. Similar to Apple's Best Buy stores, Samsung's mini-stores will display its smartphones, tablets, laptops, and televisions in a designated area within Best Buy that's staffed by Samsung product specialists.

Devil in the details
For Samsung, this partnership is a big deal. Ultimately, it gives the Galaxy device maker an instant presence in the U.S. retail market, where it had none before. For Best Buy, on the other hand, it's a small step in the right direction, although many challenges remain ahead.

While Best Buy said its current profit margins on Samsung products would remain unchanged, neither company would divulge the specific financial terms of the deal. Best Buy has a lot riding on this arrangement with Samsung, as the big box retailer continues to lose customers to the convenience of online shopping.

The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

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9/30/2016 4:01 PM
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