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Best Buy Won't Survive This Invisible Threat

By John Maxfield – Feb 22, 2014 at 11:14AM

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By all accounts, Best Buy is already struggling to compete against the likes of Amazon.com. That's why this building trend is extremely bad news for the struggling electronics retailer.

As if there weren't enough reasons for Best Buy (BBY 1.35%) to fear for its life, Amazon.com (AMZN 4.46%) is in the process of creating one more. Could it be the straw that breaks Best Buy's back?

Over the past year, the e-commerce giant has been quietly expanding its network of fulfillment centers designed specifically to "pick, pack, and ship large items to customers such as kayaks and televisions."

In January of last year, it announced the construction of two such facilities in Texas. In October, another got under way in Florida. And in November, Amazon issued a press release saying that one will be built in Connecticut.

The news couldn't come at a worse time for Best Buy, as the company is still reeling from its disappointing performance over the holiday shopping season, during which "aggressive promotional activity" caused its revenue and gross margin to contract.

Even more importantly, Best Buy has trained its eye on the television and appliances segments as strategic product categories going forward. As the company noted in its most recent quarterly report, it's in the process of optimizing retail floor space by, among other things, allocating more room for "growing products like mobile phones, tablets, and appliances."

Now, to be fair, Best Buy currently generates only a small slice of revenue from appliances. In the most recent quarter, for instance, it looked to the product category for 8% of total revenue.

However, this figure belies the importance of the segment to Best Buy's future prospects. This is because appliances are far and away the company's fastest growing product category. In the three months ended Nov. 2, same-store sales of appliances increased by 23.5% over the year-ago period. By comparison, quarterly sales of consumer electronics fell by 2.5% and its entertainment category plunged by 26.8%.

Consequently, if Amazon begins to use its growing network of large-item fulfillment centers to stock and ship appliances, it isn't unreasonable to conclude that Best Buy will be robbed of any future growth opportunities going forward. Suffice it to say, this would be an unwelcome development for both the company and its shareholders.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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