Best Buy's 2 Key Advantages in Fighting Amazon

Big-box retailer Best Buy Co. Inc. (BBY, Financial) is still in business, standing up to Amazon.com Inc. (AMZN, Financial) and thriving.

Last week, the company said its enterprise comparable sales increased 23% from last year amidst a 174% jump in online sales that fueled stronger-than-expected third-quarter earnings.

Over the past three years, Best Buy's sales increased 10%, while its Ebitda rose 10.7%.

In a statement, CEO Corie Barry praised the company's "strong quarterly results in the midst of unprecedented times."

"Our comparable sales grew a remarkable 23% as we leveraged our unique capabilities, including our supply chain expertise, flexible store operating model and ability to shift quickly to digital, to meet what is clearly elevated demand for products that help customers work, learn, cook, entertain and connect in their homes," Barry added. "The current environment has underscored our purpose to enrich lives through technology, and the capabilities we are flexing and strengthening now will benefit us going forward as we execute our strategy."

Barry also noted Best Buy's employees "showed empathy, ingenuity and extraordinary execution throughout the quarter," which is reflected in its economic profit at 6.93% above those of Walmart Inc. (WMT, Financial) and Amazon.

That's a big turnaround from more than a decade ago when Amazon's arrival in the big-box retail space changed the game. Best Buy's most important assets—location and scale—turned into liabilities. In what has come to be known as "show-rooming," customers did their window-shopping at Best Buy and their actual shopping at Amazon.com — which offered better deals.

Best Buy's revenue, profits and stock headed south, causing business strategists and stock analysts to predict the slow decline of the company.

But it didn't happen. Best Buy survived and thrived, delivering an average annual total return of 13.07% between 2010 and 2020.

What's driving Best Buy's survival? A smart strategy — Renew Blue– launched six years ago, which changed the game.

Renew Blue helped Best Buy capitalize on the benefits of scale and location -- in several ways. One of them was the introduction of a matching prices policy. This was accommodated by a push in certain states to have online retailers collect taxes, narrowing the gap between online and in-store sales.

And then there's the benefit of using stores as warehouses and pick-up places to speed up online order delivery.

There's also the expansion of product offerings in each store location to catch up with emerging consumer electronics trends like home theaters and computing, health technology solutions and assured living. The concept of stores within stores was also implemented, with Korean electronics giant Samsung (XKRX:005930, Financial) and Microsoft (MSFT, Financial) opening up in Best Buy stores. In essence, the company shifted the cost of show-rooming to these manufacturers.

The rest is history. Samsung and Microsoft were followed by Alphabet's (GOOG, Financial)(GOOGL, Financial) Google, turning the partnership between Best Buy and electronics vendors into a form of collective entrepreneurship that benefitted both parties.

Meanwhile, the company continues to gain the synergies associated with increased customer traffic — and the efficient and effective deployment of its Geek Squad to customers who buy flat-screen TVs and other accessories that need installation services.

In short, Best Buy's turnaround is the result of a deliberate strategy that allowed the company to leverage its key assets, scale and location to ride a new retailing trend, the merger of online and offline sales—a policy similar to that pursued by other brick-and-mortar retailers.

Disclosure: I own shares of Amazon.

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