We last looked at the consumer electronics retail category in late 2022, where we discussed some of the issues facing the industry, including a pull-forward demand during 2020-2021 as consumers built home offices during the pandemic; a lack of new product cycles/innovation across multiple consumer electronics categories; and an increase in smart home products being sold across other channels. Compounded with an increasingly uncertain macroeconomic backdrop, the level of skepticism surrounding this retail category has reached a fever pitch over the past several months. However, Best Buy’s discussion about the future of the consumer electronics industry (outlined on company management on its Q1 2023 update call last week) offered us an opportunity to revisit some of our previous analysis on the category as a whole.
Best Buy painted an optimistic longer-term picture for the future of the consumer electronics retail category based on three primary assumptions: (1) connected device adoption accelerated during the pandemic (management noted that U.S. households now have twice as many connected devices as they did in 2019); (2) the average consumer product life cycles is 3-7 years, depending on the category, and management forecasts that a replacement cycle for many consumer electronics purchased during the pandemic will likely take place in calendar 2024-2025, with by lower-end mobile phones, computing, and home theater likely to be the most active replacement categories; (3) consumers are still willing to pay for “newness” (management cited a record-breaking launch of new Zelda game for Nintendo Switch and the stronger-than-expected preorders for the new ASUS handheld gaming device) and several more nascent technology trends (including cloud, augmented reality, generative AI, and expansion of broadband access) should help the category to rebound in years to come.
Below, we’ve updated our consumer electronics retail as a percentage of total retail visits analysis that we first shared in December. As mentioned, we’ve seen a downward trend since 2017 because of shifting consumer preferences, retailers own e-commerce fulfillment investments, and a lack of new product innovations. Thus far in 2023, consumer electronics visits as a percentage of total retail visits are at their lowest point over the past five-plus years (0.66%), as shown below.
Best Buy’s forecast calling for a rebound in consumer electronics demand in 2024 and 2025 strikes us as realistic, although still very much dependent on the macro picture (which has implications for consumer demand as well as technology research & development investment) and how quickly consumers will replace outdated technology. Ultimately, we believe Best Buy’s strategy to navigate current industry challenges makes sense, namely increasing revenue per visit through subscription offerings like My Best Buy Plus (a paid tier of Best Buy’s current loyalty program that give consumers exclusive pricing, early-access to new products, free two-day shipping benefits, extended exchange/returns windows) and My Best Buy Total (an evolution of the retailer’s current Totaltech offering). Management has also spoken about expanding into emerging categories such as wellness technology, personal electric transportation, outdoor living, and electric car charging. The company also remains committed to embracing experiential and outlet retail formats, and continues to find ways to maximize the returns on their current stores through programs like Partner+, which allows vendors (many of whom are already “store-as-a-service” partners) to leverage the company’s supply chain and fulfillment capabilities and offer their online customers the option to pick up their products at their local Best Buy store.
On its Q1 2023 update, Best Buy also announced one of the more innovative and unique approaches we’ve seen regarding retail media. Best Buy will be partnering with Roku to make TV advertising “more relevant and performance-driven”. Roku will design TVs that will be sold exclusively at Best Buy stores and on bestbuy.com, and Best Buy will work with brands to target, optimize, and measure their ads on the Roku TVs using the retailer’s audience data.
