Is Best Buy's Loss GameStop's Gain, or Just More Pain?
Best Buy (NYSE: BBY) is closing down its 257 Best Buy Mobile stores by the end of May, ending the consumer electronics superstore's foray into small retail locations, which began over a decade ago. Best Buy has found that the industry has matured, and with the broad proliferation of competition, it's simply become too expensive to operate these niche outlets.
Because the electronics retailer's big-box stores already include store-in-store boutiques dedicated to carriers and manufacturers like Apple, AT&T (NYSE: T), Samsung, Sprint, and Verizon -- and because Best Buy is adding more of these this year -- there's little reason to continue competing against itself with the stand-alone stores.
So Best Buy isn't exiting the mobile phone business, just consolidating it, and that should worry GameStop (NYSE: GME), which is hoping to turn around its own mobile phone business to help offset its declining gaming market.
Can't game the system
Although GameStop is best known for selling video games, under its Technology Brands division it also operates 1,500 stores under the names Spring Mobile AT&T, Simply Mac, and Cricket. The Spring Mobile stores sell AT&T branded wireless products, including its DirecTV satellite service, while the Simply Mac stores sell Apple products, from its smartphones to laptops and computers. The Cricket brand is the prepaid wireless subsidiary of AT&T.
This business has been struggling alongside GameStop's video game and console business, forcing it to take a $350 million to $400 million writedown this quarter, mostly attributed to the Technology Brands division.
The division had a horrible Christmas season, with sales plunging 19%, which it said was driven by limited availability of Apple's iPhone X and changes made by AT&T to the compensation structure in 2017. It also blamed a longer upgrade cycle -- as consumers kept their existing phones longer -- for the massive charge it was taking.
While Best Buy pulling out of stand-alone mobile phone stores could benefit GameStop in some fashion, the reality is that the competitive pressures identified by Best Buy remain, and the structural problems confronting GameStop haven't been eliminated.
No easy way to dial up growth
Best Buy has the benefit that it can easily fold its mobile phone business into its big-box stores. It's already selling phones there, and it can be business as usual as it integrates the inventory and employees into the existing structure. Not so with GameStop, which would have limited ability to absorb its mobile phone business into its game stores should it choose to do so, as they are tiny -- only 1,500 square feet on average.
Worse, GameStop has been counting on AT&T's merger with Time Warner going through so that it would have new products and services to offer customers, but after the Justice Department shot down the bid and with its related trial scheduled to start soon, the likelihood of that happening increasingly looks bleak.
Best Buy was on the ropes a few years ago, driven to the brink by Amazon.com and the showrooming effect of using Best Buy stores to test out equipment and then purchasing it via Amazon. Best Buy overhauled its policies and itself, and launched a risky but ultimately successful campaign of price matching that has dramatically turned its fortunes around.
Part of that success was driven by better use of its big-box stores, including the creation of the store-in-store feature that took advantage of space that had been poorly used before. Best Buy has now driven comparable-store sales growth in seven of the last nine quarters, and in the fourth quarter saw comps surge 9% year over year.
Best Buy's decision to close its mobile phone stores may very well drive further gains by bringing even more customers in, so you can't actually call the development a "loss" for the retailer. For GameStop, though, it may very well cause more pain.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Verizon Communications. The Motley Fool owns shares of GameStop and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short April 2018 $18 calls on GameStop. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.