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Mobile phone business not what it used to be

By Kavita Kumar • Mar 2, 2018 at 10:00 AM

Best Buy plans to close all of its 250 small-format mobile phone stores in the U.S. by the end of May.

The stores — most of which are in shopping malls, and at 1,400 square feet are much smaller than Best Buy’s 40,000-square-foot big-box stores — have become less profitable for the Richfield-based electronics chain.

The closest Best Buy Mobile locations to Norwalk are located at the Great Northern Mall in North Olmsted, Franklin Park Mall in Toledo and Belden Village Mall in Canton.

Best Buy CEO Hubert Joly notified employees Wednesday of the closings, saying it is part of a strategy of “continuous optimization.”

Best Buy first began operating the mobile phone stores in 2006, a year before the iPhone launched, he said.

“The mobile phone business was in a period of high growth and margins were high,” he wrote in a letter to employees that the company provided to the Star Tribune. “Fast-forward to 2018 and the mobile phone business has matured, margins have compressed and the cost of operations in our mobile stand-alone stores is higher than in our big box stores.”

Joly said sales from the mobile phone stores represent about 1 percent of Best Buy’s overall revenue as well as 1 percent of its total square footage.

The retailer hopes to transfer the business to its 1,000 U.S. big-box stores and website, where it has been working to improve the experience and ease of the often-confusing process of buying a new phone.

“We feel good about the opportunity to retain customers and transition them to another one of our sales channels,” Joly wrote in the letter, adding that 85 percent of Best Buy’s mobile stores are within 3 miles of one of its big-box stores. “We are very excited by our mobile business and its prospects for growth.”

While small in their physical footprints, the store closings will be another setback for shopping malls that have been grappling with declining traffic and a rash of store closures in the last year as a number of chains have gone bankrupt or pared back their stores amid the rise in online shopping.

Best Buy’s mobile phone sales dropped slightly in 2016, but grew in its most recent quarters with new phone launches from Apple and Samsung. 

Meanwhile, with a combination of snazzy new video games, smart-home gadgets and an upbeat consumer ready to splurge during the holidays, Best Buy Co. rang up a better-than-expected financial results.

The nation's largest consumer electronics retailer said Thursday that same-store sales grew 9 percent during the fourth quarter, a stunning jump aided by improving consumer confidence, well-stocked shelves and fewer competitors.

"The company was firing on all cylinders," Joly said.

Profit fell 40 percent in the quarter, however, as the Richfield-based company paid performance bonuses to more than 85,000 employees and it faced costs due to the new U.S. tax law.

Net income was $364 million, or $1.23 a share, in the three months ended Feb. 3, down from $607 million, or $1.91 a share, a year earlier.

Adjusted for one-time gains and costs, earnings per share were $2.42, a bump of 26 percent that far outpaced the $2.05 per-share projections from analysts, according to Zacks Investment Research.

Revenue in the quarter was $15.4 billion, up 14 percent from $13.5 billion a year ago.

Last year, after emerging from a multiyear turnaround and surviving the existential threat brought on by Amazon, Best Buy posted strong sales growth amid a favorable product cycle and the improving economy. Its shares are up more than 60 percent in the last year and are now trading at near-record levels in the low $70s.

When Best Buy first started the mobile phone stores, it aimed to attract women, teens and seniors who were more likely to visit the mall than one of its large-format electronics stores.

At their peak several years ago, Best Buy operated a little more than 400 of the mobile phone stores. But in recent years, it’s been closing dozens of them every year. It’s been shuttering fewer big-box stores, roughly 10 a year over the past few years.

Today, mobile phone stores from carriers such as AT&T, Verizon and Sprint have become ubiquitous in shopping malls and strip centers.

Still, Best Buy executives have been telling investors they see a big potential for growth in the category. While Best Buy has a 33 percent market share in TVs, its share of the mobile phone market is only 6 percent.

Executives laid out to investors last fall how they are working to streamline and simplify the process of comparing phone plans and promotions as well as phone models both online and in stores.

Last year, Best Buy began remodeling some of the mobile phone departments in its big-box stores in an effort referred to internally as “Mobile 2020.” The spiffed up section of the store, which includes menu boards similar to a fast-food restaurants featuring current plans and promotions, rolled out to several hundred stores with plans for about 200 more to get them this year.

Many of Best Buy’s big-box stores also feature in-store shops from some of the biggest mobile phone carriers and manufacturers in the industry including Apple, AT&T, Samsung, Sprint and Verizon.

Employees who work at the mobile stores will be offered severance, but Joly said Best Buy will work to transfer as many as possible to nearby stores or to other roles such as its growing ranks of in-home advisers.

Best Buy’s mobile phone stores in Canada will remain intact.

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©2018 the Star Tribune (Minneapolis)

Visit the Star Tribune (Minneapolis) at www.startribune.com

Distributed by Tribune Content Agency, LLC.

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