To boost digital sales, Best Buy turns to its stores

If Best Buy Chief Financial Officer Sharon McCollam has her way, the company will soon operate 1,000 mini-warehouses inside its 1,000 stores across the country.

Under McCollam, who is overseeing a vast overhaul of Best Buy's supply chain infrastructure, the Richfield-based consumer electronics retailer is currently shipping merchandise housed in 50 stores to fill orders from online customers.

The effort, which will eventually roll out to all stores over the next six to 12 months, hopes to correct a major crack in Best Buy's inventory system: Customers often receive out-of-stock messages on BestBuy.com even though the product they want sits on a shelf at a nearby Best Buy store. That means quite of bit of lost revenue for a retailer that has struggled to grow sales at a stores open for at least a year.

"We've got 1,000 stores sitting with inventory and we have just gotten done telling a customer they can't have what they want," McCollam recently told investors at the Goldman Sachs dotCommerce conference.

The ship-from-store model is only one piece of McCollam's efforts to modernize Best Buy's inventory systems. For example, the retailer ships online and store merchandise from separate distribution centers. Remaking its warehouses to fill orders, regardless where customers made them, could boost efficiencies and lower costs, officials say. Eventually, Best Buy estimates it can reduce the cost of goods sold by $350 million; so far, the company said it has delivered about $30 million in savings.

In addition, McCollam also wants stores to sell discounted returned merchandise to online and bricks-and-mortar shoppers. Best Buy estimates it loses $400 million a year because it sends returned goods to third-party resellers instead of allocating space for the products on its own shelves. The company plans to create special "clearance zones" within select stores and allow customers to purchase such merchandise on the website.

"It makes a lot of sense," said Laura Kennedy, an analyst with Kantar Retail consulting firm in Boston. "Best Buy has all of this square footage in its stores and needs to make it more productive."

"I'm shocked that they don't" already ship from stores, said Steven Dennis, a retail consultant and a former top executive at Neiman Marcus and Sears. "You get the customer interested in buying and not taking care of that demand [is a wasted opportunity]. Best Buy is pretty behind compared to other retailers."

In fiscal 2012, only 1.3 percent of the 1 billion annual visits to BestBuy.com resulted in a sale. That means Best Buy does a poor job converting Web visitors into paying customers.

Here's one big reason: 2 to 4 percent of customers each month didn't buy something because the website said it ran out of the product, according to company data. However, Best Buy estimates that in 80 percent of those cases, the products in question were sitting on a shelf or the backroom of a store. In other words, Best Buy is leaving money on the table because it can't connect the two sides — stores and website — of the same business.

McCollam said Best Buy already has a built-in solution. Forty percent of online sales consist of customers who choose to pick up their orders in a store. Why not use this interaction in reverse, in which the store fills and ships the product to customer homes?

"When they created the capability to buy online and pick up in stores, they created one inventory," McCollam said. "It's not clear to me why at that point they did not take it to its ultimate conclusion, which is shipping from the store if you don't have it."

For example, a customer orders an out-of-stock item online and the system says a nearby store has three products left. But by the time a store employee looks for the product, he discovers the merchandise had been sold off days ago.

"You can't say 'we have the product' and then 'never mind,' " Silverman said.

Said Dennis the retail consultant: "Fulfilling online orders out of the store gets to be a lot complicated. Best Buy should do it on an exception basis."

Best Buy officials, however, say the company has the technology and expertise in place.

If Best Buy can figure it out, McCollam's strategy can really boost sales, said David Strasser, an analyst with Janney Capital Management.