Vertical Integration

Best Buy Store 291: Houston, Texas

The retail channel is usually considered to be the dominant route to market for the consumer electronics manufacturers. It's understood that they may add other products and services at the point of sale - cross-selling accessories, adding delivery and installation options, vying for post-sales warranty and service revenues. Building out the basket. Increasing their 'average transaction value'. But backward integration - competing with their suppliers - that's not generally the role of a 'channel partner'.

Best Buy is the giant of US electronics retailing. With the death of Circuit City earlier in the year, Best Buy is now far and away the largest specialist retailer in the US, with annual revenues expected to be not far short of some $50bn in its current fiscal year. But a story in the latest edition of [Bloomberg] Business Week says that:

Rather than waiting for electronics makers to ship Best Buy the same products its rivals get, [Best Buy's staff] are walking factory floors with executives from companies such as Hewlett Packard and Toshiba, influencing product development and design. [For example], the retailer is pushing suppliers to use standardised software and digital services so consumers can listen to music or watch movies on any device. And Best Buy set up its own venture fund to pour millions of dollars into start-ups from Silicon Valley to Asia. The goal is to shape development of new technologies in promising fields such as green vehicles, digital health, and home monitoring.

Needless to say, while it remains largely unspoken, the threat of significant 'channel conflict' is a serious possibility if Best Buy goes beyond the acknowledged [and generally accepted] route of supplying private label equivalents. By trying to find products which no one else stocks - either by doing deals with a few 'A Brand' manufacturers, or building its own products in untapped niches, or demanding product homogeneity to suit its own ends - Best Buy could be on a collision course with many of its key suppliers. And while Best Buy dominates the specialist retail sector for electronics, it has to be looking over its shoulder at the advances made by Wal-Mart and Amazon, both of which are making great inroads in the US consumer electronics business.