In their Q2 earnings release, Best Buy signaled a significant expansion of their efforts in virtual reality products: “By holiday, we expect to be selling an expanded assortment of virtual reality products in the vast majority of our stores and more than 500 stores will be equipped with demo stations”. BBY’s CEO Hubert Joly practically gushed about VR as he described the advantages of a brick-and-mortar specialty electronics store like Best Buy in selling such a product. BBY currently sells the Oculus Rift with demonstrations, but only at selected outlets. It’s clear that BBY intends to broaden that approach substantially.
Joly is certainly right that VR as a product category is likely to be sold only after demonstrations. Any scan of product reviews on VR products will reveal both enthusiastic fans and some disappointed by artifacts and/or limitations on software. VR has also been plagued by reports of motion sickness among some users; thus it would make sense that before shelling out $600 for an Oculus Rift a consumer might want to try it out first. Thus Best Buy is in a unique position to push the VR market forward; by the time they have rolled these demos out to 500 stores, Best Buy will likely become by far the biggest demonstrator of VR technology in the US, if not the world.
Joly brought investors back to earth, though, with the next comment on VR: “I am not expecting a material financial impact this year given the timing of launches, inventory availability and the fact that we are early in the cycle”. What’s a “material financial impact” for Best Buy? One indicator can be found in their press release concerning domestic segment revenue: “we are reporting comparable sales growth of 0.8% versus guidance of approximately flat”. I found that statement a bit strange, because I would have considered 0.8% growth to be the same as approximately flat, but Best Buy reported that growth, so they considered it material.
Using Best Buy’s domestic segment revenue, the 0.8% represents $63 million in revenue, so if VR sales in the rest of the year will not be material, they should be less than $63 million. If we put an upper bound of $50 million for Best Buy VR sales, that would imply less than 100,000 units (likely much less) if all the revenue were Oculus Rift-type products at $600. This would compare with millions of TVs, PCs, tablets and phones during the same period.
So though VR is an exciting new product development, in the current generation the interest and purchase intent will be limited to true “early adopters”, and is still a long way from the mainstream market. BBY is undoubtedly trying to excite investors by tapping into VR hype, but they are responsible enough to be clear that in the current marketplace there’s more hype than actual purchasing.
Leaving aside the VR comment, Best Buy had an outstanding quarter, with revenues and EPS exceeding expectations. BBY seems to be executing well in a difficult environment; for more detailed analysis of Best Buy’s Q2 earnings report see my article “Best Buy Q2 – Swimming Strongly Upstream” in the Display Supply Chain Monitor, available at the store on the Display Supply Chain Consultants website.