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Best Buy gets smaller

Jeff Horwich Jun 23, 2011
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Best Buy gets smaller

Jeff Horwich Jun 23, 2011
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Kai Ryssdal: The residential housing market may be well-nigh paralyzed, but on the somewhat brighter side commercial real estate has been looking up. Parts of it anyway. Office space and apartment buildings. Retail, less bright. Big-box stores, especially, are struggling with what to do with all those square feet that aren’t making the money they used to. Today Best Buy became the latest chain to consider walling off and subleasing parts of its existing stores.

Marketplace’s Jeff Horwich reports.


Jeff Horwich: So you’re shopping for a stereo, or a smartphone or a Wii Fit or whatever and suddenly it hits you: I want some lunch. Or a haircut. Or some cheap wine from Trader Joe’s. Best Buy hasn’t said what kind of roommates it’s looking for.

But Morningstar analyst R.J. Hottovy says subleasing is a way of creating a smaller store without actually building one.

R.J. Hottovy: In Best Buy’s case, they may be looking to sublease to a smaller specialty electronics retailer, or you may put a coffee shop in there or something. So it’s a way to make your square-footage more productive.

Best Buy’s sales are up, but a lot of them are online. Hottovy says the company needs to trim up to a quarter of its retail space. But once a big box like Best Buy walls off a chunk of the store, will anybody want to move in? After all, retail’s in a slump.

Commercial real estate expert Herb Tousley at the University of St. Thomas says that’s all the more reason.

Herb Tousley: Well, I think they’d take a chunk of a Best Buy because a Best Buy store generates a lot of traffic in its own right. And so just moving into an empty building you wouldn’t necessarily have that.

Tousley says a big box has to choose tenants that won’t dilute or compete with its own brand. That’s been a challenge for Sears, another retailer trying subleasing to help pay the bills.

Morningstar’s R.J. Hottovy says even if the strategy works for Best Buy, it’s only buying time.

Hottovy: Ultimately we do see store closures. We don’t think subleasing’s going to be enough to offset the pressures that are currently facing the company.

It all adds up to the new mantra of the big box: smaller is better.

I’m Jeff Horwich for Marketplace.

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