Retail conference. I'm Michael Lasser, UBS hardline, broadline and food retail analyst. This is probably the peak of our conference. Yes. We are super excited to have the team from Best Buy with us, aka Superman and Superwoman.
Thank you.
On my immediate left is Corie Barry, Best Buy's CEO. To her left is Matt Bilunas. And their eponymous head of investor relations, Mollie O'Brien, is also with us today. So this is going to be a fun and wonderful conversation. Best Buy has, you know, had a legendary story within the retail sector. And part of the part of the story is constant change. Such a dynamic area of retail, consumer electronics. And so the success that Best Buy has been able to achieve over the years has due in part to its adaptability. So now, as you reflect on what an incredible past few years it's been, you know, what has Best Buy learned about its ability to remain agile but still be relevant in this very dynamic world?
Thank you, first of all. Thanks for being here. Our values were created by our founder, Dick Schulze, more than 50 years ago. One of our values that he very presciently laid out is learning from challenge and change. He believed at that time. I still have a chance to chat with Dick pretty often. He believed at that time that this was a dynamic industry. Also, in order to survive in retail, you would have to be incredibly adaptable. So that value is imbued in how this company works. We still live by the same values that Dick laid out. So I think in terms of learnings, and that's only accelerated. Let's be clear. It was true then. It's even more true now. I, I think in terms of learnings, there's a few things that were really important.
First is retail's not static. So pretending like you have the answer that's going to work five years from now, that's not going to work. And then secondarily, for our teams, helping reward them for adaptability versus perfection has become a huge part of how we keep trying to move with where our customer is going and where the industry is going. And that, I mean, sometimes that's hard because retail can be totally embedded in SOPs and, like, the perfection. And instead, I think we're trying to learn, which also means, number three, you have to admit when it's not working, and you have to course-correct. And I, I think there's lots of opportunities that we've seen in the last four years that would say, "It didn't work perfectly the first time.
We're going to course-correct and move." And then the final thing that I would say, Michael, is our ability to take and have partners and bring people into this with you. CE is an ecosystem. We are a brand of other amazing brands. And so learning how to leverage our partners and bring them along in the change and use them as facilitators of the change has been a huge part of where we've come from, and I think what gives us a leg to stand on into the future.
Presumably, you feel like this is a muscle that Best Buy has developed that will continue to serve it well. You know, we're seeing evidence of it now with some of the changes and adaptability that has been made.
I mean, I think you have to. The thing about consumer electronics that's quite different than any other industry is you can completely change your product assortment in a span of five years, and you're going to be carrying things you had no knowledge of five years ago.
Yeah.
I mean, 10 years ago, I wouldn't have thought you had connected fitness equipment. You weren't going to have doorbells. You probably weren't going to have a ring that, you know, measured your pulse ox. Like, there, there and then there's whole categories that go away. We don't sell a ton of VCRs anymore. You have to be willing to pretty quickly adapt to, and I think the hardest part for anyone is that means you can't fall in love with historical ways of working.
Yeah.
I do think the team has built a better muscle around, "I'm not just going to do this because it's always how we've done it. We're going to keep trying things.
It's not only the assortment but how you're perceived in the mind of the consumer. Because if the consumer thought of you as an old-school TV and appliance retailer, that would make you less relevant to them.
Well, and think about, like, there are almost admissions that you have to make that will fly in the face of what you would always think. Like, one of the things we know right now is the consumer doesn't always need us to be the expert. You can do a lot of research on your own. You all do a lot of research on your own. Now you can ask ChatGPT to go research for you. We don't always need to be the expert, but we do need to be the one who can unlock for you.
So when I go into stores and I have, like, that favorite moment, I'll be standing behind a customer, and I hear them say something to the effect of, "I had no idea I could do that." Or, "I had no idea it could do that." Or, "I had no idea my family could do that." That's a very human way of talking about technical specifications. But it's very different than 10 years ago where we trained salespeople to talk about the speeds and feeds of a TV wall. And I think, to your point, that's not about the assortment. That is literally wholesale about thinking differently about what a consumer expectation is. Because it'd be really easy to fall in love with yourself as the expert, except that's not always what people want.
It's a very emotional category. Someone's not going to get as worked up about mac and cheese as they might about their salesperson.
It all depends on how much you like mac and cheese.
Well, yeah. Don't talk to those Lasser kids about that because they like it quite a bit. You know, one of the debates right now is Best Buy has done such a fantastic job of consolidating the sector such that there just are very few other players to now gain share from. The current state of affairs is Best Buy's up against some very strong retailers out there. How do you see that, and how does what does that mean for the algorithm moving forward?
A couple of things. One, yes, absolutely there are large players in the space. But we even said at our last Investor Day, even if you conglomerate kind of all those top 20 kind of players, that maybe is 60% of the market, which still leaves a good 40% of the market that is bifurcated amongst a bunch of smaller players. That's one. Two is that kind of assumes that everything in the CE space is statically the same. And what's really different here is that the categories keep changing, and not every competitor plays in every category. If you think about things like, healthcare, like the Oura Ring, which I'm wearing, when those are early in their life cycle, we have a really unique place that many other players do not want to play in.
It's been harder the last few years because in consumer electronics, you haven't seen as much innovation. You just haven't. There's been a lot of work on supply chains, a lot of work on production. But in an innovation cycle and an innovation category, that's when our role is quite unique from others. And our ability, whether it's digitally or physically, to showcase the new, that is the place where we really over-index and can keep differentiating. And so, I mean, we like to say we have the luxury of competing against the world's foremost retailers, but many of them are also our partners in strange ways. And so I think we keep carving out and stay very, very focused on what keeps us unique in the marketplace, and particularly bringing that new to life.
That's what we're here to do. That is quite different than what any other player is here to do.
It's part of the answer here also that Best Buy needs to adapt and serve new Profit Pools in ways that it hasn't in the past, whether it is healthcare or connected fitness or.
Completely. I mean, so there's different ways to think about profit pools. There is the last thing you said, connected fitness, which is really wholesale new categories that no one else is quite as well equipped to sell. Like, we were the first distributors of Tesla chargers. Why? Because it's a pretty unique value proposition. You need to get into someone's home to get it in there. And it's really related to as much how your house is connected, how your car is going to be connected. So there's that. But there is also completely different verticals when you talk about healthcare. I mean, the future of healthcare will be much more based on our ability to take our healthcare into our own hands. There aren't enough beds in the country. People are getting older quickly.
How we can manage our own care is a completely different vertical. Then there's completely new profit pools that leverage what we're good at in an industry that is quite different and complex. We are the largest recycler in the U.S. of electronics and responsible recycler. We have trade-in in a really unique way. We are able to provide supply chain backend to our vendors. So if you order a Samsung product on Samsung.com, you can come order or come pick it up in a Best Buy store. We're, of course, like many, we have an ads business that we're working on in partnership with our vendors. We are an Apple-authorized service provider, a Samsung-authorized service provider. So there are all these offshoots of this suite of assets that we have that we're finding, I think, really unique ways to monetize in partnership with vendors.
One of the more interesting changes and dynamics of Best Buy's business over the last 4 years is E-commerce penetration has risen, which has made it different. You know, it's gone from 20% of the business to 40% and is now settled in the 30% range of total sales, which means that you've been dealing with your customers a little differently. In the past, you might have a customer come in and said, "Hey, let us sell you a complete solution." And that's how the profitability of a transaction might work. Now the interface might be different such that it might be a little bit more difficult to sell, you know, a complete solution.
With that being said, how do you think about the balance between investing in your physical assets as well as your digital assets to ensure that you're not only having an effective customer experience but also, you know, a profitable economic model?
Sure. I mean, we're very agnostic to where our customers want to shop. It's our job to make sure that that balance of investment and just profitability is a good equation for us. I think fundamentally, it starts with a very honest, sincere assessment of what experiences need to be there for our customers and how do they need to improve or be supported. That might be, do we need more selling labor in our stores? Do we need a better fulfillment option? Do we need the personalization of our online experience to be better? And you can measure that through the customer experiences lenses that we see to say, "All right, we're not really happy with that," or, "We're very happy with that. Leave it alone. This one we need to work on." That helps us decide where do we put the investments.
But the nut of it is, just because it's an online transaction, if the gross margins are a little less, because it's a more it's a less considered purchase, it doesn't mean that's necessarily a bad profit outcome for us. Now, these customers, they shop between the channels. So ubiquitously that it's, it's really hard to determine what is and is not profitable by channel, because they go to both spots. And so it really is a, a maniacal focus on just what experiences need to improve, where do we need to make traction.
Looking around, importantly, looking around the corner back to the first question, like, one thing I think we've been able to do is, like, look ahead one or two or three years to know where the customer is going to be and start to invest in the right smart ways to be ready for when it happens. I think it's that customer experience lens that we're super focused on that helps us decide how to prioritize where those are to get the right outcome, not just from our customers but from our own profitability.
That's very helpful. One of the recent developments within the industry is that one of your competitors bought a TV manufacturer.
Sure.
The perception is that it was not necessarily a play on wanting to be a bigger seller of TVs but also to harvest other profit pools like advertising. With that being said, one of the questions has been, is there a case where Walmart starts to give away televisions at cost as a way to subsidize or build out its ecosystem in the advertising landscape? How do you think about that?
Well, let's start with how the world works today. Walmart is selling TVs at cost that they're using advertising. No. But the idea of their own brand, anyone who looks, they have their own brand. It is a very good thing, right?
So does Best Buy.
Now get there. Give me a second. I'll get there. Would you like to do this?
No, I would. I could never nearly do it as well as you do.
As I mean, they have an opening price point product. It is an on-brand product, and it has a, a very much a platform play. That's how they've learned. And they know and I give them a ton of credit. They learned a lot about how do they want to build a closed-loop advertising system. And so bought Vizio. And I, I believe you're right. It's not nearly about the hardware. It's about how do I bring people into this ecosystem and keep them in the ecosystem. That is one part of the TV industry. Some of the biggest back to our conversation, some of the biggest companies in the world have a vested interest in the TV industry, never mind the advertising industry. Samsung, LG, Sony, the breadth of partners that we carry at Best Buy have a very vested interest in how the TV industry develops from here.
And so this idea that overnight everyone's going to gravitate to a Vizio TV at an opening price point, we just don't believe that's where the world's going to go, partially because we've seen some of the experience already. I think the second thing that people forget is, you know, we signed a deal with Amazon in 2018. We are the sole provider of Toshiba and Insignia, which is our brand TVs, that have the Fire platform on them. We sell them. Amazon sells them. And we've been explicit that that is a deep relationship between the two companies as it relates to that Fire platform. We're also the only provider of Roku TVs, in the industry. And we've also said that is a deep advertising partnership between the companies. And right now, we'll have to see how Walmart's philosophy develops.
I mean, right now, they also sell Roku as a product. And I think there'll be a question of how did they evolve their marketing and their assortment strategy over time based on this new relationship? So absolutely, they have a strong position. This is a massive industry with many, many, many different partners who are interested in the economics of the industry, the vast majority of which we have the opportunity to partner with and have already developed some pretty interesting, I think, deeper-scale partnerships. You can imagine that we'll be, continuing to think strategically about how to leverage those partnerships.
Is part of the answer, A, Best Buy has been participating in the advertising profit pool for a long time.
Yeah.
As an old-schooler, I may not look that old, but I still remember the weekly circulars, which was an initial foray into Best Buy ads, perhaps, and harvesting some of the advertising profit pool. So now as the world is evolving, some of your competitors are trying to pursue that profit pool more deeply. How is Best Buy positioned to be able to subsidize its business with advertising profits?
Yeah. I mean, we've been participating with our vendors for a long time around advertising profits. They used to start with a circular, a physical copy in your store and has migrated to a digital platform in terms of advertising. And we jointly share in the need to sell units of our vendors' products. And so, we have a very deep relationship. We also have a lot of information from our customers that we're able to use to benefit them, benefit us. And believe me, they wouldn't be sharing advertising revenue with us if they didn't see a good return on that investment. And so, again, we've been doing that for quite some time. It is actually growing faster than the pace of our normal business has been growing.
We continue to use our other partners like Amazon and Roku to kind of extend our areas to be able to even expand some of the opportunities as it relates to advertising revenue.
I think often the conversation when it gets to retail media networks becomes about subsidization of profits.
Yeah.
It also is a much more effective way to reach a consumer if you do it well. When you have the audiences that we have and the quantity of information that we have on everything from search all the way through repair in a specific industry, we have the ability to help our vendors discreetly understand what's the return that they're going to get on every single small slice of their investment across the different levers that we have. So this isn't just about subsidizing your profits. This is about maximizing and much more surgically targeting your customers based on data that you have that others don't. And by the way, that only becomes more valuable in a world where you're not going to have as many cookies. You're going to start to see an ability to track a consumer get harder and harder across the internet.
It's not fair. You take the words right out of my mouth.
Well, I better.
Yeah. Well, and so where are the limitations to Best Buy's ability to serve all of its constituents through this? Because there's a perception, well, Best Buy doesn't have as well-developed a marketplace online. And a marketplace is a way to really drive the advertising revenue. Maybe it doesn't have as much frequency with consumers. So maybe that's an impediment. How do you see that?
I think that if you limit yourself to thinking about just how your business model works today as it relates to advertising, you're not going to push on the horizons of what's possible. So what do I mean by that? If you think about TV platforms, that's not just about what you know about someone's CE spend. That's what do you know about someone writ large and how do I target them at the right points in their journey? That's a very different model than. Do I get enough eyeballs frequently enough to be able to make an impact? And so in that world, you, you start to be able to extend your assets. It's not just what do I know about someone in this particular CE space.
It's what do I know about someone writ large and how do I, at the right moment, whether that's in social, because you can cross these paths in social, or whether that's in a platform, how do I tee up the right advertisement at the right moment in a way that's actually going to drive the right next best action? That's quite that doesn't rely just on frequency. It relies on depth of knowledge. Depth of knowledge is where the data becomes incredibly important.
For example, if you were to find a person who is an equity research analyst who is a big Real Housewives fan as an example.
Hypothetically.
Hypothetically.
I feel like we should dig into that.
So speaking of digging into, one of the questions that I'm sure leads off many conversations with Best Buy is, you know, when are we going to get into a replacement cycle for all of these fine consumer electronics that we've purchased in the last few years? So, A, it's, it's kind of interesting because you noted that PC notebook units were starting to, to turn positive in the Q4. I think some of that momentum had continued into the Q1, which intuitively makes a lot of sense. People bought a lot of laptops to work from home in 2020. And we're four years removed from that. And maybe some of the other categories, the replacement cycle might be a little longer.
Take us on the arc or this journey of how to think about how these replacement cycles are going to kick in and what are the key factors that are going to influence this timing?
Yeah. I mean, if you just generalize our replacement cycle from the various products, it's maybe anywhere from 3-7 years. You've got TVs and appliances maybe on the longer end of that. And you have notebooks, computers somewhere in the middle, and phones maybe towards the end, although those have gotten longer as well. And so, you're right. As we try to lay out some indicators as we think about this coming year in terms of our comp guide of 0 to -3 that would say, hey, we believe the industry is stabilizing. We believe there's a signs that it's going to grow not too far into the future.
Seeing notebooks grow in Q4 and continue to see strength as we start the year is a great indicator in a world where not that we don't want you to buy a notebook. There's not a ton of innovative reasons to buy a new notebook right now, as great as they are. And we know that just a little bit of innovation actually helps tip those minds into, I've got a computer that maybe isn't performing like I'd like, and there's cool, innovative, things around AI that I'd like to be able to try can tip people into a replacement. So and we know those things are coming. So it relates to notebooks and computing somewhere in the middle of the year towards the end.
We know that there's more innovation coming on top of a world where it looks like, based on some of these signs, that people are already starting to see a need to replace. I mean, we repair over 2 million computers a year. And we know when we see those computers that the average life is, you know, 2 to 3 to 4 years long. And so we can see when how long these things tend to work before they're broken, which is another good sign for us. We've seen TV units stabilize or if not grow in the last few quarters. Again, ASPs are a little lower based on the type of tiering that people are purchasing given the macroeconomics today.
But seeing units grow and be stable is an important indicator because at some point, you reach a spot where the macro conditions improve, my situation improves, I see a need, whether it's the form factor of the TV or just the software isn't doing what I want it to be, and I don't want to use a different device. That generates a need for replacement. I think the harder ones are places like major appliances where the housing market is not exactly strong. Hopefully, it's stabilizing right now. We clearly play in a world where a low price point area is important. Right now, it's about a single item purchased, distressed type of environment. And we clearly play in that.
At the high end, you've got packaged premium offers that we probably even over-index in when the economy's normal or better. So that might be something that might take us a little bit of time. But there is even some indications that the housing market might turn. So you take all together and you add a little innovation by area, you can see a world where you're 3, 4, 5 years into a replacement that you can see the industry start to turn the other side.
In last year, I think you were maybe a little optimistic that you would get into a replacement cycle maybe towards the end of the year, the beginning of this year. What was off about that? Why is it, hey, it was impossible to know that we were only going to have 4 million housing units? And a move event is a catalyst for someone to go out and buy a TV, a washer and dryer, a new refrigerator. Is that the right way to think about it?
I think there were a few things that were stickier than we thought. So, start with the assumption was based in, as the year went on, we think we'd start to see that replacement cycle. And at that point, we'd even said, as we head into the back half. That would have been based on traditionally how we think about replacement cycles working. What Matt quoted is like years of us watching replacement cycles. The hard part is then to figure out at a macro level exactly how are those wins going to trade and what impact will they have on historical replacement cycles. One example of that is housing where, to Matt's point, major appliances is very tied to a housing market.
But in the computing space, I think you also saw inflation was much stickier last year than even we had thought or than the projections were at the beginning of the year. The spend on services stayed much stickier than we had thought at the beginning of the year. And so in that vein, you also see people then push on the replacement cycle a bit because they're trying to sweat their assets. And then, to Matt's point, if there's not something new and innovative, it's hard for me to rationalize going out and replacing this huge pull forward of electronics that we had during the pandemic. And so I think you had the stack of a few different macro factors that were stickier and longer than we thought that put pressure on people's propensity to replace.
Part of the reason I love where Matt started with the actual data points we're seeing around notebooks, you said it too. Like what we're trying to show now is there are actual behaviors we are seeing in the marketplace, even with all the overhangs we see right now. There are behaviors we're seeing in the marketplace that feel more indicative of replacement behaviors. Like given all the news there is about the new rev of computing that's coming, probably in the back half, probably enabled with AI, there aren't a lot of reasons you'd run out and buy a new computer right now unless you were just really sick of the performance of the one you've got.
How are you thinking about the magnitude of the recovery when the replacement cycle kicks in? And what are going to be those factors? Could it be this potential perfect storm of people have to replace some of the products that they bought in 2020? So the installed base is higher. You've got a housing market that will kick in. And on top of that, the cherry will be that are the some innovation.
Yeah. If so, if I've learned anything in the last five years, a perfect storm probably is not worth betting on. But I think like.
It's more of a snowstorm than.
Right. Yeah. What's this negative?
I think there's been like five large macro factors that stacked on CE in particular have been hard. We talked about inflation. We talked about the pull forward in CE was quite large, spend in services and outspend there. We also talked about the housing market that has for sure been one, and then the lack of innovation. Those are kind of like large-scale macro factors. So could each of those start to abate? Yeah. And are we seeing some signs that some of them are starting to abate? Yeah. But not in a rush and probably not all at once, right? So let's be clear about that. There are also some really interesting tailwinds we're getting that are a little bit more in our control, bigger install base than we've ever had, starting to see the indicators of replacement. We are seeing more innovation.
For anyone who looked at any of the coverage of the Consumer Electronics Show, it was one of the strongest innovative showcases that I've seen, certainly since prior to COVID. That just provides you some horizons of innovation, which is incredibly helpful for us. Our differentiators have remained incredibly differentiated. And we're starting to see things like Geek Squad as a service and leveraging some of these assets that we have. So I think what we're at least seeing is we can, you know, see some of those headwinds and tailwinds coming together in a place where we see stabilization, at the very least, in the year that we're in.
So, the goal then is to do everything you can to position yourselves aggressively in the stabilized year so you're ready to kind of catch that more innovative wave that I, I think you'll see outside as you head on from this year.
What innovation are you most excited about?
I mean, right now, there is an incredible amount of attention that's being paid to AI. And it's not for the sake of AI. The ironic part about AI is it actually makes technology more human. And there'll be this propensity to try to find like what's it done well, you're asking a very human question and getting a very human answer. Like that is the essence of what AI is allowed to do. It's so smart, it's going to help you compile your answers. But what it also does is it starts to make technology do more human things. It starts to make robots do more human things. You end up with VR and technologies where, like, you are immersing yourself in these worlds. And, these all of these experiences are becoming more and more prevalent at a pace that is probably unlike anything that I've ever seen.
And it's not just going to enable computing. Over time, all of that AI infrastructure will start to be built in the way that our technology runs. It'll be built into TVs. It's going to be built into—I mean, my son has the Meta glasses so he can, like, live stream while he's at the beach, which seems totally useless, but he really, really enjoys it. I mean, like, yes, we can kind of laugh because they're at the starting edges. But eventually, when you wear those glasses and your text messages pop up and your emails pop up and you have a chance—I know you all multitask all the time. Like, there will be these really immersive ways that tech just keeps getting built into your life.
So what I like about more of a structural change like this is it's not one item or another. It's more that it starts to enable this really interesting suite of what technology can do for you. That's where we do really well as a company.
There's so many questions in this regard. But number one, the perception is that Best Buy does really well when there's a revolutionary cycle going from the Joyce and Bob Lasser cathode ray tube television to the Michael Lasser LED state of the art or going from a flip phone to a smartphone. Does Best Buy need that type of cycle? Does Best Buy see that type of cycle on the horizon?
I think there's this misnomer that it's that type of cycle. Like, we haven't seen a cycle like one of the two things you just talked about for about 15 years. Like the digital TV transition was in 2008. And it's been a while since we like had the phone move. Where we do well is actually in constant innovation. That is a misnomer of the industry is this idea that there's like major cyclical peaks minus gaming hardware, which is very much about like a launch of a new system minus that it's been for at least the last 15 years. And Best Buy's seen lots of growth within that time period.
It's been more about this constant cycle of innovation, constant improvements in cameras, constant improvements in the speed of processing, constant improvements in how long your battery lasts or how good your camera is on your phone. Those don't feel revolutionary yet. They're enough to continue to push the industry forward and push people to get the new even think about if you had a TV that you bought six or seven years ago. The platform on that TV, I would venture to guess, is not very user-friendly. It's hard to navigate. It doesn't look at all like what, like, an Apple TV might look like today. So where we benefit most is not this massive revolutionary cycle. I wouldn't mind it.
It's more this, like, really constant innovation that honestly is done by some of the world's biggest companies who have a very vested interest in trying to stimulate demand. That's where we do well.
Do you see some of the products today, like the Meta glasses that your son wears at the beach? No judgments. That were similar to the Palm Pilot from 2000, which the Palm Pilot or the Newton were early indications at little boxes that are in everybody's, either hand or pocket today. You know, is that a good parallel that we could be living in, in that early time period for those that type of innovation?
I feel like half the people in this room don't even know what you just talked about.
Palm. I was thinking palm tree.
Google it.
Yeah.
The most amazing thing about this industry and it's probably the most frustrating as an investor is that it is constantly recreating itself. Like, there is even discussion right now about a myriad of different AI devices that you put in your pocket and it becomes your personal assistant. We'll see, maybe. But no matter what, a whole bunch of companies are trying to figure out, how do I make your devices even more essential to your everyday life? That was the idea of the Palm Pilot. Or that was the idea, you know, as far back as you go, the idea has always been, how do you make consumer electronics essential to your life?
At the risk of asking a loaded question, is artificial intelligence more good for Best Buy than not so good for Best Buy?
I think the technology unlock that generative AI in particular represents is good, not just for Best Buy. I think it will do some amazing things in terms of technology. I always tell my team, there's no ors in retail. There's and. It comes with immense risk. It comes with responsible creation. It comes with understanding where your data is going and how it can be used. There isn't a perfect answer here. I think there will be immense opportunity in terms of, I mean, just think about what we can learn in terms of our own health, in terms of drugs and drug creation. Like, there are huge opportunities here. It will be very easy for it to be used irresponsibly. So part of our role, forget for a second, all the technical side of this.
Part of our role as the leader in CE is also just to help educate the consumer. This is what we do well. It's what our Geek Squad agents do well. There's a huge opportunity for us to help educate the consumer. I don't think everyone knows, like, at the beginning of 4K, everybody defined 4K differently. And we took a role in that to help make standards, to help set up and make sure the consumer always had the same experience. And then we partnered with our vendors to make sure that was consistent on behalf of the consumer. I think there will be and, and there will continue to be some interesting roles for us to play in helping the consumer try to navigate this.
Two follow-on questions from that. What is the most example in the near-term investible horizon of how AI is going to impact a product that Best Buy sells? Presumably, it's the Microsoft Copilot that could.
Good example.
Unlock something and give us an, you know, tell us a little bit about that.
I mean, I think you're starting to see multiple examples. I'm actually going to back the truck up even from that. I think Samsung did a really beautiful job when they released their phone. They said it was AI-enabled. But what got people was the commercial that showed you could circle the orange dog lamp, and it showed you exactly where you could go buy it and for how much. That's an AI use case. But it was the use case that actually made people interested. Like, when we got feedback, the demand for that way outstripped our expectations. And why? As we learned more, people were, like, really excited about that as a use case. Copilot's another great example, right, for anyone who's used it. The use case is you can just make me wildly more productive. That's not about AI as a thing.
That is, I can this fast write a thank you note or write a very polite decline, take a look at it, make sure it seems oh, and then I can press another button and say, make it more personal. Then it's going to make it more personal. Then I can shoot that off. That can all be done in 30 seconds. Those are. It's not just about AI. What we will help our vendors do is translate the technology into the use cases. I think that's where it's going to get really interesting for people.
Given the intimate relationship that Best Buy has with technology, is it doing an effective enough job at bringing artificial intelligence into how it runs its business?
So, we could talk a lot about this. We have four main areas that we're focused on. And what we like to say is, AI and generative AI in particular, it is not the strategy. It is an enabler of the strategy. And so we have some very proactive use cases around personalization and around, like, every time you come to our app, you will have your own personalized experience. That is all that backend is, rendered by AI. We have some effectiveness and efficiency initiatives. We are actually routing. We're doing a test, and we're routing about 20% of our trucks using AI versus people doing those routes. It's wildly more efficient. Our customers are much happier. We're using a lot in our call centers. We are also working on internally our own work around the implications, the ethical, moral, obligations, the risk factors associated with AI.
We're making sure we work on that. Finally, we're working on education. Everyone needs some hands-on work here. That, that's another big bane for us. We are staying very targeted and then really trying to be explicit about what we're learning, what cost savings we're seeing, what increased productivity we're seeing, as we start to unleash some of these models within the business.
Speaking of a pivot or an adaptation, Best Buy made some changes to its membership program over the last 12 months. Talk to us about what was the reason for the change? What have you seen as a result of the changes? And how do you expect it to unfold from both a customer behavior as well as a financial impact?
Yeah. In the course of the summertime, we were always worried about acquisition, engagement, and retention. That's those are the stalwarts of what a membership program should be. And I think we're always trying to manage the best outcome for those things. And when we made the changes, we were seeing things in the Total Tech program that people were using but not necessarily driving a sticky relationship with, you know, which is what we wanted out of our membership. And so we made some evolution around the Total Tech offering and turned it into Total. We reduced the price. We removed the free installation, and then started to sell them on a standalone basis. And we did that because, again, we didn't see the benefit of keeping it. They weren't renewing their membership when they did it.
And then we added the Plus, which is the lower price point, which resonates more online. And I think what we're seeing is a good outcome in terms of we still have a more premium membership in Total that resonates well in store, provides support, whether it's protection or service for people who are members. And that resonates well in store because it's just a more understandable when you're higher consideration purchase, interaction with an associate. And so we're learning that. For Plus, we're seeing it resonate a bit more online, which is good. It's a little lower cost. And those members are really more interested in pricing. They're really more interested in access to special events, the extended return windows. So those are doing what we would hope they would do. And we continue to sign up members.
We're seeing more frequency with these members. We're seeing a shift of share of wallet. So we're using Circana information. We can actually see those members improve their share of wallet with us, which is one of the outcomes we were hoping to get. We are, like I said, continuing to sign up members. And I think it's all in the effort to find what's most important to each individual customer. And you can appreciate we're going to keep tinkering with them along the way. There shouldn't be, I wouldn't guess, any major revolutions in those memberships, but continuing to look for opportunities to make sure that they're resonating in the right way because we want to drive frequency, interaction, and just meaningful fulfillment from those membership offerings. And so far, we're seeing what we like to see. We're seeing retention actually be a bit better than we expected as well.
So, again, we'll keep working on them to make sure they're doing what they should, like any membership offering any company would actually do.
How long do you think you need in order to judge the success or any adjustments you might need to, to make in this program?
Yeah. I mean, I think we just made the changes last June. So, I mean, you want to give any membership program a bit of time before you overreact to anything that you're seeing. And so we won't cycle those until the end of this coming June. And I think it's an appropriate time for us to maybe step back again and go, OK, are they doing the things that we want them to do? Are we actually increasing the frequency? Are we getting more share of wallet or enough of what we want? And do we make some adjustments to those membership offerings? But you need to give it a little time. We don't have a lot of frequency in Total compared to someone who sells groceries or some.
So we need to give it a little bit of space and time to breathe, understand what adjustments we might make. So later in the year, we'll take a deeper step back. Not that we're not monitoring now, but just try to understand where it sits in Total and make any more additional adjustments.
Switching gears, one of the more recent developments has been about what's happened, what's been going on with private label credit. The Consumer Financial Protection Bureau has mandated some changes. So give us a sense for how your credit card relationship works. That it is a meaningful contributor to the overall profitability to the organization. What have you assumed for that profitability contribution from here? And what levers can Best Buy pull depending on some of the various outcomes from this situation?
Sure. I mean, if I step all the way back, our partnership with Citi has been very successful. We are very happy with the portfolio in Total. We jointly have a portfolio which has all the receivables from those credit cards, whether they're co-branded or private label. We basically split the profits. We haven't talked about specifically the economics, but we split the profits with Citi. I think, so over time, if you look before the pandemic to today, generally, we've seen a very consistent amount of our sales coming from our credit card. We've actually seen external receivables grow on our credit card because people are using our card to buy grocery and gas with it. So the receivable balances are actually growing, which is contributing to the interest that we get from the book.
And that's helping offset what we believe will be a little bit of pressure as we look into next year. So but fundamentally, the book is extremely strong. What we're seeing now is more of a normalization from some macro pressures that really kind of started in the last couple of years. We ended last year with net credit losses that are pretty similar to where they were pre-pandemic. But the trend had been increasing as the year progressed. And what we expect this year is for the trend to continue to increase a bit and then at some point stabilize and reduce to normalize to where a more normal NCL rate would be. But that will create some pressure. So we said it'd be about 20 basis points of pressure to our gross margin rates coming year.
Now, that didn't include the impending changes from the CFPB. You know, we have done some initial assessment. And I think if you just step all the way back, timing is a really important factor here. It's hard to know, you know, we have the regulation changed, but we have a lawsuit that's been filed. Timing is the big component. And I think if we step back and think about what the net impact might be, I'd say it's probably approximately 10 basis points of additional pressure. That's net of anything we might do to offset it. But again, if it's one month delayed from that, that's if it goes in in July. If it's one month from July.
From 10 basis points.
Yep. If it goes in August or September, that pressure lessens as it goes. And it doesn't necessarily mean 10 basis points magnifies into 20 basis points next year because.
You just lap it.
You'll offset it with some actions. You can imagine we're going to work closely with Citi to understand what those mitigants might actually be. I would say that we're being very thoughtful about the timing and the impact because it's also a customer proposition that's really important. You know, if you're getting into places where you're raising APRs, that's not something we take lightly.
Sure.
And so we want to be thoughtful about what we might do. We've seen some people already take steps. We're trying to be not overly reactive because, again, the timing matters quite a bit. And we want to make sure that long term, our credit card is strong and profitable. And it's actually been a very strong resonating proposition for our customers. And we wanted to keep it that way. And so we're just being mindful about that impact as well.
That's a really helpful answer. You guys are good. So one of the unintended outcomes of this ruling could be that credit providers are a bit more stringent in who they give credit to. How have you factored that into this consideration, given that you do sell some big-ticket items that are, you know, where providing credit is important?
Yeah. I mean, I think we're always looking at the right approval rates for your credit card. Generally, actually speaking, I think retail credit approvals are a little better than the average from a banking card. And so I think potentially, there could be even opportunity if other rates start to go up in relation to. So I think we're always very thoughtful in managing just what's the right experience. We've actually, over the last several years, taken steps to lower our FICO approval rate averages towards, you know, closer to 600. And so we've been taking steps to try to actually expand our portfolio in a responsible way. And so I think we're always going to be mindful of what's the right amount, where's the underwriting need to be as we move forward.
But again, if we're responsible, we can actually grow the business and actually provide a better benefit to customers who, especially now, are needing credit to get through some of the challenges that they're facing.
I want to conclude our conversation, by tying a lot together, a lot of these themes that we've just discussed during this fun conversation. You know, the perception is, and it's a reasonable case, that the consumer electronics industry is going to recover. Best Buy is going to participate in that. How, as outsiders, should we think about the profitability impact, especially as there have been a lot of actions that Best Buy has taken to address its call structure over the last few years? The flow-through questions, an important one, is it, you know, it will allow your constituents, your shareholders, to have an understanding of what the earnings profile of this business looks like, looks like, depending on what their assessment of the recovery is?
Yeah. I mean, we've been mindful of this of where the industry is at in the situation the last number of years, starting with when the business considerably shifted online. And so we've been trying to take the appropriate steps to understand where's the structure need to be in terms of supporting our business long term. And we made some hard decisions along the way to get to where we need to be. I think the important part here is we've made a number of decisions. We've even took some restructuring charges in this last quarter. But we feel good about where the cost structure sits today. And we can adjust to variable changes in sales pretty well, slightly up or down in terms of where that sales growth goes to.
But importantly, as sales start to return to more normalized types of growth on annual basis, we shouldn't have to make large changes to our cost structure. Now, clearly, we're going to add labor for sales if it comes. And we might have a little bit more marketing. But that's not where the leverage comes. The leverage comes when you take the fixed cost of rent and even other areas where you don't have to grow that as sales grow 2%, 3%, 4%. So when you start to see that industry grow and you can offset those pressures like we've been able to show and do, you can enjoy some annual increases to your or expand your operating rate on an annual basis just by making sure you're being diligent and not irresponsibly growing your cost structure less than where the sales might go.
So a lot of those changes we've been able to make are, and have made, are with that in mind, be able to take advantage of sales upside when it comes, and ensure we can, at the same time, meet the right level of customer experience that's important to us.
Got you. And lastly, we're going to have plenty of opportunities to talk about this along the way. But five years from now, what does what does Best Buy look like?
I think what will be most important for Best Buy five years from now is that we have stayed true to the real differentiators in our experience. I think that means we will understand customers better. We will tailor our approach probably more digitally than it's ever been. I think that will continue to be where the growth happens within retail. It will feel like a very personal approach. We'll understand people's homes better. We'll be able to help them navigate, which I have to believe is continuing to be an incredibly fast-paced consumer electronics industry.
So I think for us, it's this balance between staying very committed to the differentiators that make us who we are and to your point where we started, thank you, is moving really quickly with an industry that, at that point, I think honestly, will be even more embedded in our lives than it's ever been. And, I think that means we get the chance to play a really crucial role in people's homes.
How fun was this? Please join me in thanking the Best Buy team. Thank you for such a wonderful.
Thank you.
Thank you.