To kick off our first discussion, I'm pleased to introduce Best Buy's Chief Executive Officer, Corie Barry, and Chief Financial and Strategy Officer, Matt Bilunas. Their fireside will be moderated by Michael Lasser. Thank you again for your continued engagement as we begin another great day of dialogue and insight.
Thanks, Scott.
I'm kind of sad I missed the tribute to Michael Lasser.
Oh, boy, you missed nothing. Well, I don't think there could be a better way to begin the second and final day of this glorious event than having my friends from Best Buy with us. I am thrilled, so thrilled to introduce Corie Barry, Best Buy's Chief Executive Officer, Matt Bilunas, who is not only the Chief Financial Officer but the Chief Strategy Officer, and someone who needs no introduction, but Mollie O'Brien leads the company's investor relations effort. Wow, there is a lot to talk about, so I am glad to have my friends here. Where I wanna start is Best Buy is a story that has constantly been underestimated by the investment community. I think my folks on the team kinda like that.
They like to be underestimated, I won't say underappreciated 'cause there are many of us who appreciate you greatly. This is a company that has been through a lot.
Mm-hmm.
has figured out ways to navigate through what is a constantly changing environment. As we begin our conversation, how has the organization been able to stay so agile and achieve so much success and really confront a lot of that hesitancy that outsiders have?
Thank you for a lovely question.
Yes. Easy one to start.
Yeah.
Easy one to start.
They get harder progressively. I actually am gonna start at the beginning. Our founder, Dick Schulze, founded Best Buy 60 years ago, and he laid out four core values for Best Buy, and one of those values was learning from challenge and change. It seems real simple, but it's actually quite prescient given what this organization has gone through, and I think he did that because in his heart he knew the products we sell at that time will evolve incredibly quickly. If you don't have an organization that is anchored in the ability to navigate that amount of change quickly, you're not going to succeed. We, as a culture, come back to that all the time. You and I were chatting a little bit about, like, how do you keep people focused?
The key is you have to hire people smarter than you. You have to put them against hard problems, you have to let them solve them without being hands-on, as long as they're within the bumpers of the values and the strategic direction of the company, and I think we've created a really resilient team. The last thing that I would say is you also have to be willing to learn from your mistakes. We're all gonna make them in an environment like this. It's moving so quickly that if you're trying to be perfect, you're actually going to shoot yourself in the foot. Moving quickly, choosing to learn from your mistakes, and then talking about them and talking about how you're gonna pivot, that for me is a skill that I think the team excels in.
Yeah. Would you not add maybe a third point that I think is one of the key values of Best Buy that's really led to its success, which is being so customer-focused. I can remember the day where Best Buy's big competitor placed its stores in maybe out of the way areas because its view was, "Well, customers would come to us.
Sure.
One of the founding principles of Best Buy was to say, "Well, we've gotta make it easy. Let's put the stores in the most convenient areas for the customer." It seems like that's been a guiding star for the company every single day.
I mean, it's so funny that you say that, 'cause to me that's just so core to who we are.
Yeah.
I don't even talk about it because we wake up every day and that's all you think about. In fact, that's not platitude. You have to be so maniacally focused on the customer that sometimes you're willing to break your own paradigm. The customer always is moving faster than the organization is. The question is, your store example is a beautiful one. At the same time, you've got a customer who wants that in-depth virtual digital experience, and they don't want either/or, they want both those things. They want them on their own terms. Having the willingness to be in love with your stores and wanting to make them these experiential hubs that are incredible and at the same time diverting investment into your digital assets so that day after day you're faster, better, stronger digitally.
Yeah.
It's a very unique balance that the team strives to make every day.
Yeah. Thank you for that.
Yeah.
At the risk of using maybe a graphic visual too early in the morning, but Best Buy is at the tip of the spear in terms of the change that our society's experienced. Not only are you as leaders, strategists and operators figuring out how this artificial intelligence and all this technological change works, but you're also empowering customers and giving them the tools to be able to do that. I wanna concentrate on this topic for a few minutes.
Yeah.
Where I wanna start is how's Best Buy using artificial intelligence?
I'm actually gonna take it up one level from there. I think about artificial intelligence for Best Buy on three levels. The first is truly the product level, what we sell to people, and our goal is, to use your own words back at you, to be at the tip of the spear in terms of those products that people access. That's everything from operating systems like, Copilot+ PC. That is also devices like Ray-Ban Meta. That is whole categories that probably will come back in a completely different way, like smart home, where it actually will be a lot smarter. That is also thinking about how platforms, think ChatGPT or Anthropic, start to show up on products, on things like your TVs or in your home, and then how your personality stretches across those things.
We're just starting the journey on the product side as it relates to how CE will change. There is the agentic shopping side, what I call the outside AI. How do you wanna show up as people are starting to use agentic shopping? We're in partnership with ChatGPT. We have downloaded our whole catalog. We're also beta testing advertising with them, so you'll actually see SKUs come up as you search. We're also working with Gemini and working on instant checkout with them. We're on with Wizard, which is just a shopping platform. We're just really working on how is the customer going to shop differently in an agentic world. Finally, really the question you asked, how are we using it? There are ways large and small.
My strong point of view is you need to really think about processes that you want to re-engineer end to end, not just point solutions, although there are some of those too. We have completely re-engineered our call centers, and I know that's a common one to say, but all the way to I have a tool on my desktop where I can ask natural language questions, and it will filter all of the calls that came through the day before, and I can actually discern what is the biggest call driver, what is happening in the Northeast, what is happening based on sentiment, all in a natural language way. That is incredibly rich data for us and for me as a leader. That came from re-engineering a call center experience. I mean, we were chatting before. I was working with the dev team.
The pace of change is accelerating unlike anything I've ever seen. We had a 14-week sprint we were gonna run, so you could pick the right box size in a store. Very important. Can't be too big, can't be too small. That 14-week sprint turned into a day. The code was completely written. It was deployable. We had it in two stores two days later. You have to re-engineer how the rest of the organization works if all of a sudden the code base can move that quickly. Now we have six examples that are moving through the organization at that speed. I think we're entering a world now where you're both gonna have re-engineered processes, and you're gonna have very quick code releases of new, very customer-centric solutions that you can update in the moment. Sorry, long answer. There's a lot going on.
No, you took half my questions, so we're done. Thank you very much.
Nailed it.
A lot to unpack there. I wanna dig in a little bit. Number one on this move from 14 months to two days. This is, hey, when you come to Best Buy, order something, you may get ship from store.
Yep.
As you ship from store, you wanna optimize the box that it goes in to make sure that you're not using too much material, but also to ensure the safety.
Yep.
of the product, and it gets to the customer's home. In the past, as you go through that experience, that might have taken a year and change, and now just in a week you were able to create the product. How does that work?
Yeah. I mean, what is happening is, AI is moving so quickly that now, the platforms are writing their own code. Claude, as an example, and this is well distributed, Claude literally is writing its own code base. In this case, this is why it's not just a point solution. Yes, I can get the code written. Then how do I display it?
Yeah.
I need to be very quickly piloting, and that's what we did in 2 stores, where now they have just easy technology to say, "This is the box. This is the thing in front of me. Okay, here is the box I would recommend." That used to be a human kind of looking at a piece of paper, trying to judge which one would I put it in. Maybe it happened, maybe didn't. The reason I like this example is that it will never just be about how fast can the code base written. It's how fast then can the risk teams look at it? How fast can you make sure that you get a little QA on it? How fast can you get it into stores and they have a new SOP to work with it?
How fast can you deploy it across 1,000 stores so everybody's working it? Ultimately, what is the productivity you get out of that, and how do you wanna leverage that productivity against maybe a different customer issue? Nothing will be as simple as just go rewrite the code, not in retail certainly. You have to almost re-engineer the way the company works so that you're moving with speed and agility in a very different way.
Big dog over there wants to know those last couple questions. Maybe at the front in terms of the productivity gains, the cost benefit, the cost savings that might come from that, to you as a leader, how are you prioritizing all of this to ensure that you are keeping pace with the changing landscape and tools and capabilities that are available to your organization, but also not moving too fast such that it's disruptive? I have one more follow-up.
Yeah. This is the hardest question for any leader right now, and they're lying if they say they've figured it out perfectly. I think what we're trying to say is where are those problems that are hard to unwind that we haven't had enough resource to put against, that we think could result in better customer and employee experiences? How do we develop small teams that can quickly get after those problems? What's most important to me is actually, I need a business leader who really cares.
Yeah.
Call center re-engineering is not done by a technology team. It's done by a business leader who really cares about what the future of our employees in that space will look like, what the future of the customer experience will look like. We've had better success, putting our resources against tangled problems that we can really see the benefit to the things. Did you call him Big Dog? To the things that he cares about.
We know.
To the things that he cares about. I mean, in the call center example, we've seen 50% less calls because they're getting routed automatically, and we've taken an immense amount of cost out of the model.
Yeah.
That didn't happen overnight, though. That took lots of iteration and movement.
Two more questions, one for you, one for you on this, and then we'll move on. It's important. One is how, you know, what we're all struggling with, both as people, as business professionals, is how does this unfold in a way where we gain productivity from it, but we don't make it disruptive to our economy, such that it displaces jobs in a way that is difficult to navigate through? How do you think about that? Then you as a person with the finance angle from it at the forefront, how are you trying to realize the most cost savings, but in a way that it's not disruptive?
Retail is a competitive space, I think we all can agree. As you're finding efficiencies that potentially impact people, I have a laundry list of other places that I would like to invest more. In a lot of cases, that is also in people. I might need more people to help me think through strategically how I wanna move AI through the organization.
Yeah.
There is absolutely a redeployment aspect to it, where we're gonna have to think differently about how might you redeploy what was cost center talent. Now I might need that. Honestly, I might need it in stores because I need more in-store interaction. Very few of us are just saying, "This is just as easy as cost center or cost savings you're gonna take to the bottom line." Most of us are thinking, "All right, how do I reinvest that so that I continue to have a strategic differentiator in terms of the experience?
The point is, there's a lot of ways that you can redeploy these resources in a way that maybe it won't be as disruptive as feared.
Again, I mean, I'm talking from a retail perspective.
Yeah.
All of us, I know we all have laundry lists of places.
Yeah.
We would like to reinvest in the business. I don't think it's quite as simple as you're just gonna pull all this cost out, all these people out. I have many other places that I need new and different talent because the world is moving so quickly.
Yeah.
Yeah. I mean, just to build on that a little bit. I think it's about efficiency and cost savings, but it's almost more importantly about the experiences that you can improve by enabling this AI technology or new technology. To Corie's point, there is an inevitability of a capacity constraint within any organization, and there is a list way longer than we can actually ever get to on what AI will help us do, is unlock those things that you just might not get to because there's just a certain amount you can kind of throughput in a year. I think the
All of these resources we have can be redeployed into places that are either gonna save us more money, but more importantly, create better experiences, whether you're automating something end-to-end, like in call centers, or you're actually just improving the way we process marketing in the back office, and how we build ads and things like that. There is a countless number of places for us to redeploy our people, again, better experiences. Yeah, it's about efficiency, but it's also about just actually making our customers happier.
Yeah.
You can do both at the same time. We have a lot of different ways to do that. You know, we'll always invest in the right return on investment type of things, and we'll take chances when we need to, and we will be smart with our dollars. We've proven to be able to do that. But there are a lot of places that we can really kinda get after this digital improvement that we're seeing across all of our channels.
The last thing. I worry that all of the narrative around AI as it relates to large scale organizations is cost-saving.
Mm-hmm.
It is a huge enabler of growth and a huge enabler, actually, of even just good employee experiences. I had an employee who literally over the weekend rewrote and created an agent for all of our employee tools. Our employee tool website sucked. Like, you would type in exactly what you needed, and it would not bring it up. Literally over a weekend, he wrote the agent that now scrapes all that employee information. Now our employees can ask very normal human questions like, "I'm new here. What are the forms I need to fill out?" It's populating. That agent will be able to repurpose to also start to solve customer support problems. Because it's not like you just write an agent and it only solves one thing.
If it knows how to ingest data, you can change the data it ingests, and now it's solving customer problems. Some of our most powerful use cases are things like creating audiences. Like, I can take outside signals and data, I can take all my internal data. Now I have LLMs that will mash all that data together and tell me exactly how to target someone. If they've been lapsed, I can pick them at just the right moment because I'm seeing the right demand signals, target them, and we're seeing an improved ability to bring that customer back to the brand. The vectors here are almost limitless.
The harder problem is what you hit on, which is how are you kind of at least trying to do some level of prioritization and at the same time opening the aperture for some curious, usually young person who wants to just get in there and create a solution for the company.
I have to ask for your forgiveness because I do have one more, so that was not my last question. You brought it up, which I wanna give you an opportunity to refute the skeptical argument. A lot of outsiders are of the easy default view that one day we're all just gonna go to our favorite large language model and say, "Send me a pair of AirPods." It is going to undermine the need for an organization who will facilitate that transaction. How do you think about agentic commerce, how this is changing? How is Best Buy being prepared for it? Please forgive me.
We've taken our time working our way into agentic commerce. Why? You do need to go in with a plan around what ubiquitously needs to be available in agentic commerce versus what is very unique to your brand, your experience, your data. I think it's gonna be an and world. You're going to need to be present in agentic commerce. In our case, in working with ChatGPT, we have really good data that could help them. A lot of especially in CE, you would ask questions, and there was a lot of wrong answers coming back because it's so. There's so many models in the world. They can be dated before you know it. There's so much data.
We're trying to go in with a plan around. We need to be present, but we also need to say, "Look, if you want this installed, if you want us to make for an easy upgrade, then you got to come back to the site." We'll see. It's early. I think right now we'd be lying. No one's figured it out, and everyone's testing a bit. I do think a real solid plan around what is your data. The last thing I would say is you also need to think about your site and your content, because not only are you out in an agentic shopping engine, but their bots are coming and scraping your site for information.
Your site needs to now be geared not just toward people, but you may actually have hidden pages of data, not for customers, simply for bots, that they can scrape so they're more knowledgeable, which again, you might feed a little bit of that in the agentic answer, and then you say, "Come back to the site if you want more expertise on it.
Smooth. Smooth.
Well, it all sounds like it, and then when we're trying to do it's really, really hard.
It's messy. One of the second order effects of all this is we're building out the ecosystem to be able to support this. This is creating some shortages of key imports and raw materials for a host of the products that you sell, such that memory prices are rising and could be in short supply over the course of the year. How are you thinking about this? I thought you guys did a really nice job of laying out what your range of expectations are and how you factor that into your guidance. If you could expand on that would be very helpful.
Yeah. We're really good at creating scenarios and plans.
Me too. Me too.
It's proven a valuable tool over the last couple of years. Memory costs are another challenge that we are very confident we'll be able to work our way through. I think at the high end of what we're planning for the year. I mean, let me step back a little bit. Memory costs really are impactful to primarily the two big categories, computing and mobile phones. They're just a bigger percentage of the cost associated for memory within those two products. On the computing side is the place where most people are probably a little bit more cautious about.
I think at the high end of our guide, basically, we're assuming there could be a little bit of a unit pressure because there may be some costs that come through to those products. But at the other side of it, you might have a little bit higher ASP because, you know, some of that, the prices may change. At the low end, I think we're just contemplating could there be a situation where there's just some constraints. You just actually can't get from the product. If you think about what's happening, all of that memory is being shifted to commercial uses, and away from some consumer products, which is creating the shortage overall. I think we're properly planning.
I think one of the good signs of evidence for us on the computing side is we've navigated last year's tariff, where we entered the year with a lot of, I think, broad worry about like what would tariffs do to CE. Through the year, we've kind of proven there was a lot of demand and need for computing, and we probably didn't see the level of unit elasticity issues that we maybe were even expecting at the beginning of the year. I think memory in a place, when people still need to have a computer, they still need to have a mobile phone, is super important.
Importantly, we kind of proved that when you come to our store, come to our website, we have a product at any price you want. Even if there are some changes to costs, you're gonna be able to find the $1,000 computer, you're gonna be able to find the phone that you want at the price range that you want, because there are some big, still demand signals within computing. Replacement cycle is still a thing. People are still replacing computers that they bought that were probably suboptimal back in the pandemic. Windows 10 is still a transition for us. There's even opportunities on the Mac side as well, where people are moving from their old chip technology to the M series.
There is still a lot of demand, and I think the good thing is there's always a price point at Best Buy to get what you need, and to get a better product overall. I think we feel really confident being able to work with our vendors to adjust the assortment, adjust the schematics of the product, just to make sure we can meet their demand at any price point they'd like.
You raised a bunch of good points. Number one, you've kind of seen the pre-game, gave it a little taste of how this is gonna play out.
Right.
Given the tariff situation. There's the silver lining of that. Have you noticed any changes in consumer behavior? There's concerns that if someone has to pay more for these products, they'll be less likely to attach a warranty or attach an accessory. Help us frame that situation.
Yeah. I mean, we really haven't seen a lot of evidence of people still not wanting to get protection for their device or be able to get a better solution overall for the device. I think the attach rates, if you will, for our big products are really pretty similar. In fact, last year, we were actually to improve our attach rates against warranties overall. We haven't seen a lot of that. I think the broader concern is, like, in a world where the Mac was still a little pressured, and what happens to in the K-shaped economy. I think that is a high-level worry for probably everyone. From a solutions and the experiences that we provide, we still are doing well in those areas.
I think there is also some other parts of our experience that are helpful here. I know we'll get to Marketplace, opening a Marketplace earlier this year is helpful in a world where there might be shortages or there is more price competition because you just have a broader assortment that might be available. We have trade-in offers, bring that old device in. We also can refurb product, which means we can put back out open box or refurbished product that might be at better price points for people. We actually can harvest parts at our Geek Squad City, which is a large facility we have where we have agents. We actually can take parts out, we keep them, and then we can use them for repairs.
When something like memory is really expensive, we can literally harvest memory from parts that come back. There are interesting other assets. I mean, you talked about. It's funny, I think sometimes almost people want to warranty more when they're investing this much money in a large high-ticket piece of hardware. And we have a great credit card offer, and a great partnership with Citi, which becomes also very important in a moment like this. I think what we're trying to use is it's not just about the box, it is about what is kind of the suite of ways in which we can get you into your needs.
At the risk of being shameless, my iPad sitting right there was a trade-in, or I traded in my old iPad.
Yeah.
It couldn't have been easier. It could not have been easier, and I felt like I was getting too much money. We can talk about that afterwards. Felt like I was getting too much money.
That's a new one.
Yeah. Tariffs. Very dynamic topic. Where do we stand right now? What are you hearing from? Before we get there, how long is this memory situation gonna last? Is it gonna be like years, months, quarters? How long do you think it's gonna be a topic?
I think it's really hard to know right now.
Yeah.
I mean, I think data center demand is high. I don't see it going down. To be perfectly transparent, you know, the issues that we're seeing in Iran and the Strait of Hormuz, there are raw materials that now also further up the supply chain are a little bit more challenged. I just think it's a really fluid situation. I wouldn't expect it to be incredibly short term in nature. The good news is, there are very large companies who are very incented to continue to meet that demand. I also believe you're gonna see some production changes given just how scaled the demand is right now.
Got you. Like everything else, we'll figure it out. On the tariff topic, and I'm gonna put refunds aside because I don't think that's really gonna be relevant for at least the intermediate term future. You know, we've seen a lot of changes. Are you seeing any changes in how your vendors are trying to navigate through this? The current regime may only be in place for a period of time. How are you operating as a result?
Yeah. I think there's still a bit of uncertainty.
Yeah
As it relates to the tariff topic. As of now, we don't see a lot of changes of direction at the moment because there's still that level of uncertainty. Overarchingly, we have continued to see vendors diversify their supply chain, which is a good thing regardless of what happens. That is good. As I mentioned earlier, last year, I think we disproved some of the things, not that it didn't have some level of impact on our business, but it did show that when you have the right product and have the right experiences, you can kind of continue to meet what the consumer needs against our products. I think we're gonna continue to navigate.
There's more news that came out this morning about how they're gonna approach the 301 process. We still continue to feel very confident in our ability to navigate through it. One big component of that is just the closeness and the contact we have with our vendors. We work very closely with them with some of the biggest categories to ensure that we can help influence where the product might get created, what sort of specs might be in the product to navigate any sort of cost pressures that come through as much as we can. That relationship has proven extremely important to us over the decades we've been at this and will continue to be.
I think, you know, whatever we feel comes through, we feel like we can confidently navigate through all of the changes that may still happen. I think we've been able to prove to navigate through a lot of that just looking at last year.
Got you. Very helpful. I wanna pivot to some of the product categories. Home theater.
Yeah.
It's been core to Best Buy throughout its history and there's some exciting category evolving for Best Buy.
Yeah, it's a really exciting new technology for us. In you know, in a world where TVs, there hasn't probably been something like this since 2013 when OLED first came out. There are actually RGB TVs today. They're just.
It's red, green, blue.
Red, green, blue.
Very, very.
Really complicated.
Good contrast.
Yeah.
Really beautiful picture.
Yeah. It has very vivid colors. It's a very high efficiency machine. It looks great in bright rooms. The viewing angles are much better than a normal television. It has a lot of benefits. A really strong competitor to what we've been seeing work well is OLED televisions. I think we're really excited about it. We will be the national partner for all of the major vendors of this technology. It'll be at Best Buy. There may be some regional players that have it, but from a national perspective, we are the exclusive provider of this technology at a national scale. Feel really great about that in partnership with our vendors to unlock that.
I think it goes very well with what we've been trying to do just within our stores as well, expanding our experiences with Hisense and TCL and LG. Having more vendor labor to explain the technology is super important. Where it's been is in very large televisions, probably too big for a lot of the folks in this city here, but for the Midwest, where you have very large homes, you can get a 100-inch television. It's gonna move its way down to kind of the large sizes, the mid sizes at really good price ranges, which is super important to be able to really unlock the growth within that new technology. We're really excited about it in partnership with our vendors.
We're pairing it with a great services offering. To just make it easy to upgrade your TV. We'll come, we'll take the old one away, we'll slap the new one on the wall, and we'll just make it easy. I think that is something that sometimes is misunderstood about our services offerings. It's seen as the Geek Squad has seen a lot of break-fix. That is absolutely part of what we do. The bigger lean for us now is more into the upgrade. How do we get you into the new? This is the sweet spot for Best Buy, commercializing new technology. You've seen it in computing.
Eighth straight quarter positive comp quarters in computing because you have some new technology. It combined with a bit of a replacement cycle, and we can help you trade in easily, whatever your situation is, get into the new. Like we saw a 20% increase in data transfers because not everyone wants to deal with transferring their data. That becomes a blockage to purchase. If we can take that purchase blockage away, make it seamless and easy, then it's easier for someone to think about upgrading.
Does this influence how you think about the competitive landscape? Best Buy's always competed in a very intensely competitive industry with great competitors. There are fears that it's getting even more competitive, especially as some of your competitors have moved further into certain product categories. How do you think about this?
Go ahead.
Yeah, I think we've always been, since my time at Best Buy, it's never not been competitive.
Yes.
We certainly have, as Corie often says, had the luxury of competing with the world's biggest companies, and I think that competition only makes us stronger. It is true in some categories you do see a bit even more intense competition, things like the major appliances area. In the other large categories, we are very competitive from pricing and assortment and how we approach it, complemented with experiences that none of them can really match in terms of scale. We feel really good about our position within that.
I think what's happened in broadly over the last couple of years, the economy has moved to a spot where in some categories, they're looking for value, they're looking for price points, and I think, you know, that we play very well in all the different price points and all the different tiers when you think about computing and televisions. I think there's just a subtle adjustment as to what consumers are looking for, and as long as you're matching the assortment, matching the prices in the right way, we feel like we're doing very well competitively. Over the holidays, we feel good about the share of that outcome that we saw. I think it's just a constant maintenance as to what do the consumers want, what are the experiences they value, what's the right price points.
you know, there are gonna be some nuances that we have to attack a little bit more head on. I think we feel really good about how we've been able to adjust, especially how the economy has kinda shifted a little bit to that mid parts of the assortments.
Got you. Very helpful. There are some new exciting categories that, like, are really fit at the core of what Best Buy does, these glasses, the no offense.
No.
You know, health category. You know, Best Buy, what is not appreciated is how instrumental Best Buy has been in helping to define some of these categories like wearable health technology. How do you see this playing into the assortment? In a way, can these, what are smaller categories that have now accumulated to be something bigger, can they? Are they at the point where they can move the needle, and how do you lean in and capitalize on them even further?
Yeah. I mean, Corie said this earlier, what we do best is operationalize new technology. We commercialize it better than anybody else. We lift up smaller brands.
You do a lot of things good, Matt.
Yes. That is true, I guess. What we really do well is work with smaller vendors to take product and build excitement, build brands, build product technology, and we can help them grow it. I think, you know, between AI glasses, which we've talked about, handheld gaming, there's some amazing little handheld games out there that are growing very nicely.
There's toys, there's Pokémon cards, and there's a lot of things that you wouldn't think that Best Buy sells that our customers are looking for that are either technology or technology adjacent, that we see customers come in and say, like, "We really wanna see this on your website or in your stores." This year it's not insignificant, over a 1/2 a point of comp is expected to come from a lot of these small areas that will only continue to grow as we look into the future. Health technology is certainly a thing. I don't think that's going away, especially for executives in big companies. We need to make sure we're watching our health.
You gotta practice what you preach.
Yeah. I gotta make sure I'm taking care of myself. I think these aren't things that are like, will they grow at the same pace every year? Probably not, but there's no way it's not gonna grow across new things. Technology's proliferated everything from transportation, scooters and rings and everything in our lives, it's not gonna slow down, especially if you think about what AI might do, how it can kinda infuses into televisions and home security and making everything actually, to Corie's point, smarter than it was supposed to be in the first place.
Yeah.
I don't think any of that's gonna slow. We do that very well.
One of the hardest things about being a specialty CE retailer is we can't always tell you what the next product is going to be. It always happens, and if you've ever looked at, even just looked at videos of the Consumer Electronics Show in Las Vegas, the amount of innovation that's coming through the pipeline is incredible. A lot of it on the back of AI, we haven't even started to talk about the beginning of robotics.
Yeah.
It will accelerate quickly. I just wanna underscore Matt's point. It's exciting to me that we're able to bring in these smaller categories and really kind of make markets. That is when we're at our best, and I think Matt and the team are doing a great job getting our stores ready for more experiences and making them a little bit more of that just fun place you go to for electronics.
I mean, I wanna underscore this point because it's important. Based on everything you know and what you see today, you feel the pipeline of innovation and new products for the foreseeable future is robust and exciting?
Yeah, I think we've actually gotten back to closer to a normal level of innovation with our vendors back from where it slowed during the pandemic for many reasons. I think we're getting back to a normal level of investment and innovation coming through the pipeline. To Corie's point, will we know exactly which thing at which quarter? Probably not. What we see with working with our vendors and when you go to see, you can see it kind of really quickly grow back to a similar pace that we've seen in the past. You know, you can go back, you know, 20 years ago, there weren't doorbells that were electric, right? Like, those are only gonna continue to grow into different categories as we move forward.
We think the pace is really good at the moment.
Matt Bilunas is aging himself with the doorbells that used to.
You still have them?
Yes.
Okay.
Were you gonna say something? I'm sorry.
No.
Okay. It's hard to follow up. Just to pivot. Not only are you capitalizing on new technology, but you're capitalizing on new ways to do business. Marketplace and Best Buy Ads are great examples of that. You expect 20 basis points of margin contribution from each of those businesses this year. Did I get 20 basis points together?
30 basis points.
30 basis, yep.
of gross profit rate improvement this year.
Yep.
About a little less than 1/2 of that number is gonna come from Marketplace.
Yep. I was trying to, you know, raise expectations there.
Yeah. Good try.
Keep it up. Yeah, yeah. If you could help us frame what you have seen so far, first from Marketplace, then from Ads, and where you see this unfolding from here.
Yeah, I mean, we're really excited about the launch of Marketplace. It's, you know, we're probably five months, six months in at this point. We've seen a really good engagement with our sellers. We saw a strong performance in Q4. We expect this year to continue to ramp. I think, you know, we went in knowing that the experience is super important and what we can see with Marketplace, with the experience coming through our 3P Marketplace product is every bit as good as the 1P experience, so that's good. The returns are actually lower, and they're coming through our stores, which is good as well. Experientially, we feel really good about it.
The goal there is to really drive unit share in categories that have, quite honestly, been hard to drive unit share, and when most of them have moved to 3P marketplaces in the industry. You think of accessories, home automation, small appliances. 3P marketplaces have really taken that over, and we see good unit growth in those areas overall, and we see it solidifying our unit share, which is great. It's doing the things that we want. It also, importantly, broadens price perception and pricing for us, gives us more options and assortment when maybe there's some level of outage in our 1P side. Feel really good about it. It's gonna continue to grow this year. It's gonna grow the gross profit rate. It's gonna be a bit more neutral.
The combination of Ads and Marketplace together is a little bit of a rate improvement this coming year. As we look outward, we feel like it's gonna be an even better outcome from a rate perspective. There's just still investment we need to make in both of those two areas for us to really get the most out of it as we look forward.
What are those areas of investment? I think that's been a big question. Is it people? Is it technology?
It's a little bit of everything.
Yeah.
I think it's technology for sure, for both Ads and Marketplace, maybe a little bit more on the Ads side, a little bit for sure technology on the Marketplace side. It's also people, like bringing in sellers, selling and new ad products takes a different type of people.
Mm.
at Best Buy than what we're used to. We've been bringing in good skill from the outside and leveraging great talent internally to kind of boost those two areas. It's technology people, and then there's just normal variable costs that come through it as well. Certainly on the ad side, too, it takes marketing dollars to drive ad sales or ad collections. There's some level of increase. It's just you have to have the ad advertising expense to fuel the collection process. That's also part of the ad side as well.
Is this giving you insight, especially on the Marketplace, to categories that maybe Best Buy has not traditionally thought about being relevant to its consumer for that you could now consider?
1,000%.
Yeah. What would be examples of those?
I mean, back to some of, like, where are we seeing some of the growth? We're seeing a lot of growth in phone cases.
Yeah.
Small appliances, I mean, some of those deeply digital categories. The other thing, it may not be the biggest growth drivers, but you can bring on a new smaller player who might have a really innovative solution, and you can see pretty darn quickly, without much investment on their side, is this something we should consider for 1P? Because there's just enough of a demand profile there. You get both. We can go deep into catalogs that have penetrated much more deeply online, and you can bring new technology on a lot faster with a really easy halo with our brands, much easier to find, and we can decide pretty quickly if that's something we wanna investigate more from a 1P perspective because there's excitement.
If we put aside, these are gonna be important drivers of Best Buy's profitability this year, how are you thinking about product margins and other considerations? I wanna dive into this a little bit.
Yeah. Well, on the Ads side, it's a very complementary gross margin rate overall. Right now, the incremental isn't a ton more from a rate perspective because we're investing. Overall, the Ads business is extremely profitable.
It scales nicely.
It scales nicely. As you think about having probably some of our less inventory on-site that would be normal for the industry as we scale the on-site inventory, that actually produces a better margin rate outcome because you're not paying for the inventory to advertise. So as you look forward, we believe that's gonna be a help as we think about our rate growth in the future. We can either let it flow to the bottom line or actually use some of that to invest because, you know, we know we live in a very competitive space to your point. Marketplace as well, I think, you know, as we continue to sign up sellers and grow the GMV, we're okay. There's probably a little bit of cannibalization of the 1P, and we are completely okay with that.
That was the go-in strategy. The one note to that is, like, even if it does cannibalize from a sales perspective, the commission rates we make on this product isn't, in a lot of cases, very dissimilar from the product margin rates we would have in some of these categories. From a profit perspective, it isn't all that painful.
With less inventory risk.
With less inventory risk, less working capital. I think feel good about how they, you know, how we're growing them now and what they're gonna prepare us to look like as we go forward.
Got you. It's also a way for you to become even closer with your vendor community, work more closely together. Vendors have been seeing the value forever in Best Buy, even increasingly contributed labor to your organization. How do you think about the opportunity for either greater collaboration in that regard? 'Cause one of the questions that overhangs the story is, has Best Buy pulled back too hard on labor? I think there's a piece of it that's underappreciated where you work so closely with your vendor partners that they're contributing knowledge and labor.
It's actually both and. Our labor model is incredibly complex, and if there's one thing I think we don't get enough credit for, we have actually over the last two years, invested exponentially in our frontline associate labor and especially the more specialty labor, the Best Buy labor. We have just what I would call normal advisors. They work the whole store. They can help anyone. We have category specialists who actually stay within the category. Think home theater or appliances. We have premium labor who will help you with a full end-to-end, like home remodel. Think about something like that. Incrementally on top of that, we layer vendor labor. I think one of the misnomers is that the vendor labor is a replacement of the Best Buy labor. It is not.
Right now we have way more Best Buy labor than we've had over the last two years. Incrementally, we added into holiday, we had 20% more hours in our vendor labor as well. The idea here is how can you help a customer seamlessly, depending on how they want to shop, if they're very vendor specific, you have an answer for that. By the way, that is still labor that we control, and we teach and learn. If you want something that's a little bit more, you wanna work across the whole store, we have employees who can help you do that too. The science, back to the AI conversation that sits behind, like how do you get the right people in the right place, certified at the right level at the right time?
That's the science that we've been working on for the last two years. I wouldn't want the takeaway to be that we're switching to vendor labor. We're not. We are augmenting an already increasingly large Best Buy labor base with more specialized vendor labor as well.
Got you.
The only thing I'd add is we're actually seeing improvement in our associate availability scores with our customers. It's all manifesting in an experience that we can see is a really good one for our customers and improving with all of these changes.
It's going to get better because you got a new internal website over the weekend, which is very exciting.
They'll be happier.
When we are doing this again a year from now, what will we look back on to say, you know, Best Buy was able to overcome X, Y, Z and where the organization is a year from now that we may not anticipate today?
I'm actually gonna end where we started.
Yeah.
Which is, it's highly likely a year from now, five, ten other things have happened that we weren't thinking about, both probably in the macro and the micro. The question is more, why does Best Buy exist on the planet? We commercialize new technology better than anyone, and we have amazing vendor partners, to your point, that are helping us bring that to life. Investors, these are the biggest companies in the world who are trying in a race to bring new technology to the consumer. I think actually we'll be surprised in a year how much newness, innovation, interest there is. It's a team who knows how to resiliently navigate whatever's thrown their way. It's a pretty good combo platter.
Well, I can't wait to do this again next year, and I wanna thank you so much. I could do this all day. Please join me in thanking Best Buy for their tremendous contribution.