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Best Buy gets the best of Microsoft in Windows Store deal

'Big win' for the retailer, argues analyst, because no matter what happens, Best Buy stores gets free remodel

June 14, 2013 01:07 PM ET

Computerworld - While Microsoft gained space in 600 Best Buy stores yesterday, the electronics retailer got the better end of the deal, an analyst said.

"This is a big win for Best Buy," said Stephen Baker, a retail analyst with the NPD Group, in a Thursday interview. "They get a free remodel of their PC department in 600 stores."

And if the Windows Store experiment flops, well, Best Buy still has the remodels in its pocket.

According to Baker and other analysts, Best Buy needs remodeling. The company's poor performance in the last year and its price-matching guarantee -- a move that tried to combat "showrooming," when consumers browse a brick-and-mortar store but purchase online -- had trimmed margins to the bone, leaving little for store refreshes or remodels.

For the quarter that ended May 4, Best Buy reported in-store sales were down 1% compared to the same period the year before.

Baker assumed that Microsoft was the one ponying up the money for the new Windows Stores, which will effectively replace the computer departments in the affected stores.

"That's the normal practice," Baker observed, talking about money changing hands whenever retailers dedicate space to a vendor. "This is really no different than advertising or an end-cap," he added, although the scale of this deal is obviously much larger.

Microsoft and Best Buy did not disclose the financial details of the deal, and Baker hesitated to take a guess.

Besides the partial remodels, Best Buy comes out smelling sweet for other reasons, Baker argued. "This forces Microsoft to acknowledge and allocate significant resources to Best Buy," he said. "It sets Best Buy apart from the other retailers. That's the most important part of this from Best Buy's perspective."

Best Buy didn't give up control over prices, the SKUs (stock-keeping units) to be displayed in the Windows or the inventory purchased, Baker said, ceding only some say to Microsoft on special displays by other PC OEMs.

Nor does Best Buy become an arm of Microsoft's own retail chain, which numbers just over 60 outlets, since the 1,200 new employees who will staff the store-in-a-store concept will largely be the retailer's own. It's unknown whether Microsoft will subsidize those new workers.

While other experts, such as Forrester's J.P. Gownder, said the expansion into Best Buy was a long-overdue move by the Redmond, Wash., software giant, Baker disagreed. "I don't know if Best Buy would have been as receptive previously," he said. "Previously, sales were going OK, so something like this was not imperative."

But Best Buy realized, as did Microsoft, that selling Windows 8 and its offshoot Windows RT, and more importantly the explosion in form factors that touch-enabled operating systems prompted, wasn't working using traditional PC merchandising. Baker and others have criticized big-box retailers -- Best Buy is the U.S.'s biggest example -- for relying on old-fashioned sales techniques, but also laid some of the blame on Microsoft.

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