Best Buy makes more than half its profits from the sale of extended warranties, according to company data and my estimates. If you’ve been in a nearby shop, should not be a surprise to you. This dependence on the profit guarantee to suggest that Best Buy ‘s business model may not be sustainable in the long term.
Let’s take a closer look.
Do you want to warranty for that?
Ever wonder why a friendly blue shirt at Best Buy pushing hard to extend the guarantees? Became a stream of huge profits for the company – are likely to be more profitable than the actual work of selling electronics and appliances. If you check the footnotes to the latest best buy 10-K ( page 74, if you’re looking ), you’ll see that ” the company’s revenues from the sale of extended warranties represent 2.8%, 2.7%, and 2.6 % of revenue in fiscal year 2013 (11 months), 2012, and 2011, respectively.
” It may not seem like a lot, but the margins on the extension of the guarantees are too high. Best Buy does not disclose profitability guarantees, but it is estimated to be 50% or higher. In the past year, and it was the best buy revenue of $48 billion, and operating profit of $1.2 Billion. If you assume that 2.8% of revenue came from the guarantees with operating margin of 50%, eight about $ 670 million in operating profit. In other words, more than half of operating profit came from the guarantees.
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So what is the problem? Safeguards are just smart business.
The money spends the same, regardless of how the company was born. A lot of respect for retailers to make money outside of their core operations from the sale of goods. Costco generates most of its profits from membership fees. Shares of CarMax approximately generates a large part of their profits from financing plans and services.
New Car Dealers such as Penske Automotive Group relies on spare parts and service, not selling new cars, ‘s profitability. Station and gas companies such as savvy Wawa and Sheetz make most of their profits from store sales, not gasoline sales. Smart operators in the retail look for innovative new ways to make money, and just beyond the sale of goods.
It May not be Sustainable, and it’s unfair to Customers
While others may not penalize Best Buy for being heavily dependent on sales of security, it does not bother me. It is another indication that the basic business best buy is not viable – I’m not sure that Best Buy even without the presence of a stream of profit guarantees. Second, it is my opinion that the extension of the guarantees are not worth the cost (Consumer Reports agrees). Via – dailyfinance.com