Best Buy and Samsung further tie their knot

Apple may be Best Buy Co.'s biggest supplier, but Samsung may be Best Buy's biggest ally.

Samsung, the world's largest consumer electronics maker, and Best Buy, the world's largest electronics retailer, are planning to install Samsung Experience mini-stores at nearly all Best Buy and Best Buy Mobile stores across the country by this summer.

Best Buy hopes the move will generate buzz and profits at a time when the Richfield-based consumer electronics retailer needs both, analysts say. Though Best Buy is the country's largest seller of Apple products, Apple's own stores and website siphon quite a bit of sales and profits from Best Buy's coffers.

While retailers are theoretically brand-neutral, the Best Buy-Samsung alliance seems to suggest that Best Buy has doubled down on its relationship with the Korean giant, especially as Samsung increasingly challenges Apple for dominance in the fast-growing mobile device market.

The Samsung stores "are an important counterbalance to Apple's presence," said Carol Spieckerman, president of Newmarketbuilders, a retail consulting firm. "This is a big bet on the [Samsung] brand."

Samsung Experience, which averages about 460 square feet, features a broad selection of Samsung mobile devices, all sold by Samsung employees who can activate and service the products. By contrast, Apple mini-stores in Best Buy average just under 205 square feet. Nearly 750 Best Buy stores carry the Apple mini-store, compared with 1,400 for the Samsung Experience.

In a business where every square foot of real estate is precious, devoting the equivalent of a generous studio apartment in New York City to one vendor speaks volumes to how Best Buy values Samsung and vice versa.

Nevertheless, Best Buy must be careful, industry analysts and executives say. Best Buy prides itself on offering unbiased advice to customers, and a Samsung mini-store might peel away that veneer of neutrality. Favoring one vendor too heavily might alienate consumers, not to mention other manufacturers, who might develop the next breakthrough product that Best Buy will want to sell.

"A retailer has always been a third-party, agnostic place," said Stephen Baker, an analyst with the NPD Group. "If you give too much space to one brand, it might [create] a conflict of interest."

Apple, which didn't respond to a request for comment, is likely not happy, analysts say. A Best Buy spokesman said he does not know how Apple reacted to the Samsung Experience, though the company informed Apple of its plans well in advance.

"They were made aware of it," said spokesman Jeff Haydock. "They knew what was happening."

A chaotic retail marketplace

In many ways, the Best Buy-Samsung alliance reflects the chaotic nature of today's retail business. While Best Buy sells plenty of iPads and iPhones, the products generate little profit for Best Buy because the company also competes with Apple's own stores and website.

In the past, mass retailers like Wal-Mart and Best Buy would pressure suppliers for the lowest possible prices. Given the clout of these retailers, suppliers had no choice but to comply. But then Apple and Internet powers like Amazon.com tipped the balance, stealing customers away from traditional physical stores, so much so that suppliers must find new ways to prop up bricks-and-mortar chains beyond price, experts say.

Compounding the problem: products from major Best Buy suppliers — Sony, Panasonic, Dell, Microsoft — have lost favor with consumers. As a result, Best Buy has struggled to grow sales. Suppliers grew alarmed last fall when the company lowered its free-cash-flow estimate for fiscal 2014. For the first time, some vendors worried that Best Buy could file for bankruptcy, said Peter Keith, a New York-based retail analyst for Piper Jaffray.

"Suppliers started to consider what a world without Best Buy looks like," Keith said. "It was not a good world."

In a recent report, Barclays analyst Alan Rifkin estimates that Best Buy purchases about 100 percent to 150 percent more products from a wide variety of vendors compared to Amazon. Without Best Buy, Amazon would enjoy even more clout over suppliers.

"With many other regional and national [retailers] closing their doors in years past, the vendor community has a particular interest in maintaining the viability of Best Buy," Rifkin wrote.

Working with device makers

In an interview during his first week on the job last September, Best Buy CEO Hubert Joly told the Star Tribune that Best Buy must work with its suppliers to give customers prone to Internet shopping a compelling reason to visit its stores.

"It's like a game," Joly said. "We have this space. How do we maximize the contribution from that space in a way that's good for the customer and economically feasible? It's an interesting puzzle to solve, but not one that can't be solved."

He cited how Ralph Lauren, where he serves as a board director, worked with Macy's to create attractive Lauren displays throughout the department store.

"That's something I want to explore," Joly said. "As a major retailer, we are very important to our suppliers. There's got to be things that we can do for their benefit and for our benefit. There are partnership opportunities, exclusive products or other things. I look forward to meeting with these guys."

As it turns out, Samsung was looking for ways to beef up its retail presence. The Korea-based giant's Galaxy family of smartphones has emerged as the first legitimate challenger to Apple. Already, Samsung's popular Android-based Galaxy smartphones outsell Apple's iPhones. This week, Samsung will launch Galaxy S4, its highly anticipated new flagship phone.

"We saw a tremendous growth of our brand," said Ketrina Dunagan, vice president of retail marketing for Samsung Telecommunications America. "The remaining question from our customers was, 'Are you going to be there for the life of product ownership?' "

Samsung stores? Nope

Samsung quickly ruled out opening its own stores like Apple and Microsoft. Building out a chain of stores would take 12 to 24 months and would have been "self-serving" to Samsung instead of helping customers, Dunagan said. Opening mini-stores in Best Buy would generate immediate impact, she added.

Burt Flickinger, managing partner with the Strategic Resource Group consulting firm, said he sees another reason why Samsung and other suppliers would want to partner with Best Buy. At a time when Wal-Mart has cut store employees, Best Buy has protected its Blue Shirts from layoffs and invested millions of dollars into retraining them. That can only benefit the manufacturers, Flickinger said.

But between the Samsung employees, Blue Shirts, and Geek Squad agents, some analysts wonder if the stores are getting too crowded — and confusing — for customers.

Dunagan dismisses those worries, noting that customer service is the top reason why shoppers visit stores.

"I think it would be delightful to have all of these people," she said.

Nevertheless, the Samsung-Best Buy relationship does mean that Best Buy will need to be mindful of its reputation for providing unbiased advice to customers on technology. In fact, Best Buy paid millions to purchase a Super Bowl commercial starring Amy Poehler that sought to promote the ability of its Blue Shirt employees to provide knowledgeable and truthful information.

Spieckerman, of Newmarketbuilders, thinks Best Buy is simply giving consumers what they want.

"Samsung has become wildly popular," she said. "There is a lot of buzz. Best Buy can easily say that's what's important to customers."

Thomas Lee • 612-673-4113