Buying Target on a Geek Squad Pilot Program

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While the news that Best Buy’s (NYSE: BBY) Geek Squad will begin providing service to EBay (NASDAQ: EBAY) customers is a significant positive for the electronics retailer, the announcement that similar service is being tested at a limited number of Target (NYSE: TGT) stores should be seen as a catalyst for acquiring shares of the retailer.

The move demonstrates Best Buy’s current strategy to stave off the fate of its previous rival Circuit City by focusing on customer service. Over the past several years, Geek Squad has become the most recognizable and appreciated part of the big box electronics giant. At a time when sales of larger items like TVs have slumped and the company is closing a series of large stores in favor of smaller, more intimate options, the company realizes that finding a link to its customers is vital. Within the realm of the massive retail store shopping experience, if Target can successfully bring this feeling of connection to its store, the addition has the potential to be an important point of differentiation.

The Geek Squad Goes Walkabout

Under the new partnership between EBay and Best Buy, EBay customers will have access to 24-hour support through service plans offered for sale on the EBay website. Three-month plans will be priced at $29.99, while six-month plans will be priced at $49.99. The technical support service – which was once a stand-alone business founded by a single technician with his bicycle – is being positioned as a unique brand that can exist beyond the walls of Best Buy stores. In addition to the EBay partnership, the new service is being tested in 28 Target stores in Denver and one in Minneapolis.

Central to this decision by Best Buy management is its acknowledgement that the era of impersonal big box electronics stores may be passing. The company is closing 50 of its warehouse-style stores and working to open more boutique-sized venues. In addition, the company is providing additional training to all employees with the goal of becoming an education center for customers. Last quarter while same store sales dipped by 3.2%, revenues from services were up by 6%. The risk to Best Buy remains the very real possibility that customers will visit its store for education and then shop online for more attractive prices.

The Target Angle

The brilliance of adding Geek Squad service to Target is that it feeds into the company’s existing strategy, while enhancing it further. While Target tends to be marginally more expensive than competitor Wal-Mart (NYSE: WMT), it differentiates itself by offering a more high-end feel for its customers. On price, Target remains squarely in the discounter end of the spectrum, but its stores are not the low-cost option – prices tend to be very slightly higher than those at Wal-Mart, but the experience is significantly different.

Where Wal-Mart has the feel of shopping in a huge warehouse, Target has attempted to recreate a scaled-down version of the department store. The recent addition of its “Shoppes at Target” push accentuates this goal and reveals the appeal of this strategy. Customers are willing to pay slightly more for an enhanced shopping experience. By offering Geek Squad service to its customers, Target creates an additional point of differentiation from Wal-Mart that also gives the feel of a more high-touch experience.

The Trade

Even with the expansion of Geek Squad, Best Buy has a long way to go to reverse the slide the company has been experiencing for the last several years. This year alone shares are down over 20% and the company is facing significant earnings contraction. Given the position of Best Buy, increased revenues by Geek Squad will take some time to be meaningful for the company. On the other hand, the addition of the service to EBay and Target could have an immediate impact.

While EBay customers will be able to add the service – a major positive – part of the Geek Squad experience is the face-to-face interaction. For many customers, the need to have a technician dispatched to their home would be overkill, but the ability to stop at a kiosk within Target should be appealing. If the pilot program does not yield positive results, you will be left owning a powerful discounter at reasonable levels. If the program is successful and expands, the potential benefit is significant. Given the risk-reward relationship, the best way to profit from Geek Squad’s expansion is with an investment in Target.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy. Motley Fool newsletter services recommend eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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