Best Buy Company, Incorporated (henceforth: Best Buy) is a publicly traded retailer that operates electronics and entertainment stores primarily within North America, though it does operate some stores within China. Though most of the company’s operations are maintained under the Best Buy brand, the company also operates a variety of niche brands, some of which are integrated into Best Buy’s retail stores, others of which are freestanding retail storefronts (Best Buy Co., Inc.). These brands all focus on appliance, home information technology, or entertainment technology sales and services. This sample case study, dissects the corporation and its recent growth and achievements.
Best Buy Co: A Case Study in Business Development
When it was founded in 1966, the Best Buy company’s original focus was sales of home and car stereo systems at retail stores called “Sound of Music”, which expanded from a single-store operation located in St. Paul. Minnesota in 1971. By 1982, the company had expanded its range of product offerings to include home appliances and VCRs, and in the following three years, would change its name to Best Buy Co., introduce an electronics “superstore” format retail operation, and go public. The company’s new name stemmed from a promotion where a massively-promoted annual sale – the “Tornado” Sale (named after a tornado hit one of the company’s stores) – was billed as a “Best Buy” for consumers; eventually, the popular sale’s name was adopted as the company’s new brand image.
A change in branding
This change in the company’s brand name marked a large shift in strategy for the company. For the preceding two years, the company’s founder and chairman, Richard Schulze, had been attempting to steer the company’s direction away from catering to buyers of audio equipment, largely thanks to inspiration he credits to a management seminar he attended in 1981.
Schulze had realized that the buyers of such equipment tended to be young, and that the audio equipment market was increasingly saturated with other brands. Hence, he decided to re-orient the company’s strategy towards catering to the needs of a broader, older, and generally more affluent customer base. This strategy was extremely successful – after 1984, the company experienced explosive growth in the Midwest region, while simultaneously using expanded warehouse size and a low-cost ‘superstore’ operations strategy to reduce operations costs and thus product markup.
Through the early 1990s, the company’s aggressive retail and advertising tactics – such as converting retail operations into hybrid warehouse-superstores (which cut overhead by reducing employee costs), and focusing on offering a diverse array of products, such that Best Buy stores became “one stop” shopping destinations for consumer electronics, appliances, and associated accessories. These strategic shifts allowed the company to survive vicious price wars in the consumer electronics market in the late 1980s, and later allowed it to emerge as the consumer electronics hegemon in the 1990s, though many factors contributed to several years of mediocre earnings throughout that decade (Funding Universe).
More recently, in the wake of the collapse of Best Buy’s primary retail competitor – Circuit City – the company’s continued efforts to diversify its offerings and target specific segments of the consumer electronics market has been credited as a key reason in why the company avoided the demise that other electronics retailers (Circuit City, CompUSA, and others) have faced since the beginning of the 20th century (Serres).
In addition to continuing to adapt its offerings within North American markets, the company is continuing to pursue market development efforts within international markets, mostly in Asia, Europe, and Latin America. (Doran, 2007). These efforts might appear as though Best Buy is present in a strong position. However, the company has been facing declining revenue in consumer electronics market segments such as gaming, digital imaging, televisions, and notebook computers, which contributed to a staggering drop in profits during the company’s second fiscal quarter of 2012. The company saw a 91% drop in profits, and the value of the company’s stock dropped to a 9-year low (Blackden, Profits Plunge at Troubled Best Buy, 2012).
Best Buy in 2012: A Snapshot
Given the recent results of Best Buy’s second quarter earnings report, the company’s present outlook is somewhat bleak. Though the company has faced similar instances where profits have dropped to uncomfortable lows relative to the company’s revenues, the consumer electronics market sector has recently been upset by online retailers such as Amazon.com. Amazon and other retailers that focus on online sales posses a competitive advantage over brands with retail storefronts like Best Buy: no retail outlets and heavy warehouse automation means lower overhead operating costs, which means that these retailers can offer items at lower price points than most “brick and mortar” retailers.
The result of the retail shift
As a result, Best Buy (and other traditional retailers) have been increasingly falling victim to a phenomenon that analysts are calling “showrooming” – customers are previewing items in brick and mortar showrooms, but making their purchases from online retailers that can offer a lower cost (Skariachan D. , 2012). The practice of showrooming appears to be spreading to consumer markets in other developed nations as well: Amazon in particular has been credited with inducing this behavior in Japanese consumers (The Nikkei Weekly, 2012), and some analysts in the UK believe that showrooming behavior is at least partially responsible for Best Buy’s decision to shutter all 11 of its (recently opened) retail outlets within the UK in the spring of 2012 (Blackden, Best Buy's Problems Should Act as a Cautionary Tale for UK Retailers, 2012).
Indeed, it appears that Best Buy’s retail operations – which are generally quite large (on average, around 58k sq. ft. per store) and heavily staffed – are serving as dead weight that prohibits the company from completing the rapid adjustments it needs to make in order to stay afloat. (Blackden, Best Buy's Problems Should Act as a Cautionary Tale for UK Retailers, 2012) Recent moves – such as the company’s decision to reassign many of its loss-prevention department staff to sales positions in an effort to increase customer interaction with employees – indicate that the retailer is struggling to maintain profitability in its sprawling stores (Burrit, 2012). These factors, in combination with Amazon’s tendency to offer rock-bottom prices on many goods, lead one analyst to remark that
“I just don’t think [Best Buy is] well positioned to deal with the onslaught from the Internet…They have a big disadvantage to the Internet retailers because they have a big cost structure”, and another to remark that under former CEO Brian Dunn’s leadership, Best Buy “has been too late to address all industry upheavals” (Skariachan D. , 2012).
Presently, Best Buy’s founder – Robert Schulze – is working with private-equity firms to pursue a buyout of the company, which, if successful, may provide the company with the responsiveness and flexibility that it needs to respond to its declining profitability (Roumeliotis, 2012).
Best Buy’s Competition in 2012
In the traditional retail sector, Best Buy has previously largely squeezed other electronics warehouse-superstores out of the business (or left them as a shell of their former self), with the exception of some regional retailers such as HH Gregg, or Fry’s Electronics. In addition to competing with these smaller chains, Best Buy continues to compete in the consumer electronics retail sector with companies such as Staples and Office Depot, which offer a small selection (compared to Best Buy) of competitively priced electronics and accessories. Other competitors, particularly in the areas of laptop computers and televisions, include retailers such as Costco and Wal-Mart (Funding Universe). However, all brick and mortar retailers are facing increasing pressures from online retailers, which given their comparably lower operating costs, can accept much lower profit margins on each item that they sell.
Amazon is by far the most formidable player in this market, given that it has assembled a massive global network of highly automated warehouses, acquired successful online retailers like Zappos and Woot!, has struck deals with parcel carriers to offer 2-day and overnight shipping at very low prices, and cultivated a reputation for offering products at low prices with particularly lenient and understanding customer service.
These advantages have helped to cultivate a considerable brand affinity for Amazon among consumers. Additionally, Amazon has carved into the markets for media that big box stores like Best Buy have depended upon for revenue – Amazon offers a large catalog of digital music, as well as an ever-expanded catalog of movies and television shows that can be streamed, rented, or purchased at low price points. However, some of Amazon’s competitive advantage has been lost, as many states within the US are moving to close loopholes that allowed Amazon to sell items without sales taxes. As a response, Amazon has initiated an effort to expand its physical footprint by placing new distribution centers near key markets (where in the past, a physical presence would have triggered a need for consumers to pay sales taxes).
This push is part of an effort to close one of the biggest gaps between Amazon and brick and mortar retailers: the lag time between purchase and when a customer holds an item. Amazon has already rolled out same delivery for its most popular items in 10 US cities, and expects to expand this program as rapidly as possible, wherever it is financially tenable. These moves are likely to greatly enhance Amazon’s ability to lure customers away from its traditional brick and mortar competitors (The Toronto Star, 2012).
Best Buy: SWOT Analysis
Internal Strengths
• Over two decades of brand presence, with at least one decade of extremely strong brand recognition within the US
• Longstanding relationship with vendors
• Widespread presence in most major consumer markets in the US
• Offers consumers access to functional, physical demonstration models of electronics and accessories
• Offers consumers same-day access to in-stock items
• Offers consumers in-person access to sales and service professionals
Internal Weaknesses
• Sprawling size of most of the company’s retail stores entails very high overhead operation costs, thanks to real estate and employees
• Cannot offer most products at price points that compete with online retailers, largely because of overhead operations costs
• Cannot feasibly stock stores with the sheer variety of products available in online retailers’ warehouses
• Biggest advantages (in-person sales/service force, in-person access to products) are the most expensive elements of the company’s overall business strategy
External Opportunities
• Government imposition of state and local sales taxes onto items sold by online retailers presents opportunity to reclaim market share (because in some cases, advantages of buying online are eliminated) before online retailers have a chance to respond with added value
• Size and spread of workforce uniquely poises Best Buy to venture into online retail, while satiating consumer demands for “hands on” experiences by operating smaller showroom storefronts; said storefronts can also serve to eliminate the gap between the customer and customer service/returns departments that most online retailers face Threats
• Thanks to lower overhead costs, online retailers can probably offer products at a lower cost even in spite of added sales taxes
• Online retailers are poised to, and are experimenting with, offer(ing) same-day delivery via courier, and pre-designated item pick-up locations
• If analysts’ comments and stock prices are any indicator, consumer and investor confidence in the brick and mortar retail model is tenuous
• Consumers’ tendency to engage in ‘showrooming’ behavior is essentially impossible to circumvent without compromising on profit margins
Strategy recommendations to drive Best Buy’s future growth
Though Best Buy’s sales force is one of the primary aspects of the company’s model that sets it apart from online retailers, it is also one of the company’s biggest disadvantages. A salesforce that can barely justify the cost of its own maintenance – a present reality for Best Buy’s sales force – is nothing but dead weight for a retailer. If the sales force cannot perform, then underperforming aspects of that sales force – whether entire departments or individual employees – need to be trimmed from the company’s list of expenses.
Best Buy’s recent move of shifting loss prevention associates to the sales floor is probably a losing decision for the company. In the status quo, Best Buy stores show no lack of salespeople of every kind and variety – and they simply don’t seem to be able to convince customers to make their electronics purchases at Best Buy. Worse, the sheer number of employees that Best Buy must keep on staff to cover its sprawling stores – most of which exceed an acre in floor area – is a major contributing factor in the company’s inability to match the prices offered by online retailers, recently however, this has been turning around.
Though a sales force of some sort needs to be maintained, it needs to consist of solely top-performers from the existing sales force. Since US consumers seem quite content with the necessarily “self service” shopping model implemented by online retailers, Best Buy could adapt to running its stores with less employees by expanding the amount of information provided on product demonstration displays, and perhaps by placing touchscreen computer terminals that answer “frequently asked questions” about each category of item offered on the store’s showroom floor. These measures should only be implemented in a way that is comparatively less expensive than employing the workforce that they are intended to compensate for.
Key performance measure: Gains in online sales revenue
While scaling back traditional retail operations, Best Buy needs to aggressively expand its online sales operations. If the company is going to survive the competitive onslaught wrought by online retailer competitors, Best Buy must expand its online sales offerings, focus on improving warehouse and shipping logistics efficiency, and reduce its markup on items sold online. The company should also engage in marketing efforts that leverage the company’s physical presence as a unique factor that simplifies the buying experience by providing customers with hands-on access to products prior to purchase. In order to create sales conversions in consumers practicing “showrooming” behavior, the company should offer a discounted “delivery” price that matches the price of items sold on the Best Buy website; consumers that wish to make impulse buys or need immediate access to items should be able to opt to pay a premium price for immediate acquisition of items.
Two changes in the operations of Best Buy’s retail operations would make this possible. First, consumers should be directed to kiosks throughout the store to carry out an online purchase after examining an item on the showroom floor. Alternatively, a Best Buy mobile device app could allow consumers to scan a QR code, then purchase the item without utilizing a kiosk. Second, the stores should avoid alienating customers that intend to make impulse purchases by maintaining a limited inventory of items on-hand. These items would be priced somewhat higher than online items, in order to reflect the additional overhead costs associated with maintaining an in-store inventory. In this manner, the firm could effectively cater to customers’ desire to order products if they are offered at lower prices, while simultaneously using assets as a brick and mortar retailer to add value to customers’ shopping experience.
Key performance measure: Reduction of store footprint / Increase in stores’ Per Sq. Ft. revenues and profits
In order to lower overhead costs and compete with online retailers, Best Buy needs to massively reduce the sprawling size of their stores, which will enable savings on rent. This can be achieved by centralizing inventory warehousing to distribution centers that handle both shipping of online orders, as well as delivery of product inventory to stores. Distribution centers should be established in low-rent locations that enable expedient delivery of products to store locations.
This will allow Best Buy to consolidate the size of their existing retail operations by drastically reducing the number of items that are kept in-stock at any given point in time. If Best Buy adopts the strategies outlined in recommendations I and II, this plan to reduce stores’ on-hand inventory is a sensible way for Best Buy to reduce its stores’ physical footprint. Besides savings on rent, reducing the square footage of Best Buy’s stores should result in savings in terms of energy costs, and various upkeep expenditures. Additionally, this should allow the company to reduce the number of employees necessary to handle issues such as back-of-house warehousing, and stocking of store shelves. If successfully implemented, this shift in Best Buy’s store operations strategy should result in drastic reductions of the period between when a store receives an item from a regional distribution center, and the time that the item is sold to a customer.
This strategy should also result in an increased amount of revenue and profit per square foot in Best Buy’s stores, which is a key indicator in predicting the company’s financial future, as well as its ability to maintain growth.
References
Best Buy Co., Inc. (n.d.). Company Information. Retrieved October 24, 2012, from BestBuy.com: http://www.bestbuy.com/site/olspage.jsp?id=cat12114&type=page
Blackden, R. (2012, April 15). Best Buy's problems should act as a cautionary tale for UK retailers. The Sunday Telegraph.
Blackden, R. (2012, August 22). Profits plunge at troubled Best Buy. The Daily Telegraph (London).
Burrit, C. (2012, September 14). Best Buy reassigns many staff to sales; Move an attempt to revive slumping profits. National Post.
Doran, J. (2007, February 10). Best Buy continues with aggressive world expansion. The Times.
Funding Universe. (n.d.). Best Buy Co., Inc. History. Retrieved October 24, 2012, from FundingUniverse.com: http://www.fundinguniverse.com/company-histories/best-buy-co-inc-history/.
Roumeliotis, G. (2012, October 4). Schulze begins due diligence on Best Buy; Teams with private-equity players: Sources. National Post.
Serres, C. (n.d.). Adaption is Key for Best Buy. Retrieved October 24, 2012, from Chicago Sun Times: http://web.archive.org/web/20070211181650/http://www.startribune.com/535/story/991027.html
Skariachan, D. (2012, June 22). Best Buy to end 'showrooming,' make even deeper cuts to satisfy investors. The Gazette.
Skariachan, D. (2012, April 11). 'Sales Guy' steps down at Best Buy; Shares drop; Electronics store losing out to internet retailers. The Gazette.
The Nikkei Weekly. (2012, Juny 9). As internet marketing grabs bigger share of sales, bricks-and-mortar stores turning into showrooms. The Nikkei Weekly.
The Toronto Star. (2012, September 10). Amazon's digital empire spreads offline; online retailer expands its physical footprint, aims for faster shipping. The Toronto Star.