Introduction
In the battle to become the largest consumer electronics retailer in the US, some might say that Best Buy is up by a few rounds. Beginning as a single location car and home stereo store in 1966, Best Buy has grown into a massive firm with 1,400 stores in North America and over 2,600 stores in Europe and China.1 As recently as 2007, Best Buy was seen as the team to beat, boast- ing a strong lead in market share over its competitors, large and consistent profits, healthy stock returns, and a global expansion strategy. In accomplishing this feat, Best Buy brought down its biggest competitors—Circuit City and CompUSA.2
With CompUSA out of the way (at least temporarily) in 2007, the economic recession and the ensuing reduc- tion in consumer discretionary spending added the last bit of leverage needed to topple Circuit City in 2009.3 This allowed Best Buy to emerge as the clear champion of the large format consumer electronics retail segment; a position many consider prophetic of future success. However, whether the downfall of its competitors is the result of Best Buy’s superiority or simply the inevitable demise of a retail model that is becoming obsolete remains to be seen.
Unfortunately for Best Buy, recent results suggest that the latter might be the case. As shown in Exhibit 1, Best Buy’s recent stock returns have been consistently below those of the S&P retailing group as well as those of the S&P 500.4 In addition, revenue growth slowed to a miniscule 1.6 percent over the course of fiscal year 2011.i While the recession can be blamed at least in part for this reversal of fortunes, more of the blame likely lies with the presence of new competitors in the industry including the better diversified Walmart and Costco, additional “go straight to the source” Apple stores, and the monster of online retail—Amazon.com. In fact, Amazon’s stock price increase is a near mirror image of Best Buy’s stock price decline.5 Likewise, these new competitors have been gaining market share in the consumer electronics segment while Best Buy has been losing it.6 The threat of these new entrants is particularly ominous in that they are quite different from Best Buy in terms of their structure, focus, and features that customers find attractive. For example, it is not uncommon for a customer to browse Best Buy for a particular product, use Amazon’s app on their smartphone to scan the barcode, and then purchase the product from Amazon at a better price while still in Best Buy—a scenario that has led to a new—and painful— nickname for Best Buy—“Amazon’s showroom.”7
History
In 1966, Richard Schulze, disgruntled that his suggestions for improvement weren’t being taken seriously, quit his family’s electronics distribution business and, together with a partner, started his Minnesota-based home and car stereo store called “Sound of Music.” The firm grew through acquisitions and the opening of new stores and hit the million-dollar revenue mark by 1970. During th ...
IntroductionIn the battle to become the largest consumer electro.docx
1. Introduction
In the battle to become the largest consumer electronics retailer
in the US, some might say that Best Buy is up by a few rounds.
Beginning as a single location car and home stereo store in
1966, Best Buy has grown into a massive firm with 1,400 stores
in North America and over 2,600 stores in Europe and China.1
As recently as 2007, Best Buy was seen as the team to beat,
boast- ing a strong lead in market share over its competitors,
large and consistent profits, healthy stock returns, and a global
expansion strategy. In accomplishing this feat, Best Buy
brought down its biggest competitors—Circuit City and
CompUSA.2
With CompUSA out of the way (at least temporarily) in 2007,
the economic recession and the ensuing reduc- tion in consumer
discretionary spending added the last bit of leverage needed to
topple Circuit City in 2009.3 This allowed Best Buy to emerge
as the clear champion of the large format consumer electronics
retail segment; a position many consider prophetic of future
success. However, whether the downfall of its competitors is the
result of Best Buy’s superiority or simply the inevitable demise
of a retail model that is becoming obsolete remains to be seen.
Unfortunately for Best Buy, recent results suggest that the latter
might be the case. As shown in Exhibit 1, Best Buy’s recent
stock returns have been consistently below those of the S&P
retailing group as well as those of the S&P 500.4 In addition,
revenue growth slowed to a miniscule 1.6 percent over the
course of fiscal year 2011.i While the recession can be blamed
at least in part for this reversal of fortunes, more of the blame
likely lies with the presence of new competitors in the industry
including the better diversified Walmart and Costco, additional
“go straight to the source” Apple stores, and the monster of
online retail—Amazon.com. In fact, Amazon’s stock price
increase is a near mirror image of Best Buy’s stock price
decline.5 Likewise, these new competitors have been gaining
2. market share in the consumer electronics segment while Best
Buy has been losing it.6 The threat of these new entrants is
particularly ominous in that they are quite different from Best
Buy in terms of their structure, focus, and features that
customers find attractive. For example, it is not uncommon for a
customer to browse Best Buy for a particular product, use
Amazon’s app on their smartphone to scan the barcode, and then
purchase the product from Amazon at a better price while still
in Best Buy—a scenario that has led to a new—and painful—
nickname for Best Buy—“Amazon’s showroom.”7
History
In 1966, Richard Schulze, disgruntled that his suggestions for
improvement weren’t being taken seriously, quit his family’s
electronics distribution business and, together with a partner,
started his Minnesota-based home and car stereo store called
“Sound of Music.” The firm grew through acquisitions and the
opening of new stores and hit the million-dollar revenue mark
by 1970. During the 70s, Schulze’s company experienced
significant financial success, allowing him to expand the chain
and buy out his partner. Even early in his managerial career,
Schulze showed an uncanny ability to adjust to market trends
and seek out profitable opportunities. For example, his position
on a school board gave him insight into the fact that the
customer pool of 15- to 18-year-old males (his target
demographic) was shrinking. Consequently, he adjusted his
business approach by diversifying into appliances and video
equipment with the goal of targeting the expanding demographic
of older and wealthier customers emerging in the 80s. As
another example, when a tornado destroyed one of his stores but
left the inventory largely unharmed, Schulze held a “no
frills” parking lot sale with reduced prices. This approach was
so successful that in 1983, Schulze reorganized the business
into a superstore format under the “Best Buy” brand name and
in 1985, took the new company public.8
As Best Buy continued to evolve, the sales approach used in the
superstores changed from that of a specialty electronics retailer
3. with highly knowledgeable commissioned sales staff, to a mass
merchandiser with a larger variety of products, discounted
prices, and a more dispersed and non-commissioned sales
force.9 Although customers seemed to appreciate the increased
variety and did not seem to mind the reduction in sales
assistance, some suppliers were skeptical of the superstore
concept and, for a time, pulled some of their products from Best
Buy’s shelves.10 Since the introduction of the superstore, Best
Buy has refined the concept to allow for moderate levels of
customer service, balanced with displays and product groupings
designed to allow customers to shop for many items without
extensive assistance.11
This moderated approach was successful and prompted the
brand to expand rapidly throughout the US between 1989 and
1995—opening 47 new stores in 1995 alone. However, Best
Buy’s rapid expansion brought with it high debt levels and low
profit margins that eventually forced the firm to slow its
expansion and reconsider some of its low-cost strategy. This
setback notwithstanding, Best Buy began to expand again in
1999, opening new superstores in additional regions of the US
and launching a separate subsidiary—BestBuy.com—to claim its
stake to the online market.12
If Best Buy experienced rapid growth in the last 34 years of the
twentieth century, it was paltry compared to the meteoric rise it
experienced during the decade beginning in 2000. Growth came
through sold all remaining Musicland assets later that year.19
Best Buy’s Speakeasy acquisition ultimately did not provide the
strategic advantages Best Buy had expected, and was sold in
2011. Due to the lethal combination of non- existent brand
equity and cultural mismatch, the Best Buy branded stores in
Turkey and China also performed poorly, resulting in the
decision to close (or in the case of China, convert to Five Star
branded stores) those locations in 2011 and 2012
respectively.20
Managerial changes at Best Buy have been infrequent over the
course of the firm’s history and because most of the changes
4. that have occurred have been internal leadership promotions,
managerial succession has had little impact on Best Buy’s
overall strategy. Dick Schulze led the company from its
founding in 1966 until he resigned from the CEO position in
2002 and continues to be a driving force as Chairman of the
Board. Upon Schulze’s retirement from CEO, Brad Anderson,
who had been serving as the firm’s vice chairman, took over the
position and worked as the company’s CEO until 2009 when he
retired. Brian Dunn, who started his career with Best Buy
working as a sales associate over 25 years ago, accepted the
CEO position in 2009.21
Industry
Suppliers
Due to the variety of products Best Buy offers, the firm
maintains relationships with hundreds of suppliers. Even so, in
2010 Best Buy purchased almost 65 percent of its products from
just 20 suppliers with 5 of those suppliers (Apple, HP,
Samsung, Sony, and Toshiba) providing almost 40 percent of its
merchandise.22 Although there are no signs of supply
disruption from any of these major companies, supplier firms
themselves are evolving. In the past, major electronics
producers like Sony would sell only to specialty electronics
retailers like Best Buy or Circuit City. Today, the major
electronics suppliers are increasingly allowing their products to
be sold by warehouse clubs and online distributors. As suppliers
extend the scope of their distribution, Best Buy loses the
exclusivity it once enjoyed.23 Compounding this problem is the
fact that major supplier firms like Apple are integrating forward
and distributing their products through websites and bricks-and-
mortar stores.24
As Best Buy has increased its emphasis on cell phone sales
through the Best Buy Mobile store-within-a-store format, the
major cell phone carriers are becoming more important as
suppliers than in the past.25 However, because the cell phone
business is becoming increasingly concentrated and
commoditized, the cut for middle- man distributors is
5. dwindling. In the end, vendors such as Best Buy may find it too
difficult to achieve profit margins sufficient to continue this
foray.
Customers
Like many firms that focus on retail sales, Best Buy’s customers
represent a broad array with no single customer profile
accounting for a significant portion of overall sales.27
Nevertheless, in its effort to meet each customer in an efficient
manner, Best Buy has worked to understand its customers
better. As an example, the firm has recently worked to increase
its offerings to business customers—training designated staff to
provide consultation services to business purchasers as well as
showcasing products specifically designed for business
applications.28
Of course, technological trends have important implications for
firms in the consumer electronics industry. The increased use of
the Internet provides businesses with multiple challenges and
opportunities, both in terms of the range of products offered as
well as new ways to conduct business and access customers.
The trend toward a decrease of retail prices in the consumer
electronics industry combined with an increase in market
saturation could become problematic for firms.29 Additionally,
the smartphone and tablet trend toward the consolidation of
functions (i.e. computing, messaging, phone calls, GPS
navigation, games, camera, etc.) will influence not only the
demand for these products, but the products they replace as
well.
The increasing rate at which technology is changing offers firms
in this industry an endless supply of new products, but carries
with it the threat of being caught with unsold stock that is
newly obsolete or simply suddenly unpopular. To offset this
particular risk, firms with the ability to bring products to an
international market could benefit from economies of scale. In
addition, offering products considered by advanced markets as
obsolete to secondary and tertiary markets would extend the
shelf life of a product and give sellers the opportunity to move
6. products from inventory that could not otherwise be sold.
International access to inexpensive labor and production
facilities also affords firms in the industry the opportunity to
consider backward integration in terms of developing their own
“house brand” products with lower financial risk than would be
the case without international options.
Specifically in regard to the US, the aging population suggests
the need to offer products and use marketing approaches that
appeal to older customers. Likewise, the increased ethnic
diversity of the population, the staying power of the dual career
family, and the subsequent increase in the purchasing power of
women mark opportunities to provide and market electronic
products to consumer groups beyond the typical white-middle-
aged-male segment. Also, stagnating population growth in the
US and expanding international populations and economies fuel
opportunities in international expansion opportunities
that come however with the threat of increased competition
from international firms.30
The economic downturn and tightening of credit late in the most
recent decade resulted in decreased growth for several consumer
electronics firms and likely contributed to the demise of Best
Buy competitors such as Circuit City and CompUSA. In general,
firms selling lower-end electronic products are thought to
benefit from this trend while those selling cutting-edge
technologies are expected to suffer. Clearly, the speed and
extent of economic recovery will influence future growth
opportunities. Recent indicators suggest that personal income is
on the rise in the US, a change that will likely increase the
demand for luxury, high-end, and discretionary products once
again.31 However, recession induced trends such as increased
financial prudence could at least temporarily delay this effect.
Responses to the recession that influence inflation and trade
balances internationally—and by extension, exchange rates—
will affect the viability of international expansion.
With increased competition in the consumer electronics industry
coming from online retailers, the political/legal segment is
7. becoming increasingly important to firms like Best Buy. This is
because when a company operates even a single bricks-and-
mortar retail outlet in a US state, all sales made within that
state, both in-store and online, are subject to sales tax.32
Alternatively, if a firm does not have a “physical presence” in a
state, they do not have to charge its online customers sales tax.
The issue up for debate is whether distribution centers fall
within the definition of “physical presence” with online
retailers threatening to pull distribution centers— and the jobs
they provide—from any state that says it is so. With retail
locations in the majority of US states, Best Buy would like to
see state legislators level the playing field by clearing up the
definition to explicitly include these distribution centers.33
Competitors
The industry in which Best Buy operates is in an unprecedented
state of flux. The recession finished the job of eliminating weak
competitors in the specialty consumer electronics store segment
that started years earlier with the advent of the Internet and
mass-market merchandisers. With the elimination of Best Buy’s
traditional head-to-head competitors (i.e., those like Circuit
City and CompUSA that sold the same products and used the
same format), Best Buy is left to compete primarily against
unfamiliar rivals on unknown terrain. The strategies and tactics
used by competitors coming from the online retail, warehouse
club, and mass market approaches differ from those
traditionally used by bricks-and-mortar electronics stores.
Major competitors in the “new” consumer electronics industry
and their effects on industry competition are discussed below.
Amazon.com. Jeff Bezos developed the idea for Amazon.com in
1990 when he was struck by the goodness-of-fit of book selling
via online marketing because of the need for precise and
automated inven- tory controls in each. Over the next four
years, he developed the idea for his new company and launched
the online bookstore in 1995. Sales grew rapidly and the
company went public in 1997. Realizing the potential based on
its unprecedented success, in 1998, Bezos contracted with AOL
8. and Netscape to increase Amazon’s visibility to Internet users,
and later that year, Amazon added music, video, electronics,
and toy segments to its product offerings.34
Since its inception, Amazon has continued to grow— sometimes
through its own ventures including the development of
Endless.com, Amazon’s online shoe store, its own e-reader
device, the Kindle, and the addition of media downloading
services including music, TV shows, and movies—but
oftentimes through acquisitions of online retail firms. Each
representing a product market niche, the firms Amazon has
acquired offer a range of products and services including audio
books (audible.com), to pet care (pets.com), and groceries
(homegrocer.com). Acquisition of a European version of Netflix
suggests that Amazon may be considering entry into the mail-
delivered DVD rental business in the US. While most
acquisitions serve to extend Amazon’s reach into markets it can
effectively and efficiently supply, some come with additional
benefits as well. For example, Amazon’s acquisition of
Zappos.com not only increased its presence in the online shoe
market but also made it possible for Amazon to integrate some
of Zappo’s customer service skills into its main operation.35
Not one to be behind the curve, Amazon quickly capitalized on
the smartphone trend as a way to sell new products and attract
new business. Early in 2011, Amazon went into direct
competition with Google’s App Marketplace with the launch of
its Appstore for Android. Amazon’s site allows customers to
“test drive” an app before purchasing, carries ad supported free
apps, and has a “premium-app-a-day” giveaway to increase
market share and encourage customers to regularly check back
with the site.36 In a major coup and as mentioned previously,
Amazon’s new shopping app allows smartphone users to say the
name of a product or take a picture of its cover art or bar code
(presumably in a store) and receive instant information on the
price of the product at Amazon—as well as the opportunity to
make the purchase.
There are two factors central to Amazon’s successful bid as a
9. consumer electronics retailer. First, its operating expenses are
lower than those typical
back to the drawing board with Carphone Warehouse to review
their plans.60 Best Buy has had difficulty in other international
locations as well. The Best Buy branded big box stores in China
have not proven to be as profitable as those run under the
acquired Five Star brand, and Best Buy is currently working to
reformat its Best Buy stores into Five Star locations.
Additionally, the Best Buy store in Turkey has been
unprofitable and will be closed this year.61 Closer to home,
with no large format competitors left in existence, the size of
some of Best Buy’s big box stores may be superfluous as,
having a showroom four times the size the nearest competitor
may be less profitable than being only two or three times their
size.
Geek Squad. Best Buy acquired Geek Squad in 2003 and
integrated the firm and its concept within its big box stores.
This branch of Best Buy offers after-sale services including
installation, repair, and technical support.62 Examples of
specific services offered include home the- ater and surround
sound setup, flat screen television mounting, wireless network
setup, virus and spyware removal, and the installation of
aftermarket electronic equipment such as GPS and remote
starters in cars.
Though the services Best Buy sells through the Geek Squad
make up a relatively small portion of revenue, the percentage is
consistently increasing and the profit margin earned on Geek
Squad services is higher than the firm average.64
Best Buy Mobile. These stores focus on selling cellular
phones and small computing devices and their associated
service plans and accessories. Best Buy Mobile stores can be
found within all domestic and Canadian big box locations and,
in increasing numbers, as stand-alone “small box” stores.65 It
offers cell phones from all major brands including Apple,
Motorola, LG, and Samsung running on all major platforms
(i.e., iOS, Android, Blackberry, and Windows), and sells service
10. contracts with all major providers such as Verizon, AT&T, T-
Mobile, and Sprint as well as contract-free phones through
Boost Mobile, Virgin Mobile, and MetroPCS.66 As with Geek
Squad, Best Buy Mobile operations have provided a financial
cushion for the firm in what could have been a very difficult
time. For example, although Best Buy comparable store sales
experienced a five percent slump in December 2010, the
decrease would have been 15 percent if not for the addition of
Best Buy Mobile sales. Bestbuy.com. In recent years,
Bestbuy.com, the firm’s online channel, has become more
integrated with the in- store experience. Most of the same
products offered in the big box stores are available through the
online channel, as well as many additional products.68 Driving
customers to the site, Bestbuy.com attempts to outdo other
online retailers by providing superior assistance to customers
making purchases. For example, the site provides 24/7 human
customer assistance, user forums, professional and customer
reviews, and optional in-store pickup. The website’s value to
Best Buy extends beyond the revenue produced by sales. In fact,
it has been estimated that regardless of whether they eventually
purchase products from the website or a bricks-and-mortar
store, 60 percent of Best Buy customers begin their research and
shopping on the Best Buy website.69
The Carphone Warehouse. Unlike the domestic division’s big
box format stores, most of the stores making up the Best Buy
Europe portion of the international division are either Carphone
Warehouse or Phone House branded “small box” stores. Not
coincidentally, these stores are similar to Best Buy Mobile
stores, offering cell phones, service contracts, and small
computing devices with a large percentage of their revenue
derived from the sales of device insurance. (A team of
consultants from Carphone Warehouse helped develop the Best
Buy Mobile plan.) Many of the stores also offer Geek Squad
services that focus mainly on the repair of consumer-owned
devices.70 Best Buy Europe is a 50 per- cent owner in the over
1400 Carphone Warehouse and Phone House stores in Europe.
11. Five Star Appliances. Prior to its acquisition by Best Buy in
2007, the Jiangsu Five Star Appliance Company was one of the
largest retailers of consumer electronics and appliances in
China.71 Best Buy’s reasoning for the acquisition was two-fold.
First, it offered a quick way to move into and gain a foothold in
the lucrative and grow- ing consumer electronics market in
China and second, it was seen as an opportunity to get an inside
perspec tive of selling electronics in China from a successful
firm. With the exception of entertainment media, the large
format Five Star stores offer a similar mix of products to Best
Buy stores in the US. Overall, Best Buy’s Five Star branded
stores have done well, even during the recession, and Best Buy
plans to open 10 to 15 additional stores in the coming year.72
The importance of the Five Star stores is seen when their
success is juxtaposed against the lack- luster performance of the
soon-to-be-closed/re-branded Best Buy stores in China. With
similar product offerings and overhead expenses, this disparity
of outcomes can only be explained by the fact that Five Star
was developed by individuals who understood the culture, while
Best Buy stores and operating procedures were largely imported
from abroad.
Past and Current Strategies
Before Best Buy’s bricks-and-mortar competitors shut down it
was clear that, considering how easy it was to drive to a
competitor’s location, no firm targeting the broad consumer
electronics market would be successful if it charged too high a
premium over its competitors. Because of this, Best Buy was
forced to find ways to reduce its costs to remain competitive.
While Best Buy’s size and purchasing power was and is an
important factor in keeping costs down, former CEO Brad
Anderson admitted that the firm did not develop its own
approaches to reducing costs. Instead, Best Buy observed
companies like Walmart and Target and then acted as a “fast
follower” to implement new ideas and efficiencies in ways
suited to Best Buy’s operations.73 Through copying the
successful approaches to logistical issues of stores like Walmart
12. and Target74 and building relationships with its network of
suppliers,75 Best Buy is able to quickly and accurately
distribute its products to stores and customers worldwide.
Although cost efficiencies have been important to Best Buy, to
avoid falling into a “commodity hell” where all competition in
the industry is based on price, the firm has had to develop other
reasons for Best Buy to be a shopper’s first stop. According to
Ranjay Gulati of Harvard Business School, Best Buy has done
this by doing a better job than its competitors at looking at the
electronics industry through the eyes of a customer. In other
words, instead of telling customers what they should want next,
Best Buy works to understand both the technology as well as its
customers’ needs, wants, and tendencies so it may then provide
technological solutions that not only match, but actually work
for the consumer.76 In addition, rather than simply present- ing
a display model and a stack of boxes containing the product,
Best Buy is highly adept at anticipating all of the needs a
consumer may have in association with a particular purchase.
These needs may include help with product comparison and
selection, home delivery and setup, training, accessories,
service, etc. To meet these needs, Best Buy has developed well
thought out and communicated processes, structures, displays,
and services.77
As an extension of this proficiency and even before the recent
narrowing of the field in the big box segment of the consumer
electronics industry, Best Buy had a reputation for providing
superior sales assistance for a big box retailer. Today, with its
main competitors a warehouse chain offering essentially no
sales assistance, a website that discourages person-to-person
customer service contact, and an oversized grocery store with
extremely limited specialized support staff, it would seem that
Best Buy has the potential to not only retain, but extend, this
lead. Disappointingly, however, a recent consumer survey
revealed that customers perceived Best Buy’s service as only
average, placing Best Buy flat even with Amazon and only
slightly ahead of Costco and Walmart. While the customer
13. service expectations of a consumer entering a Best Buy are
likely higher than when entering a Costco or Walmart, Best Buy
cannot lower the bar to those levels simply because CompUSA
and Circuit City are no longer around.78
Best Buy refers to its overarching plan for its future as the
“Connected World” strategy. Best Buy defines this approach as
follows: “Broadly defined, our Connected World strategy is
based on the goal to demystify and humanize technology to help
customers get the most out of the rapidly expanding role that
technology plays in their lives.”79 Major objectives associated
with this goal include growing the Bestbuy.com web presence to
capitalize on online opportunities, expanding the Best Buy
Mobile segment in the US, utilizing its size and scale to
improve returns in international markets, and increasing its
presence at a reduced cost by increasingly relying on stores
with a smaller footprint.80 As a positive indication of the
potential of its international expansion, compared to many firms
that experience a high failure rate in their foreign acquisitions,
the vast majority of Best Buy’s acquisitions of foreign
electronics companies have been profitable.81 This suggests
that the firm knows how to bring the benefits of Best Buy’s
scale and experience to its acquired firms without requiring
conformity in areas that could dilute the location specific
strategies that made the acquired firm desirable in the first
place.
While Best Buy has standardized many of its processes across
its big box stores to create economies of scale and reduce
operating costs, as illustrated by its management of
acquisitions, Best Buy remains flexible in many novel ways
including its understanding of the benefits attached to
supporting entrepreneurial innovations initiated at the store
level. For example, noticing the large Brazilian population near
a Manhattan store, store managers hired Portuguese-speaking
staff to better serve that population segment and brokered a deal
with a Brazilian cruise company to bring tourists to Best Buy as
a stop on their trip.82 With a company culture that values the
14. ability to recognize opportunity and spearhead this type of
initiative, Best Buy is more likely to develop company policies
that allow it to compete successfully with small local
competitors both domestically and abroad.
As for innovation beyond the big box model most often
associated with Best Buy, the rapid financial success of the new
Best Buy Mobile stores in the US and Canada, as well as the
ongoing profitable growth of the Carphone Warehouse stores in
Europe suggest that Best Buy has the capabilities necessary to
compete in this market. Furthermore, the speed with which Best
Buy Mobile stores in North America went from non-existent to
successful suggests that Best Buy may be particularly adept at
adapting knowledge gained in one locale to another.
Financial Results
The above strategies have resulted in the financial outcomes
examined in this section. Despite a 1.16 percent increase in
gross revenue, Best Buy’s fiscal year 2011 net income dropped
3 percent (see Exhibits 3A and 3B for and overview of BBY
financial performance). A key component of Best Buy’s
decreasing net income was an increase in selling, general, and
administrative (SG&A) expenses. From 2010 to 2011, SG&A
increased $452 million, or 4.4 percent, and followed its 2009 to
2010 increase of over 10 percent. Clearly, Best Buy did not
adjust its fixed costs when revenue growth went into decline.83
Although its increased expenses were well masked by gains in
other segments, the economic downturn and changes in the
competitive nature of the industry have affected Best Buy.
While its average revenue growth over the last five years was
10.26 percent, it slowed to 7.9 percent in the last three years,
and became downright sluggish in fiscal year 2011 at 1.16
percent.
Best Buy’s domestic sales contribute 74 percent of total gross
revenues—$37.2 billion compared to $13.1 billion from the
international segment (see again, Exhibit 2). In the international
segment, Best Buy’s primary regions are Europe with 10.9
percent of total revenue ($5.5 billion), Canada with 10.8 percent
15. ($5.4 billion), and China with 3.9 percent ($1.9 billion) (Exhibit
4). Beyond these three, the total of all other foreign sales
contributes the remaining .03 percent ($155 million) of total
revenue. Historical financial reports demonstrate that revenue
growth as a percentage of sales is greatest in the international
segment of the firm; from 2007 to 2010, international gross
revenue increased an average of 15 percent per year as opposed
to less than 6 percent in the domestic segment.84
Looking at the product categories that Best Buy sells, consumer
electronics comprise 37 percent of US sales (down from 39
percent in the previous fiscal year) and 21 percent of
international sales (up from 20 percent) (Exhibit 2). Home
office equipment was the largest component in foreign sales at
55 percent, which was a 2 percent increase from prior year
sales. In the US, home office equipment accounted for 37
percent of sales, up 3 percent from the previous year. In total,
the remaining categories of entertainment, appliances, services,
and other made up 26 percent of US sales (down 1 percent as a
group) and 24 percent of international sales (down 3 percent).
When compared to its competitors, Best Buy’s gross profit
margin of 25.14 percent is only slightly less than Walmart’s
25.26 percent and better than Amazon’s 22.37 percent. It is in
the net profit margin that Best Buy’s challenges surface. At
2.54 percent, Best Buy is markedly lower that Walmart and
Amazon at 3.88 percent and 2.85 percent respectively.
Providing further comparison, the market standards in the gross
and net profit margin categories are 30.36 percent and 3.87
percent respectively.86
Strategic Leaders
The strategic leaders responsible for the financial results
discussed are described in this section. Best Buy’s
ownership is made up of 65 percent institutional and mutual
fund owners, 19 percent insiders and large-block shareholders,
with the remaining shares held by various investors. The largest
institutional stockholder of Best Buy (FMR LLC) and the
largest mutual fund stockholder (American Funds) collectively
16. own more than 10 percent of Best Buy thus providing a solid
governance mechanism. The largest individual stockholder is
Richard Schulze, founder and current Chairman of the Board.87
External members and insiders represent 71 percent and 29
percent of Best Buy’s comparatively heterogeneous Board of
Directors, respectively. The key insiders on the Board of
Directors include Richard Schulze (Founder and Chairman of
the Board), Brian Dunn (CEO), and Elliot Kaplan (Director of
Finance & Investment Policy Committee). Additional key
insiders on the Board include Jianguo Wang (Chairman of
subsidiary Jiangsu Five Star Appliance), Kathy Higgins
(Independent Director of Best Buy since November 1999),
Ronald James (Independent Director of Best Buy since May
2004), and Rogelio Rebolledo (Director of Best Buy since
August 2006). Key outsiders on the Board include Hatim Tyabji
(Bytemobile), Gerard Vittecoq (Caterpillar), Lisa Caputo
(Citigroup), Matthew Paull (KapStone Paper and Packaging),
Sanjay Khosla (Kraft Foods), and George Mikan III
(UnitedHealth Group).88 Best Buy’s key strategic decision
makers include Richard Schulze (Founder and Chairman of the
Board), Brian Dunn (CEO), James Meuhlbauer (CFO), and
Andrew Harrison (Best Buy Europe CEO).89 Richard Schulze
received technical training in electronics from the US Air Force
and founded the company in 1966. He took Best Buy public in
1985 and held the position of CEO for the following 19 years.
Aside from Best Buy, Schulze is a member of several Boards
including St. Thomas Business School, National Entrepreneurs
of the Year Institute, and Pentair, Inc. Schulze’s marketing and
entrepreneurial spirit was instrumental in Best Buy growing into
the largest US electronics retailer. Currently Chairman of the
Board, Schulze’s main responsibilities include long-term
strategic planning and the development of leaders within the
company. Schulze’s total compensation for the year 2010 was
$165,000.90 Brian Dunn has been with Best Buy for 26 years,
working his way up from Store Manger to become CEO in 2009.
In addition to his position at Best Buy, Dunn also serves on the
17. Board of Directors for Dick’s Sporting Goods and is a member
of the Board of the Consumer Electronics Association. Dunn’s
total compensation for the year 2010 was $10.2 million.91
James Meuhlbauer was hired as CFO in 2008 after serving as
interim CFO in 2007. He came to Best Buy after 10 years with
Pillsbury where he was a Vice President and Controller.
Meuhlbauer has extensive experience in audit/compliance
having worked as a consultant and full time employee of several
law firms. Meuhlbauer’s total compensation for the year 2010
was $2.95 million.92 Andrew Harrison was named CEO of Best
Buy Europe in February 2011 amidst a suddenly unstable time
within the Carphone Warehouse/Best Buy joint venture during
which it lost several key leaders including Best Buy Europe’s
head of online services, its branded operations chief, marketing
director,93 CEO, and Carphone’s senior insight manager.94
Originally hired in 1995 by Carphone Warehouse as its Strategy
Manager, Harrison became Carphone’s Commercial Director in
1998 and CEO in 2001. Harrison had been previously appointed
COO of Best Buy Europe in July 2010 in addition to his CEO
position with Carphone Warehouse and The Phone House.
Challenges Best Buy’s strategic leaders begin the second decade
of the 21st century facing several key strategic challenges.
From its beginnings as a single retail outlet, it has grown to
become the largest big box chain in the consumer electronics
industry. Through its 45-year life, the company has successfully
navigated changes in technology, customer needs, and the
industry environment in general to remain profitable but to
continue to do so will require its leadership to make important
strategic decisions. An increased intensity of competition in an
evolved and less familiar form is exerting pressure on Best
Buy’s bottom line. The retail industry in general has embraced
the online delivery of products—a development that places
weighty competitive pressure on retailers that continue to bear
the costs associated with maintaining bricks-and-mortar stores.
As the products that Best Buy traditionally sells become
increasingly commoditized and profit margins are reduced, the
18. firm will need to find new ways to achieve profitability in the
industry—or will need to find a new industry in which to
compete. Will Best Buy try to continue to set itself apart
through its product line and customer service? Will it try to find
a way to reduce costs substantially enough to “slug it out” with
online competitors? Can its strategic leaders formulate a
strategy to do both?