July 11, 2008
Best Buy Plans to Double Sales
Best Buy is looking to double its sales to $80 billion over the next five years and the consumer electronics (CE) giant has a plan for getting there, according to a report on the TWICE (This Week in Consumer Electronics) website.
Mike Vitelli, executive vice president of Best Buy’s customer operating group, outlined five keys that will enable the chain to achieve its goals at an Oppenheimer & Co. investor conference.
The first piece of the puzzle for Best Buy is the continued strength of the CE market. The retailer is projecting CE will continue to grow at a rate of six percent a year.
Mr. Vitelli said Best Buy intends to grab greater share of the CE market by opening new locations and also expanding its presence in categories where it currently has a limited presence such as in Apple computers, major household appliances and mobile phones. According to TWICE, Mr. Vitelli said Best Buy has gone from single- to double-digit annual growth in both appliances and cell phones.
Best Buy is also looking to enter completely new categories to achieve sales gains. The company has introduced “top shelf” musical instrument selections in a number of locations around the U.S.
The fourth opportunity Best Buy sees is in completely new business models or formats. A case in point, according to Mr. Vitelli, is the company’s plan to take its Pacific Sales premium appliance store national.
Finally, Best Buy is looking outside the borders of the U.S. for significant growth. It currently operates stores in Canada, China and Europe (as part of its deal with The Carphone Warehouse). It currently has plans on the board to open stores in Mexico and Turkey.
Discussion Questions: What factors will be most critical to Best Buy achieving its goal of doubling sales within the next five years? Where do you see the biggest threat to Best Buy that could keep it from achieving its sales and share goals?
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Conceptually, this is a heartening development that should clearly position Best Buy as something much more than just the other CE store competing with Circuit City. It’s also a clear repudiation of CC’s implied direction as the place to get stuff cheap from people who don’t know much.
But Best Buy may have to get its own customer-sat house in order.
I’ve read some horrific blog accounts of bait-and-switch involving newspaper FSI offers at the store level–complete with different web screens with different pricing in-store versus what consumers had seen at home. Naturally, no new strategy is going to work with legions of angry customers telling their friends that Best Buy is out to cheat them.
I’ve also heard a local radio announcer tell his story of a difficult return of a defective item.
If these are more than isolated cases, BB is going to have to start with a complete culture change: Root out the bad apples in management who encouraged these practices, let people up and down the chain of command know the miscreants are gone and start a bottom-up needs analysis that asks the folks on the front line what they need to support the new strategy.
And I would show those folks that they’ll get the support they need from the very top rungs of management. It sounds hokey, but I’d go so far as to have an ice-cream social or some other picnic-type event in every major market BB is in, in the biggest sports stadium in each market, and have senior management wearing aprons and serving the food.
And then I’d make sure the changes stick over time. As I just read on BNet, the problem isn’t that employees don’t like change. It’s that they’re tired of programs that promise change and then don’t deliver it.
The goal to double sales at Best Buy is lofty but possibly not unrealistic if everything comes together. A few components off the top:
1. Inflation.
2. Less Competition.
3. New and expanded C.E. technology and offerings.
4. More stores.
5. Take business away from other channels of trade.
6. Greater online coordination with brick and mortar.
Inflation is tricky because the nature of consumer electronics is that once an item is introduced, the prices usually come down thereafter.
Best Buy’s biggest opportunity is international sales. Also they might want to become more consumer friendly. Recently I noticed they have a restocking fee on returned merchandise. Best Buy needs to go to a no questions asked, 100% money back on returns. This would eliminate consumer’s fears of buying products at their store.
Great. Looks like Sears may have finally found a buyer for all its real estate.
Continued focus on electronics and expanding internationally is natural. Perhaps the sweet spot is fine-tuning Geek Squad. This means an enhanced commitment to service and a better understanding of consumer needs. If executed properly, it will produce a substantial margin lift.
Best Buy is in an enviable position: It’s the dominant retailer in a category that continues to grow, driven by demand and innovation. Some of its key competitors (such as Circuit City and Sears) are on the ropes. There are multiple opportunities for small-format stores.
A couple of cautions, however, as Best Buy pursues its aggressive plans:
1. Don’t expand for expansion’s sake and end up like the next Starbucks (or, worse, Steve & Barry’s) with a portfolio of problem locations;
2. Don’t expand into too many categories that take you out of your key mission and competency.
If Best Buy stays focused, there is considerable upside opportunity.
Aggressive growth plans are always a romantic and appealing strategy. Investors get excited and it looks good on paper. All you need is strong consumer spending in these new markets and you’re set. I am confident that best Buy has enough company wide cash flow to support the growing network until each store becomes profitable.
Sounds so simple, and yet so many seem to screw it up.
Going for a market share grab in tough economic times is a proven strategy for retailers (hello, Wal-Mart); however, Best Buy’s goals are pretty aggressive. I envision several bowling pins at the end of Best Buy’s alley: Lowe’s, Home Depot, Guitar Center, Sears, and Circuit City among them.
For Best Buy to roll a strike would be a remarkable feat and any remaining pins would certainly be teetering. The larger questions are: Are Best Buy’s suppliers able to service these goals within Best Buy’s notoriously stringent execution guidelines, especially as marquis CE brands increasingly resent having their brands subjugated to a controlling retailer master brand? This is a dynamic that in apparel, led to a rush of owned-store activity that has retail brands competing against wholesale customers. Best Buy’s previous concept extensions (anyone remember EQ Life?) were ill-conceived distractions that, at the end of the day, did not hurt them. The stakes are much higher in this game and Walmart is awfully determined in this space.
The big threats are economic power shifts, inflation in Asia, the heart of electronics manufacturing and the life cycle of products before they become commoditized; along with international expansion and the cultural and demographic differences that are tied into this. New product developments and differentiation are paramount and clearly the right way forward as is international development.
External buying consortiums are an answer that the company should consider to leverage scale more effectively, bring new products to market and bring a wider global perspective. My consortium in Asia does this for many clients in the US and increases profits and helps clients differentiate and build barriers to their competition.
Best Buy’s ambition is commendable, and their goals are attainable with a combination of domestic and international growth. Let’s see them follow it up by targeting their new product lines such as musical instruments to stores where those products will most likely succeed based on the consumers in the store trade areas, and doing the consumer and location research to understand what rules apply to both Best Buy and Pacific Sales, and where those two retail formats differ in terms of what makes for successful stores as they expand Pacific Sales into a national chain.
Best Buy benefits greatly by the missteps of its competitors (Dell, Sears, RadioShack, CompUSA, Circuit City, Home Depot). Best Buy’s cell phone expansion will help offset the collapse of the DVD music business. (Radio Shack does 1/3 of its business in the “mobile” segment.)
Best Buy would probably do best by cutting its new location growth in the USA, because it already has over 900 domestic locations, so almost all new location expansion would cut comp sales increases via cannibalization.
The foreign segment, particularly China, looks great, especially since Best Buy reports earnings in dollars and the dollar will continue to decline against the RMB.
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Conceptually, this is a heartening development that should clearly position Best Buy as something much more than just the other CE store competing with Circuit City. It’s also a clear repudiation of CC’s implied direction as the place to get stuff cheap from people who don’t know much.
But Best Buy may have to get its own customer-sat house in order.
I’ve read some horrific blog accounts of bait-and-switch involving newspaper FSI offers at the store level–complete with different web screens with different pricing in-store versus what consumers had seen at home. Naturally, no new strategy is going to work with legions of angry customers telling their friends that Best Buy is out to cheat them.
I’ve also heard a local radio announcer tell his story of a difficult return of a defective item.
If these are more than isolated cases, BB is going to have to start with a complete culture change: Root out the bad apples in management who encouraged these practices, let people up and down the chain of command know the miscreants are gone and start a bottom-up needs analysis that asks the folks on the front line what they need to support the new strategy.
And I would show those folks that they’ll get the support they need from the very top rungs of management. It sounds hokey, but I’d go so far as to have an ice-cream social or some other picnic-type event in every major market BB is in, in the biggest sports stadium in each market, and have senior management wearing aprons and serving the food.
And then I’d make sure the changes stick over time. As I just read on BNet, the problem isn’t that employees don’t like change. It’s that they’re tired of programs that promise change and then don’t deliver it.
The goal to double sales at Best Buy is lofty but possibly not unrealistic if everything comes together. A few components off the top:
1. Inflation.
2. Less Competition.
3. New and expanded C.E. technology and offerings.
4. More stores.
5. Take business away from other channels of trade.
6. Greater online coordination with brick and mortar.
Inflation is tricky because the nature of consumer electronics is that once an item is introduced, the prices usually come down thereafter.
Best Buy’s biggest opportunity is international sales. Also they might want to become more consumer friendly. Recently I noticed they have a restocking fee on returned merchandise. Best Buy needs to go to a no questions asked, 100% money back on returns. This would eliminate consumer’s fears of buying products at their store.
Great. Looks like Sears may have finally found a buyer for all its real estate.
Continued focus on electronics and expanding internationally is natural. Perhaps the sweet spot is fine-tuning Geek Squad. This means an enhanced commitment to service and a better understanding of consumer needs. If executed properly, it will produce a substantial margin lift.
Best Buy is in an enviable position: It’s the dominant retailer in a category that continues to grow, driven by demand and innovation. Some of its key competitors (such as Circuit City and Sears) are on the ropes. There are multiple opportunities for small-format stores.
A couple of cautions, however, as Best Buy pursues its aggressive plans:
1. Don’t expand for expansion’s sake and end up like the next Starbucks (or, worse, Steve & Barry’s) with a portfolio of problem locations;
2. Don’t expand into too many categories that take you out of your key mission and competency.
If Best Buy stays focused, there is considerable upside opportunity.
Aggressive growth plans are always a romantic and appealing strategy. Investors get excited and it looks good on paper. All you need is strong consumer spending in these new markets and you’re set. I am confident that best Buy has enough company wide cash flow to support the growing network until each store becomes profitable.
Sounds so simple, and yet so many seem to screw it up.
Going for a market share grab in tough economic times is a proven strategy for retailers (hello, Wal-Mart); however, Best Buy’s goals are pretty aggressive. I envision several bowling pins at the end of Best Buy’s alley: Lowe’s, Home Depot, Guitar Center, Sears, and Circuit City among them.
For Best Buy to roll a strike would be a remarkable feat and any remaining pins would certainly be teetering. The larger questions are: Are Best Buy’s suppliers able to service these goals within Best Buy’s notoriously stringent execution guidelines, especially as marquis CE brands increasingly resent having their brands subjugated to a controlling retailer master brand? This is a dynamic that in apparel, led to a rush of owned-store activity that has retail brands competing against wholesale customers. Best Buy’s previous concept extensions (anyone remember EQ Life?) were ill-conceived distractions that, at the end of the day, did not hurt them. The stakes are much higher in this game and Walmart is awfully determined in this space.
The big threats are economic power shifts, inflation in Asia, the heart of electronics manufacturing and the life cycle of products before they become commoditized; along with international expansion and the cultural and demographic differences that are tied into this. New product developments and differentiation are paramount and clearly the right way forward as is international development.
External buying consortiums are an answer that the company should consider to leverage scale more effectively, bring new products to market and bring a wider global perspective. My consortium in Asia does this for many clients in the US and increases profits and helps clients differentiate and build barriers to their competition.
Best Buy’s ambition is commendable, and their goals are attainable with a combination of domestic and international growth. Let’s see them follow it up by targeting their new product lines such as musical instruments to stores where those products will most likely succeed based on the consumers in the store trade areas, and doing the consumer and location research to understand what rules apply to both Best Buy and Pacific Sales, and where those two retail formats differ in terms of what makes for successful stores as they expand Pacific Sales into a national chain.
Best Buy benefits greatly by the missteps of its competitors (Dell, Sears, RadioShack, CompUSA, Circuit City, Home Depot). Best Buy’s cell phone expansion will help offset the collapse of the DVD music business. (Radio Shack does 1/3 of its business in the “mobile” segment.)
Best Buy would probably do best by cutting its new location growth in the USA, because it already has over 900 domestic locations, so almost all new location expansion would cut comp sales increases via cannibalization.
The foreign segment, particularly China, looks great, especially since Best Buy reports earnings in dollars and the dollar will continue to decline against the RMB.