The ” Best Buy case” are attached below. read it

These is an assignment where you will complete a competitor, industry and market analysis SUMMARY  That means you do the competitor, industry and market analysis of best buy and place only the main findings into this summary.

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Professor John R. Wells and Research Associate Galen Danskin prepared this case. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012, 2014 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

J O H N R . W E L L S

G A L E N D A N S K I N

Best Buy in Crisis

Introduction

At the end of fiscal 2012, Best Buy found itself in an increasingly challenging situation. Although it could still claim to be the world’s largest consumer electronics retailer with $50.7 billion in revenues, growth for the year, at 0.9% was anemic. Meanwhile, Amazon’s sales in Best Buy’s categories were growing at more than 50% p.a. and its total sales, at $48 billion, were approaching those of Best Buy. Operating profits were also disappointing having dropped 54% to $1.1 billion and net income fell into the red at -$1.2 billion. The fiscal 2012 year-end stock price fell to $24.70, down from a high of

$53.86 in 2006. In five years, Best Buy had lost more than 55% of its market capitalization.1

Best Buy had slowly been losing market share to both discounters and online retailers. As Wal- Mart cherry-picked popular items for steep discounts and Amazon encouraged consumers to

compare prices using smart phones, Best Buy became a showroom for lower cost retailers. 2 Although there had been promising growth in Best Buy’s online and mobile divisions, store closures and

programs to reduce the size of stores by 10% increased expenses.3 International expansion, a key pillar of a goal to double revenues in five years was struggling. Adding to the problems, the boom in digital TV sales was cooling and in 2011 mobile devices comprised a larger percentage of overall electronics sales than digital TV sets, effectively ending the sixty-year reign of television as the biggest category in consumer electronics.4 Moreover, many mobile devices were sold by telephone service providers, creating increased retail competition.

To add to Best Buy’s problems, on April 10, 2012, CEO Brian Dunn resigned after an investigation

into his “personal conduct” with a female subordinate.5 Board member G. Mike Mikan took over as interim CEO. On May 14, 2012, Dick Schulze, the firm’s founder, stepped down as chairman after other board members suggested that he had not kept them properly informed of Dunn’s behavior. At first, he agreed to remain on the board for a year, but on June 7, he reversed this decision, resigning in order to “explore all available options” for his 20.1% stake in the company. Schulze was the company’s single largest shareholder and had steered the firm through many crises since the company was founded in 1966.

Early Years 6

In 1966, Dick Schulze and a business partner opened the first Sound of Music store in St. Paul, Minnesota. Sound of Music sold hi-fi audio products and by 1969 it had expanded into five more locations around Minneapolis. By 1970, revenue reached $1 million and Schulze bought out his

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original business partner. In 1973, Sound of Music opened its first 3,000 square-foot central warehouse and first 5,000 square-foot showroom. By the end of 1978, it operated nine stores of around 5,000 square feet. However, competition in hi-fi audio grew increasingly cut-throat and the company began looking for a new business model. A natural disaster and a clever marketing ploy became the catalyst for this new sales formula. In 1981, a tornado hit Best Buy’s outlet in Roseville, Minnesota and, while it destroyed the building, it left the inventory undamaged. Schulze held a Tornado sale in the parking lot and the success of this heavily discounted event prompted Schulze to change his strategic direction and shift focus from service to discounted name brands. In 1981, Schulz added photography, home office products, video equipment, and televisions to Sound of Music’s selection, driving his sales per square foot up to $350, compared to an industry average of $150 to $200. In 1983, inspired by the 12,000-square-foot stores of the Federated Group, Schulze decided to venture into superstores. Schulze renamed the company “Best Buy” to emphasize their commitment to discounted, value products.

Concept I: 1983-1988

In 1983, Best Buy opened its first superstore in Burnsville, Minnesota. It featured a wide assortment of discounted brand-name merchandise, central service and warehouse distribution, and above all, low prices. Household appliances and VCRs were added to expand the line. In 1985, Best Buy raised $8 million in an initial public offering and was listed on the NASDAQ. This helped fund three new superstores outside the Twin Cities area. A second public offering in 1986 raised $33.6 million, funding a 12-store expansion. CDs and an expanded line of photo equipment were added to the product line. In 1987, Best Buy debuted on the NYSE with an offering of 8.3 million shares to fund more growth. Sales more than doubled in 1987 for the fourth consecutive year, reaching $240 million with operating profits of $15.3 million. In 1988, personal computers were added to the product line.

Four years into the superstore strategy, Highland, the industry number two, lowered its prices in Minneapolis, Best Buy’s heartland, selling at 10% above cost. Best Buy margins fell sharply. In search of a new approach, Best Buy conducted consumer research and discovered the customers had a poor image of superstores. They saw shopping as a stressful experience and felt pressured by salespeople into buying expensive items. Customers wanted an enjoyable shopping experience and a no-pressure selling environment.

Concept II: 1989-1994

In response to this consumer research, Best Buy implemented a ground-breaking “grab-and-go” store format in 1989 called Concept II. Backroom space in stores was turned into sales space and the inventory was put out on display with basic information labels so that customers could see what was in stock and understand the product without explanations from sales staff. Salaried product specialists replaced commissioned sales staff and, rather than pushing products on customers, patiently waited in department centers for customers who sought help. The format proved very popular, and by fiscal 1994, Best Buy operated 151 stores generating $3.0 billion in revenue and $77 million in operating profits. In the process, Best Buy entered Chicago and Texas, Highlands’ core territories. Highland declared bankruptcy soon after.

Concept III: 1995-2002

In 1995, Schulze, anxious to avoid waiting too long to change, decided that it was time to try a new business model. The company began to upgrade, broaden, and promote a wider range of

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products. Best Buy was the first national retailer to add DVD hardware in 1997 and it added high- definition televisions to their selection in 1998. By the end of fiscal 1996, 130 of Best Buy’s 251 stores were Concept III, revenues had grown to $7.2 billion, and Best Buy had displaced Circuit City as the number one consumer electronics retailer.

However, explosive growth and a wide product line caused the company to lose control. Disappointing sales in the 1995 holiday season undermined fiscal 1996 results, and PC inventory write-offs in the fall of 1996 erased profits for fiscal 1997 and resulted in Best Buy’s first quarterly loss as a public company. Best Buy slowed its expansion to between 15 and 20 stores a year, rationalized its inventory and introduced a Standard Operating Platform in every store. Profitability was restored and the growth reignited. In fiscal 2000, Best Buy reached $12.6 billion in revenue with operating profits of $539 million

The new century marked the beginning change of strategy for Best Buy. Management felt that they would saturate the market for warehouse stores by 2005 and so began looking for new growth opportunities. One of these was BestBuy.com, which was launched in early 2000 to sell Best Buy’s full product line on the Internet. The company also made a number of acquisitions, including Magnolia (home theater), Future Stores (a Canadian consumer electronics chain with 104 outlets), Geek Squad (an in-store and in-home service business), and Musicland (music CD’s). Musicland was subsequently divested but Best Buy continued to invest in the other businesses, integrating Geek Squad and Magnolia into its stores.

Fiscal 2002 sales reached $19.6 billion, a 28% increase from the prior year, and operating profits $937 million.

Concept IV: Customer Centricity: 2002-2009

On February 25, 2002, Best Buy announced that Schulze, 61, would step down as CEO on June 30 to be replaced by Brad Anderson, a long-time employee who had started as a stereo salesman. Schulze would remain chairman of the board. Anderson was convinced that although the company was doing well, it should change again. Rather than rely on opening new stores to maintain sales growth he pledged to get more out of current stores and sell more to current customers. A key element of this approach was customer centricity. He identified a number of key customer groups and organized the company around them, launching a loyalty card to help build stronger relationships. Initial attempts to redesign stores to serve these customers better were driven by top management with little effect, so instead store associates were empowered to make the changes and same-store sales grew strongly. However, this required introducing a new set of Agile Operating Procedures that provided each store with more flexibility to choose and display merchandise. The

customer centricity program drove same-store sales growth of 8.4%.7 By the end of fiscal 2007, all 822 Best Buy stores had completed the transition to customer centricity.

Another one of Anderson’s strategic imperatives was “win-in-the home.” To meet this need, he

expanded Geek Squad to 12,000 service personnel by 2006, generating about $1 billion in revenues.8 Lehman Brothers analyst Alan Rifkin commented, “(Geek Squad) fits perfectly in that it’s a concerted effort on service. There are many stores selling these must-have items, at the end of the day we think service levels are important because of the complexity of the products and the fluidity that these

products are coming down the pipeline.”9 In addition to home installation and support, the Geek Squad also began to expand into the small business market with intent to achieve the same recognition and market dominance as they had with the home sector. Tom Healy, executive vice- president of Best Buy for business, stated, “We have a great customer acquisition tool in the store

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with 80 million unique customers, many of whom are small business customers. I don’t think there is anybody else who is as well positioned to take advantage of the next big thing. There is nowhere for

customers to go to incorporate that into their businesses.”10

The success of Geek Squad attracted a variety of imitators. In fiscal 2007, Circuit City launched firedog(SM). In 2008, Wal-Mart expressed interest in the home installation/repair market and soon

after it contracted with Dell to provide these services for its customers.11 At the same time, Wal-Mart began opening Sam’s Club Business Centers, targeting the same small business owners that Best Buy

was actively courting.12 Target also began offering installation and repair services through Zip Express, a privately held company, and Staples expanded its EasyTech services to better assist small

business owners. 13

Anderson was also committed to “win-in-entertainment.” He launched the first Magnolia store- within-a store in 2005 and rolled Magnolia out to 300 Best Buy stores by 2007. Musicland was more of a problem, performance declined significantly immediately after the 2001 acquisition, so Anderson divested the business in fiscal 2004.

Product Expansions

In fiscal 2006, Best Buy acquired Pacific Sales Kitchen, a high-end home appliance chain with 14 outlets. By fiscal 2010 they had added 21 more outlets.

Also in fiscal 2006, in partnership with Carphone Warehouse, a British cellular retailer, Best Buy

opened nine Best Buy Mobile stores in Manhattan.14 Five of these stores were stand-alone and located in trendy neighborhoods, such as Chelsea and Union Square, and the remaining four were located inside existing Best Buy locations. Scott Moor, the marketing director at Best Buy Mobile, commented that although “Best Buy has been in the cellphone business for sometimes” a decision was made to reconsider their marketing of phones because “we are becoming a more customer-centric

organization.”15 While Best Buy had a 20% market share in consumer electronics, it only sold three

million cellphones a year, a 2% share of the market. 16

By the end of fiscal 2009, Best Buy had rolled out mobile stores-within-stores to all of its US

locations and added 32 more stand-alone locations in the USA, bringing the total to 38.17

During this period, on January 10, 2007 Apple released its iPhone and by end of 2009 had sold nearly 25 million phones and quickly captured 14% of the smartphone market.18 Although Best Buy was the first US national retailer to sell Apple’s iPhone, Apple products only carried profit margins of

around 17%.19 Apple also actively sold its products on-line and through its own stores. Many telephone service providers also actively marketed a wide range of mobile devices through their own retail channels, posing significant competition to Best Buy.

Best Buy partnered with both Apple and Dell to carry their products, expanded their warranty line, and increased their SKUs for small businesses. Jeff Severts, VP of Services, commented on the expansion of warranty options, “Anybody can sell them a TV or a computer or a mobile phone. The real value is in finding someone who can get this stuff to work for you and can keep it working. This

is the area where Best Buy is moving aggressively to create options for customers.” 20 Small businesses remained a key focus and David Hemler, president of Best Buy for Business, asserted, “We know that those customers are there. The data we’ve looked at shows about 3.4 million active small-business customers at Best Buy. The secret is: how do we turn on our stores to engage those

customers while they’re in there with their business hats on?” 21

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In fiscal 2008, Best Buy acquired Speakeasy, a broadband voice and information technology services provider to small businesses.

In fiscal 2009, Best Buy Co signed a deal to acquire digital music provider Napster Inc. for $54 million, giving the retailer a means of taking on Wal-Mart in the increasingly important on-line

distribution channel.22

Internationalization

Through this period, Anderson also actively expanded the company internationally. In May of 2006, Best Buy purchased a majority stake in Jiangsu Five Star Appliance Co., China’s fourth-largest

appliance and electronics retailer, for $180 million.23 Five Star operated 134 stores in 7 of China’s 34 provinces. Five Star’s business model depended on manufacturers to supply sales people while it provided the display space. By December, Best Buy had announced that it would open its first flagship store based on the Best Buy model in China.24 Ellen Wang, a project manager for Best Buy, said that the company would “distinguish itself from competitors in China by staffing the store with Best Buy employees paid regular salaries, not sales commissions” as well as by stocking a mix of home appliances and consumer electronics that were generally not sold under one storefront in

China.25 Best Buy opened four more flagship stores in fiscal 2009, bringing their total to five.

Best Buy also continued to expand its Canadian presence, growing their Future Shop stores to a total of 139 stores in fiscal 2009, up from 104 in 2003, and adding 58 stores competing under the Best Buy name.

In fiscal 2007, Best Buy joint ventured with Carphone Warehouse (CPW) of the U.K. to launch Geek Squad in the U.K. In fiscal 2009, Best Buy acquired a 50% stake in CPW which operated 897 Carphone Warehouse stores in the U.K. and 1,568 Phone House stores throughout continental Europe. As part of the deal, Best Buy acquired CPW’s interest in Best Buy’s US mobile stores. The newly constituted European operation announced that it would open four to five large-format Best Buy stores in the U.K. They also announced their intention to open 100 big-box stores over the next

five years and claim 10% of the European consumer electronics market. 26

Financial Performance

As customer centricity took hold and the product line expanded, financial performance improved significantly. Despite a tough holiday season in 2006 with discounters Wal-Mart and Lowe’s forcing down prices of popular flat-screen televisions and creating a venerable “blood-bath” of holiday

discounts,27 Best Buy achieved sales in fiscal 2007 of $35.9 billion 83% up on 2002, and operating profits of $2.0 billion, an increase of 113%. In January of 2007, Circuit City and Best Buy entered into discussions with manufacturers to prevent a repeat of these discount wars, but the price slashing continued. In the first quarter of fiscal 2008, Best Buy posted an 18% decline in quarterly profits even through sales rose 14%. Regardless of these challenges, Best Buy continued to expand aggressively

and pursue a 5-year plan to double sales. In fiscal 2008, sales grew 11% to $40 billion and operating

profits rose 8% to $2.2 billion million. In June of 2007, the board approved a $5.5 billion buyback of

common shares and raised the quarterly dividend by 30%.28 (See Exhibit 3).

In fiscal 2009, the pressure continued. Sales grew 12%, to $45 billion but operating profits fell to $2.0 billion. Brad Anderson attributed this trouble to the industry, stating, “Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen.

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Best Buy simply can’t adjust fast enough to maintain our earnings momentum for this year.”29 He also recognized the work that Best Buy needs to do in “managing our expenses amid a challenging macro-

economic environment”30 and added that the company doesn’t need to resort to a price war to

compete with discounters.31

In December 2008, just before 2009 fiscal year end in February 2009, all corporate employees were

offered voluntary separation packages in order to reduce corporate expenses. 32

2010–2012: Brian Dunn Becomes CEO

The end of fiscal 2009 marked the end of Bran Anderson’s reign as Best Buy’s CEO; Brian Dunn, previously the president and COO, succeeded him. In Anderson’s seven-year stint as Best Buy’s CEO, the company more than doubled annual revenues from $17.7 billion to $45 billion while store count

increased from a 591 locations in the U.S. and Canada to 3,942 locations in 13 countries. 33 It also marked the end of Circuit City, the industry number two, which was forced into liquidation on January 16, 2009. The loss of a $10 billion competitor promised to relieve some of the competitive pressure of recent years.

Best Buy began fiscal 2010 by promising that capital spending would fall 50% and that there

would be a “substantial reduction” in new store openings. 34 Additionally, Best Buy made sweeping cuts in their sales associates and store management positions. Although the retailer declined to make statistics public, brokerage firm, Sanford C. Bernstein estimated that as many as 8,000 senior sales associates were demoted to positions that would pay half the hourly rate of their old positions. Assistant store manager headcount was reduced and approximately 1,000 salaried jobs were

eliminated. 35 A Best Buy spokeswoman stated that such change “places greater emphasis on

customer-facing employees and provides more focus and clarity to the leadership roles in the store.”36 However, the dramatic staff cuts reminded more than one media source of Circuit City’s ill-fated staff

cuts two years previously. 37

In order to drive growth, Best Buy began testing new product categories, from musical

instruments and exercise equipment to electric scooters and pool tables. 38 It was also looking to

increase high-margin private label sales which had soared 40% during fiscal 2009. 39

The international division continued to be plagued with problems. In the first six months of fiscal 2010, international business generated an operating loss of $42 million compared with a profit of $24

million the previous year. 40 Internal troubles also saw the division’s CEO, CFO, and COO retire in

quick succession.41

Sales in fiscal 2010 rose to 10% $49.7 billion and operating profits 14% to $2.29 billion (see Exhibit 3).

In 2011, competition with online retailers reached new levels and began to substantially impact sales. Amazon released a “price-check” mobile phone application that allowed users to compare offers in stores to the prices on Amazon’s website. Since Amazon, according to a Wells Fargo study, “beats bricks-and-mortar retailers across the board on average electronics prices,” this app represented a dangerous maneuver in Amazon’s war against big-box retailers.42 In fact, by the end of calendar 2010 (roughly in line with fiscal 2011 for Best Buy), Amazon’s electronics and non-media sales had risen 66% to $18 billion and their share of portable audio devices rose to 11% of the market.43 Customers began using Best Buy as a showroom and information center for purchases that they would later make on Amazon. Although Best Buy attempted to compete with Amazon directly

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in 2011 by offering deep Black Friday promotions and free holiday shipping, their profit margins fell

dangerously low and quarterly earnings plunged 29%.44 (See Exhibit 1.)

One advantage Amazon enjoyed over Best Buy was that it didn’t levy sales tax on its purchases. The median sales tax in the USA was 6%, putting Best Buy at a significant disadvantage (see Exhibit 4).

Despite these challenges, Best Buy continued to develop its Best Buy Mobile concept and further expand their domestic product line. At the end of fiscal 2011, Best Buy Mobile had 305 stand-alone mobile stores and had increased their market share to around 5%, with executives planning to reach

20% in the next five years. 45

International operations continued to pose problems. In February 2011, Best Buy announced that it would be closing its flagship stores in China and focusing on expanding the Five Star model. It also

closed recently opened outlets in Turkey and the U.K.46 Brian Dunn confirmed that the European stores “could not overcome the challenging macro environment and did not provide the results we

had expected.” 47

Sales in fiscal 2011 rose 1% to $50.3 billion and operating profits 2% to $2.34 billion (see Exhibit 3).

In fiscal 2012, the pressure mounted. Best Buy bought out CWP in the end of fiscal 2012 for $1.3

billion. Brian Dunn commented, “Going forward, we are capturing the full profits from our Best Buy

Mobile format”48 Domestic product expansion continued with the sale of 3D televisions and tantalizing mentions of electric cars. In response to questions regarding Best Buy’s potential involvement in the electric car sector, Leo Raudys stated simply, ““It’s a new technology; it’s part of

our strategy to get consumers to think of us as the first in the consumer technology.”49

However, Best Buy encountered difficult setbacks in their international division. Sales in Fiscal 2012 rose 1% to $50.7 billion while operating profits fell 54% to $1.1 billion. Net income fell from $1.3 billion in 2011 to a loss of $1.2 billion. Meanwhile, Amazon’s sales world-wide increased from $34 billion to $48 billion over the same period. (See Exhibit 8.)

Dunn announced that Best Buy would be cutting $800 million in costs and back-office jobs

through closing 50 big box stores.50 He also outlined a plan to downsize Best Buy stores by an average

of 10% to better reflect the smaller electronics and the shift toward mobile computing. 51

Less than a month after these announcements, on April 10, 2012, Brian Dunn resigned amidst

accusations of improper conduct.52 Board member G. Mike Mikan took over as interim CEO. On May 14, 2012, after an internal investigation, Dick Schulze stepped down as chairman. At first, he agreed to remain on the board for a year, but on June 7, he resigned from the board in order to “explore all available options” for his 20.1% stake in the company. It was rumored that he was talking with bankers to try to take the company private. Schulze had steered the firm through many crises since the company was founded in 1966. The company and the board would sorely miss his experience. Moreover, the search for a replacement CEO was unlikely to be swift or easy. (See Exhibit 5.)

Over its long history, Best Buy had escaped from many “near death” experiences and reinvented itself many times in the process. What could it do this time to avoid the cherry-picking challenge from broad based discounters like Home Base and Wal-Mart and the rapidly growing on-line global giant, Amazon?

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