Best Buy Vs Walmart And Target 1
Read more!
View more presentations from Chito.
Thursday, October 15, 2009
Some Insightful Feedback from Pollsters
Read more!
I would shop at Best Buy, but I actually find their customer service to be pretty horrible. I do not shop at Wal-Mart because of what I see as their exploitative corporate and labor practices, so I would not buy anything from Wal-Mart or Sam's Club.
I would shop at Best Buy, but I actually find their customer service to be pretty horrible.
However, if you want me to answer the more general question (i.e. am I willing to pay a premium for good customer service), the answer is YES, I am definitely always willing to pay a little extra for excellent customer service.
However, in my experience, Best Buy is NOT a model of good customer service.
Some companies at which I shop, even though they cost a little more, because of their superb customer service are:
(1) Apple
(2) Amica Insurance
(3) Zingerman's mail order.
These are three examples that come to mind of companies with exemplary customer service--they cost more, but I think they are worth it specifically because of their customer service.
______
A Male respondent who preferred the "expertise of blue shirts" over any other Best Buy feature wrote:
If I am buying a gadget, I probably have already been online, reading reviews, finding the best price and probably then ordering from Amazon.
Given the choice, I would not buy electronics or any other 'big ticket' item from Walmart, just every day commodity products.
_____
Another respondent from NW VA wrote:
"I do not and will not shop at Wal Mart due to their business ethics". Read more!
A respondent from Milwaukee wrote:
I do not shop at Wal-Mart because of what I see as their exploitative corporate and labor practices, so I would not buy anything from Wal-Mart or Sam's Club.
I would shop at Best Buy, but I actually find their customer service to be pretty horrible.
However, if you want me to answer the more general question (i.e. am I willing to pay a premium for good customer service), the answer is YES, I am definitely always willing to pay a little extra for excellent customer service.
However, in my experience, Best Buy is NOT a model of good customer service.
Some companies at which I shop, even though they cost a little more, because of their superb customer service are:
(1) Apple
(2) Amica Insurance
(3) Zingerman's mail order.
These are three examples that come to mind of companies with exemplary customer service--they cost more, but I think they are worth it specifically because of their customer service.
______
A Male respondent who preferred the "expertise of blue shirts" over any other Best Buy feature wrote:
If I am buying a gadget, I probably have already been online, reading reviews, finding the best price and probably then ordering from Amazon.
Given the choice, I would not buy electronics or any other 'big ticket' item from Walmart, just every day commodity products.
_____
Another respondent from NW VA wrote:
"I do not and will not shop at Wal Mart due to their business ethics". Read more!
Monday, October 12, 2009
Best Buy vs. Wal-Mart: Is There Room for Both, and Others?
Read more!
Published: April 01, 2009 in Knowledge@Wharton
Is this a David vs. Goliath battle, or should it be more of a truce in an industry where, rather than one foe slaying the other, there is space for both adversaries to co-exist?
With the demise of electronics retailer Circuit City, Best Buy and Wal-Mart Stores are ramping up their struggle to capture added share of the consumer electronics market. Best Buy, the nation's largest specialty electronics retailer, is positioning itself as the provider of quality service and sales help to consumers who are often baffled by high-tech merchandise. The company is focusing on more high-end products and new interactive features to differentiate itself from the big box atmosphere at Wal-Mart.
Wal-Mart, the world's largest retailer, is using its dominance in the global marketplace across all retail categories to position itself as the low-price option in consumer electronics. The chain also has massive reach with consumers. More than 800 million people a year visit a Wal-Mart store to buy everything from groceries to sweatpants to gasoline. In what's seen as an attempt to compete with Best Buy, the chain is adding a new emphasis on electronics, including big-screen televisions and Apple iPods.
Wharton faculty and industry analysts say instead of fighting to the death, both stores can coexist if they follow clearly defined strategies focusing on service and price. "The good thing, the consumer electronics market is big enough that one doesn't have to grow at the expense of the other. They can find their own space in the marketplace and prosper together," says Wharton marketing professor John Zhang.
He and other Wharton faculty predict that Best Buy is likely to gain the biggest share of sales left behind following Circuit City's liquidation in March. After 60 years in business, the Richmond, Va.-based retailer, which peaked with 700 stores and sales of roughly $10 billion, became a casualty of the current recession and competition from Best Buy, Wal-Mart and others.
Best Buy, which announced surprisingly strong full-year sales of $45 billion in March, has 900 U.S. stores and is the nation's largest electronics seller, according to market research firm NPD. Wal-Mart, with total sales of more than $400 billion, does not release figures for individual categories, but NPD estimates that last year it was second to Best Buy in consumer electronics sales, followed by Dell, Circuit City and Apple.
Wharton marketing professor David Reibstein suggests that the key to Best Buy's strategy is offering customers knowledgeable service from a youthful, somewhat geeky sales force identified by their bright blue shirts. He imagines how a consumer confused about whether to buy an LCD or plasma screen television would approach the purchase: "Would I go to Wal-Mart or Best Buy? The answer -- no doubt about it -- is Best Buy. Best Buy has the personnel who [can] help advise me."
Some customers, he says, may have the product knowledge to feel confident about buying electronics off the shelf at Wal-Mart. But for those who do not buy new electronics frequently, the purchase is viewed as expensive and risky. "It's critical to get the right item; for [those people], it turns out that Best Buy is the only real option," says Reibstein. Another key element of Best Buy's strategy is that it will install some of today's more complex electronics systems. "For the person who is risk adverse, the depth of knowledge and the Geek Squad format at Best Buy is a really important component."
Jagmohan S. Raju, another Wharton marketing professor, points out that Best Buy warranties are another way to comfort nervous buyers, although he says consumers generally pay more for that protection than the risk of a product failure justifies. Consumers, he says, tend to buy electronics warranties because they remember vividly when a product breaks, but don't recall the many more times the product performs as expected. Because electronics retailers typically earn strong profit margins from warranty sales, just about every cashier is pushed to try and sell a warranty, Raju adds.
Best Buy might even be considered a "lifestyle" retailer that is able to build a level of intimacy with customers by matching them with gadgets that suit their particular psychic needs, says Wharton marketing professor Peter Fader. "At Best Buy, they really care about what the customer is doing and thinking. [They] want to make their stores into an experience so that customers might say on a Saturday night, 'Let's go see what's going on at the Best Buy.' You don't go to Wal-Mart for fun."
In an interview with the Wall Street Journal on March 16, Best Buy's incoming chief executive officer, Brian Dunn, who started there as a salesman, said the key to his company's success will be engaging the customer. "We want our stores to morph into a series of experiences. To do that, you have to go where the rubber meets the road, the sales floor."
Advantage, Wal-Mart
Wal-Mart's strong suit is its highly efficient operations and supply chain systems, along with an extraordinary customer reach that allows the mass merchandiser to compete effectively in nearly every retail category.
Zhang notes that an emphasis on service over price led to the demise of Tweeter, the high-end electronics retailer whose 94 stores closed in December. Tweeter lost ground to Best Buy because, Zhang says, electronics technology tends to become commoditized over time, and consumers were unwilling to pay a premium for Tweeter. The same dynamic could work against Best Buy in its bid to compete with Wal-Mart.
For a consumer buying a new television set, the big issue is simply size, not the differences in technology that are hard to detect to the untrained eye, Zhang adds. "Given that most of the technology is more or less standardized, people will look for price." In that case, Wal-Mart's scale and its ability to negotiate sharp prices from its vendors will allow it to pass along substantial savings to shoppers. "If I were Best Buy, I would be a little bit scared, given that Wal-Mart is moving in a big way into consumer electronics. Wal-Mart has the scale and a huge customer base."
The consumer electronics market is fluid, with consumers typically visiting two or three stores before making a purchase, according to Zhang. As a result, price becomes a key consideration. Even though Wal-Mart's price is not always lowest, Zhang notes, most consumers perceive that to be the case, thereby making Wal-Mart the choice for price-conscious consumers, particularly during the current economic downturn.
To compete against Wal-Mart, Zhang advises Best Buy to provide a different product mix than its discount competitor. For example, Best Buy could develop multiple versions of products with manufacturers that are just slightly different; in that way, their model numbers could not be directly compared to those at Wal-Mart by shoppers online.
Meanwhile, he notes, Wal-Mart carries considerable sway with manufacturers because it can offer floor space for myriad products. For example, Wal-Mart can offer space to LG for consumer electronics, but also many models of LG's home appliances and computers. "As leverage, Wal-Mart can say, 'I will let you sell other products if you give me a better deal on the electronics.'"
Best Buy should try to avoid the common retailing mistake of making its stores totally uniform, says Zhang. Best Buy could use micromarketing techniques to compete against Wal-Mart on a store-by-store basis depending on the distance of its stores to the nearest Wal-Mart. Under this strategy, Best Buy stores closer to Wal-Mart locations should pay closer attention to price than others with the luxury of more distance.
In addition, he suggests, Best Buy should make the most of its low-price guarantee, which provides peace of mind to consumers most concerned with price. At the same time, the guarantee would not have a major impact on margins because, in practice, only about 15% of shoppers actually make an effort to find a lower price elsewhere.
Wal-Mart, for its part, could become even stronger if it began to develop better relationships with customers, says Zhang. The company falls short in developing these connections because it does not emphasize loyalty programs. For example, Wal-Mart could offer points for purchases of groceries and other necessities that could then be put toward big-ticket consumer electronics. "Wal-Mart has a lot of touch points with the consumer and could leverage the other products in the store," says Zhang.
Buying from the Blue Shirts
While it is possible that customers will soak Best Buy salespeople for their knowledge and advice, and then drive across town to actually purchase items at Wal-Mart, Fader says most consumers are not likely to do that. "If you really develop a relationship with a good salesperson in the blue shirt, there's going to be a strong inclination to buy from that person. Often, people think it's awkward to say, 'I'll come back next week' or 'I'll think about it some more.'"
Raju points out that the fate of all electronics retailers is often tied to the product development cycle in the industry. Best Buy, he says, rose to its current position largely on sales of the DVD player which, in its early days, was a breakthrough product that initially cost up to $800. "Now they are banking on wide screen televisions. They rely on innovation from the industry, [which brings] people into their stores. That's what makes their business thrive."
According to faculty, GPS systems are a current business driver, while low-priced, lightweight netbooks and reading devices, similar to the Kindle, are potential big sellers in the future.
David Schick, a managing director at Stifel Nicolaus Equity Research, who follows Best Buy, says the last major product -- flat panel televisions -- will continue to become commoditized through 2010. He predicts the next revolutionary technology will be 3DTV, which is still about five years away.
Schick points out that while Best Buy and Wal-Mart are the leaders in consumer electronics retailing, Target, Costco, BJ's Wholesale and online retailer Amazon are also competitors in the consumer electronics market. "The truth is the bulk of retail is outside the channel." He says that technology enthusiasts are willing to buy at a specialty retailer and pay top prices early in the product cycle. As time goes on and many consumers become familiar with a new gadget, they are willing to buy them at mass merchandisers or online. The retail distribution channel may also change as manufacturers become a more important part of the landscape -- following the same path as Apple, which has opened its own chain of popular retail outlets.
As a general rule, all retailers in the consumer electronics space must concentrate on their strengths and ignore the noise from competitors, says Fader. "That's what happened at Circuit City. It was neither fish nor fowl. They couldn't match the efficiency of Wal-Mart, but they couldn't match the relationship aspects of Best Buy."
He points to Fry's Home Electronics, the West Coast retailer with a strong reputation for service, as another potential factor. "This overall market has room for multiple players at the table, especially if they find ways to draw lines among each other. The danger is if one company attempts to beat the other at its own game." Best Buy, he says, should avoid the temptation to cut prices at the expense of quality sales and service, and Wal-Mart should be wary of adding salespeople who are not fully able to compete with Best Buy.
"That would be mutually assured destruction," Fader states. "If they each stick to their piece and grow that piece, they can expand the total pie rather than carve it up. The world is big enough for both of them. They would do well to ignore each other."
Read more!
Published: April 01, 2009 in Knowledge@WhartonIs this a David vs. Goliath battle, or should it be more of a truce in an industry where, rather than one foe slaying the other, there is space for both adversaries to co-exist?
With the demise of electronics retailer Circuit City, Best Buy and Wal-Mart Stores are ramping up their struggle to capture added share of the consumer electronics market. Best Buy, the nation's largest specialty electronics retailer, is positioning itself as the provider of quality service and sales help to consumers who are often baffled by high-tech merchandise. The company is focusing on more high-end products and new interactive features to differentiate itself from the big box atmosphere at Wal-Mart.
Wal-Mart, the world's largest retailer, is using its dominance in the global marketplace across all retail categories to position itself as the low-price option in consumer electronics. The chain also has massive reach with consumers. More than 800 million people a year visit a Wal-Mart store to buy everything from groceries to sweatpants to gasoline. In what's seen as an attempt to compete with Best Buy, the chain is adding a new emphasis on electronics, including big-screen televisions and Apple iPods.
Wharton faculty and industry analysts say instead of fighting to the death, both stores can coexist if they follow clearly defined strategies focusing on service and price. "The good thing, the consumer electronics market is big enough that one doesn't have to grow at the expense of the other. They can find their own space in the marketplace and prosper together," says Wharton marketing professor John Zhang.
He and other Wharton faculty predict that Best Buy is likely to gain the biggest share of sales left behind following Circuit City's liquidation in March. After 60 years in business, the Richmond, Va.-based retailer, which peaked with 700 stores and sales of roughly $10 billion, became a casualty of the current recession and competition from Best Buy, Wal-Mart and others.
Best Buy, which announced surprisingly strong full-year sales of $45 billion in March, has 900 U.S. stores and is the nation's largest electronics seller, according to market research firm NPD. Wal-Mart, with total sales of more than $400 billion, does not release figures for individual categories, but NPD estimates that last year it was second to Best Buy in consumer electronics sales, followed by Dell, Circuit City and Apple.
Wharton marketing professor David Reibstein suggests that the key to Best Buy's strategy is offering customers knowledgeable service from a youthful, somewhat geeky sales force identified by their bright blue shirts. He imagines how a consumer confused about whether to buy an LCD or plasma screen television would approach the purchase: "Would I go to Wal-Mart or Best Buy? The answer -- no doubt about it -- is Best Buy. Best Buy has the personnel who [can] help advise me."
Some customers, he says, may have the product knowledge to feel confident about buying electronics off the shelf at Wal-Mart. But for those who do not buy new electronics frequently, the purchase is viewed as expensive and risky. "It's critical to get the right item; for [those people], it turns out that Best Buy is the only real option," says Reibstein. Another key element of Best Buy's strategy is that it will install some of today's more complex electronics systems. "For the person who is risk adverse, the depth of knowledge and the Geek Squad format at Best Buy is a really important component."
Jagmohan S. Raju, another Wharton marketing professor, points out that Best Buy warranties are another way to comfort nervous buyers, although he says consumers generally pay more for that protection than the risk of a product failure justifies. Consumers, he says, tend to buy electronics warranties because they remember vividly when a product breaks, but don't recall the many more times the product performs as expected. Because electronics retailers typically earn strong profit margins from warranty sales, just about every cashier is pushed to try and sell a warranty, Raju adds.
Best Buy might even be considered a "lifestyle" retailer that is able to build a level of intimacy with customers by matching them with gadgets that suit their particular psychic needs, says Wharton marketing professor Peter Fader. "At Best Buy, they really care about what the customer is doing and thinking. [They] want to make their stores into an experience so that customers might say on a Saturday night, 'Let's go see what's going on at the Best Buy.' You don't go to Wal-Mart for fun."
In an interview with the Wall Street Journal on March 16, Best Buy's incoming chief executive officer, Brian Dunn, who started there as a salesman, said the key to his company's success will be engaging the customer. "We want our stores to morph into a series of experiences. To do that, you have to go where the rubber meets the road, the sales floor."
Advantage, Wal-Mart
Wal-Mart's strong suit is its highly efficient operations and supply chain systems, along with an extraordinary customer reach that allows the mass merchandiser to compete effectively in nearly every retail category.
Zhang notes that an emphasis on service over price led to the demise of Tweeter, the high-end electronics retailer whose 94 stores closed in December. Tweeter lost ground to Best Buy because, Zhang says, electronics technology tends to become commoditized over time, and consumers were unwilling to pay a premium for Tweeter. The same dynamic could work against Best Buy in its bid to compete with Wal-Mart.
For a consumer buying a new television set, the big issue is simply size, not the differences in technology that are hard to detect to the untrained eye, Zhang adds. "Given that most of the technology is more or less standardized, people will look for price." In that case, Wal-Mart's scale and its ability to negotiate sharp prices from its vendors will allow it to pass along substantial savings to shoppers. "If I were Best Buy, I would be a little bit scared, given that Wal-Mart is moving in a big way into consumer electronics. Wal-Mart has the scale and a huge customer base."
The consumer electronics market is fluid, with consumers typically visiting two or three stores before making a purchase, according to Zhang. As a result, price becomes a key consideration. Even though Wal-Mart's price is not always lowest, Zhang notes, most consumers perceive that to be the case, thereby making Wal-Mart the choice for price-conscious consumers, particularly during the current economic downturn.
To compete against Wal-Mart, Zhang advises Best Buy to provide a different product mix than its discount competitor. For example, Best Buy could develop multiple versions of products with manufacturers that are just slightly different; in that way, their model numbers could not be directly compared to those at Wal-Mart by shoppers online.
Meanwhile, he notes, Wal-Mart carries considerable sway with manufacturers because it can offer floor space for myriad products. For example, Wal-Mart can offer space to LG for consumer electronics, but also many models of LG's home appliances and computers. "As leverage, Wal-Mart can say, 'I will let you sell other products if you give me a better deal on the electronics.'"
Best Buy should try to avoid the common retailing mistake of making its stores totally uniform, says Zhang. Best Buy could use micromarketing techniques to compete against Wal-Mart on a store-by-store basis depending on the distance of its stores to the nearest Wal-Mart. Under this strategy, Best Buy stores closer to Wal-Mart locations should pay closer attention to price than others with the luxury of more distance.
In addition, he suggests, Best Buy should make the most of its low-price guarantee, which provides peace of mind to consumers most concerned with price. At the same time, the guarantee would not have a major impact on margins because, in practice, only about 15% of shoppers actually make an effort to find a lower price elsewhere.
Wal-Mart, for its part, could become even stronger if it began to develop better relationships with customers, says Zhang. The company falls short in developing these connections because it does not emphasize loyalty programs. For example, Wal-Mart could offer points for purchases of groceries and other necessities that could then be put toward big-ticket consumer electronics. "Wal-Mart has a lot of touch points with the consumer and could leverage the other products in the store," says Zhang.
Buying from the Blue Shirts
While it is possible that customers will soak Best Buy salespeople for their knowledge and advice, and then drive across town to actually purchase items at Wal-Mart, Fader says most consumers are not likely to do that. "If you really develop a relationship with a good salesperson in the blue shirt, there's going to be a strong inclination to buy from that person. Often, people think it's awkward to say, 'I'll come back next week' or 'I'll think about it some more.'"
Raju points out that the fate of all electronics retailers is often tied to the product development cycle in the industry. Best Buy, he says, rose to its current position largely on sales of the DVD player which, in its early days, was a breakthrough product that initially cost up to $800. "Now they are banking on wide screen televisions. They rely on innovation from the industry, [which brings] people into their stores. That's what makes their business thrive."
According to faculty, GPS systems are a current business driver, while low-priced, lightweight netbooks and reading devices, similar to the Kindle, are potential big sellers in the future.
David Schick, a managing director at Stifel Nicolaus Equity Research, who follows Best Buy, says the last major product -- flat panel televisions -- will continue to become commoditized through 2010. He predicts the next revolutionary technology will be 3DTV, which is still about five years away.
Schick points out that while Best Buy and Wal-Mart are the leaders in consumer electronics retailing, Target, Costco, BJ's Wholesale and online retailer Amazon are also competitors in the consumer electronics market. "The truth is the bulk of retail is outside the channel." He says that technology enthusiasts are willing to buy at a specialty retailer and pay top prices early in the product cycle. As time goes on and many consumers become familiar with a new gadget, they are willing to buy them at mass merchandisers or online. The retail distribution channel may also change as manufacturers become a more important part of the landscape -- following the same path as Apple, which has opened its own chain of popular retail outlets.
As a general rule, all retailers in the consumer electronics space must concentrate on their strengths and ignore the noise from competitors, says Fader. "That's what happened at Circuit City. It was neither fish nor fowl. They couldn't match the efficiency of Wal-Mart, but they couldn't match the relationship aspects of Best Buy."
He points to Fry's Home Electronics, the West Coast retailer with a strong reputation for service, as another potential factor. "This overall market has room for multiple players at the table, especially if they find ways to draw lines among each other. The danger is if one company attempts to beat the other at its own game." Best Buy, he says, should avoid the temptation to cut prices at the expense of quality sales and service, and Wal-Mart should be wary of adding salespeople who are not fully able to compete with Best Buy.
"That would be mutually assured destruction," Fader states. "If they each stick to their piece and grow that piece, they can expand the total pie rather than carve it up. The world is big enough for both of them. They would do well to ignore each other."
Sunday, October 11, 2009
Best Buy's Customer Centricity Model
Read more!
There are many critical and relevant lessons to be learned from Best Buy's customer centricity model. In this blog, we will be dissecting this model's strengths and weaknesses.. There are many critical and relevant lessons to be learned from Best Buy's customer centricity model. In this blog, we will be dissecting this model's strengths and weaknesses.
Blue Shirts focused on developing a deep understanding of the customer’s needs
.
Read more!
Best Buy customer-centricity model consists of a very meticulous kind of stereotyping—the idea was to identify the most profitable customers and “shower them with knowledge and attention.” (1)
Their Major Customer Segments are
1. Barry -- Affluent Professionals who want the best technology and entertainment experience
2. Buzz --- Active younger males who want the latest technology and entertainment
3. Ray -- Family man who want technology to improve their lives -- practical adopters of technology and entertainment
4. Jill -- Busy suburban mom who want to enrich their children's lives with technology and entertainment.
In 2005, Brad Anderson became CEO of a $30-billion-a-year company that was Number 1 in consumer electronics for the last ten years, accounting for 16.5% of the market share.
But in 2006, Brad Anderson felt that his company was fully in the "maturity" phase of the life cycle, and sensed that profits could soon decline.
The decision to turn to the customer-centric model was fueled by the need to gain a competitive edge over similar warehouse stores like Wal-Mart, the now defunct Circuit City chains and Target.
After a broad market analysis, Best Buy determined that customers signaled that they cared more about customer service than deals in pricing.
CEO Brad Anderson then spearheaded the customer-centric model to make his chain
with nearly 120,000 employees more "talent powered and customer driven." But during that time when the economy was good, customers were willing to spend more to be given special attention at stores.
Evaluation:
Best Buy tried to cover too much ground--it was trying to sell both to the barrys (older men with money) and those looking for deals.
"Centralizing" a store requires a huge investment , tailoring them to cater directly to the sales and demographics.
Instead, companies like Apple, spend enormous amounts of money on their brands in order to build an image. Although there are mp3 players with more functions than ipods (and cheaper), Apple still dominates the market. If you do not have an ipod, you aren't just cool, you're cheap.
Best Buy should have stuck to catering only to customers shopping for high end products OR the deal seekers.
Weakness:
What began as a good idea became too far reaching. Too much money was spent n training and hiring its employees.
The in-between space of shelling out customer centricity in more and more of its stores and integrating the centricity model into every business decision, became Best Buy's weakness.
Blue Shirts become customers “techy friends,” there is a “hip” element in the image. It is a flip on the usual stereotype of nerds/techy types
Blue Shirts focused on developing a deep understanding of the customer’s needs
They were not just experts on products but solutions (knowing how to bundle products and what to offer customers depending on their needs)
See section “centricity” for an explanation of the method: http://money.cnn.com/magazines/fortune/fortune_ archive/2006/04/03/8373034/ How is Best Buy doing in 2009?
The central question is whether it was smart for Best Buy to apply its centricity model to every part of its business
Centricity stores are now run like a small business, and managers are expected to develop relationships with the most profitable customers—they are given the freedom to tailor stores around a neighborhood’s interest
Best Buy has acquired various companies that it also applies the centricity method to—at some point, Best Buy has spread itself too thin.
My take on it: centricity works in certain specialized populations but it becomes too costly if it is overly-relied on
(1) Rajiv Lal, Carin-Isabel Knoop and Irina Tarsis, "Best Buy Co., Inc.: Customer-Centricity", Harvard Business School, Oct 16, 2006
Tuesday, October 6, 2009
Wal-Mart Sharpens Its Pricing Pincers
Read more!
By John Jannarone, Oct 6, 2009
Read more!
By John Jannarone, Oct 6, 2009Investors hoping for a big retail performance next year should beware the Wal-Mart effect.
In a way, the recession has been a break for the world's biggest retailer, directing more traffic to its stores at the expense of pricier rivals. And while many retailers reduced spending and slashed prices, Wal-Mart Stores has actually spent more and avoided aggressive price cuts.
But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.
That could put Wal-Mart's smaller rivals further on the defensive. Take grocery stores. J.P. Morgan's Charles Grom says prices of identical baskets of 31 products have fallen 14.4% between January and September at Kroger, while Safeway has seen a 9.7% decline. Wal-Mart, meanwhile, has only lowered prices by 2.6%.
Even so, Wal-Mart is still cheaper. Its basket costs $92.77, compared with $100.98 at Kroger and $113.03 at Safeway. If Wal-Mart gets more aggressive in using its scale, rival grocers will likely have to cut prices further, translating into gross-margin declines.
Other rivals such as Best Buy could also suffer if Wal-Mart offers better deals on consumer electronics. Best Buy already saw its U.S. gross margins decline 0.6 percentage point last quarter as it competed with Wal-Mart and Amazon.com. While the economy will probably be better for retailers next year, investors should remember how fiercely Wal-Mart can compete.
In a way, the recession has been a break for the world's biggest retailer, directing more traffic to its stores at the expense of pricier rivals. And while many retailers reduced spending and slashed prices, Wal-Mart Stores has actually spent more and avoided aggressive price cuts.
But with comparable-store sales barely growing, Wal-Mart appears ready for an offensive that could hobble rivals' hopes for a sharp profit rebound. Following unusually high gross-margin growth in recent quarters, Wal-Mart Chief Executive Mike Duke told The Wall Street Journal Thursday he expects gross margins to be more stable. That could mean the company will cut prices faster and put more cheap products on its shelves.
That could put Wal-Mart's smaller rivals further on the defensive. Take grocery stores. J.P. Morgan's Charles Grom says prices of identical baskets of 31 products have fallen 14.4% between January and September at Kroger, while Safeway has seen a 9.7% decline. Wal-Mart, meanwhile, has only lowered prices by 2.6%.
Even so, Wal-Mart is still cheaper. Its basket costs $92.77, compared with $100.98 at Kroger and $113.03 at Safeway. If Wal-Mart gets more aggressive in using its scale, rival grocers will likely have to cut prices further, translating into gross-margin declines.
Other rivals such as Best Buy could also suffer if Wal-Mart offers better deals on consumer electronics. Best Buy already saw its U.S. gross margins decline 0.6 percentage point last quarter as it competed with Wal-Mart and Amazon.com. While the economy will probably be better for retailers next year, investors should remember how fiercely Wal-Mart can compete.
Monday, October 5, 2009
Best Buy's Giant Gamble
Read more!
By Matthew Boyle, March 29, 2006
NEW YORK (FORTUNE Magazine) - Wander around the executive suite at the Minneapolis headquarters of Best Buy, and near the CEO's office you'll encounter a strange tableau.
It's a mock "retail hospital"--including a row of truncated beds in which effigies of stricken retailers like Kmart and Woolworth, the old five-and-dimes, lie with their corporate logos propped up on pillows and with their abysmal financial results displayed on bedside charts. Declares a sign nearby: THIS IS WHERE COMPANIES GO WHEN THEIR STRATEGIES GET SICK. Keeping Best Buy (Research) out of those beds -- and staying a jump ahead of scary rivals like Wal-Mart (Research) and Costco (Research) -- is the challenge that Brad Anderson, Best Buy's jolly gambler of a CEO, wants his people to focus on.
The $30-billion-a-year company has ruled consumer electronics retailing for ten years by popularizing the superstore. Today its yellow-tag logo adorns more than 930 spacious, shrewdly located stores amply stocked with the latest flat-panel TVs, game consoles and discs, home-computing gear, and appliances.
Best Buy accounted for fully 17 percent of the consumer electronics market in the U.S. and Canada last year. For investors the payoff has been big: Throughout the 1990s Best Buy's earnings per share grew faster than Microsoft's, and its shareholder returns bested Intel's.
But the mock hospital is a reminder that in the volatile, low-margin retailing realm, complacency brings doom. Because of that awareness, Anderson has been willing to roll the dice again and again throughout a legendary retailing career, junking perfectly good business models in favor of high-risk innovations.
"When most of us say, 'Well, I'm more comfortable where I'm at,' " says CFO Darren Jackson, "Brad pushes us around the next corner."
Changing the business formula -- again
Anderson now is out to blow up Best Buy's entire success formula -- by shifting the company's focus from pushing gadgets to catering to customers. Known internally as customer-centricity, the plan is so far-reaching and risky that last year, when Best Buy announced that clumsy execution had hurt third-quarter results and that same-store sales growth had been sluggish, its stock price plunged 12 percent, to $44, in a single day.
Analysts also fretted that the company might be juggling too much -- Best Buy is preparing to open its first stores in China, seeding U.S. cities with technology boutiques, and recruiting techies by the thousands to expand its Geek Squad service business. Though a post-holiday surge has brought the share price above $57 -- most analysts now recommend the stock -- Anderson's great transformation has only begun.
"Whether we're doing it in the right way is a highly challengeable premise," he says. And he knows the risks: If the strategy fails, Best Buy could end up a consumer electronics also-ran, like those retailers in the mock hospital.
Working his way up the ranks
Brad Anderson does not look like a gambler. At 56, he has warm blue eyes, a hearty laugh, and an easygoing, self-deprecating manner. The son of a Lutheran pastor in Minneapolis, he started at Best Buy when it was a struggling regional chain called Sound of Music, way back in 1973.
Business during that oil-crisis year was so slow that it took Anderson two weeks to make his first sale, a set of Bose 901 speakers he had to drive 70 miles to install for the customer. The measly commission hardly paid for the gas.
But to Anderson that was better than losing the deal. "It was so frustrating to be unsuccessful that I didn't care that it wasn't a rational commitment of time," he recalls.
The company expanded and Anderson worked his way up, becoming founder Dick Schulze's right-hand man in 1981. In the 1980s boom, the two opened superstores and gradually built Best Buy into a Midwestern power. But unlike the long parade of regional players that blossomed and died -- from Crazy Eddie to Highland -- Best Buy changed and grew.
Its most controversial innovation came in 1989, when Best Buy stopped paying commissions to its sales staff and instead put them on salary. Among manufacturers like Toshiba and Hitachi that depended on salespeople to push premium-priced items, the move went over "like a fart in church," a former Best Buy executive recalls. But customers liked the no-pressure atmosphere in Best Buy stores, and overall revenues grew at a 25 percent-a-year clip, enabling Best Buy to far outpace its rivals.
The Schulze and Anderson approach set Best Buy on the path of a 12-year expansion. It entered markets like Chicago, Philadelphia, and Boston and became the biggest seller of home PCs in 1995, just in time for the Internet boom. In 1996 it surpassed Circuit City (Research) to become the nation's top consumer electronics retailer.
But Best Buy's big gambles did not always pay off. Hoping to wield more influence in the music industry, the company paid $696 million to acquire Musicland, a mall-based retailer of CDs, in early 2001. The timing could not have been worse -- Internet downloads soon crippled CD sales, and the acquisition became a financial drag.
Hard times
Schulze had long planned to have Anderson succeed him. But when Anderson became CEO in June 2002 (Schulze became chairman), economic shock waves from 9/11 had sapped demand across the industry, and sluggish sales, combined with a write-off of Musicland's goodwill, sent Best Buy's stock plunging.
Worse for Best Buy, Wal-Mart and Costco were ramping up their consumer electronics offerings. Direct seller Dell (Research) was gaining market share too. Anderson moved quickly to stave off the mass merchants.
That October, Best Buy bought Geek Squad, a Minneapolis startup that specialized in repairing and installing PCs. Though it had just $3 million in revenues and 50 employees, Anderson knew that digital devices and home networks were growing in complexity and that the technical services market had huge potential. (Best Buy today pegs the small-business and home services market at more than $20 billion a year.)
Better still, Anderson figured, Wal-Mart and its ilk were never going to provide the help many customers would need. Within a year Best Buy had Geek Squad "precincts" in more than 20 stores; by 2005 the geeks had set up shop in all Best Buys.
Creative solutions
Anderson faced another huge challenge as CEO: Wall Street had come to expect growth of 20 percent a year. But having saturated North America, Best Buy could no longer rely entirely on adding new stores. To the consternation of his management team, the new CEO would disappear for weeks at a time, going to conferences outside the electronics industry in search of ideas.
Anderson also invited big thinkers to Minneapolis. Among them was Larry Selden, a professor at Columbia's business school, who laid out a theory about where most businesses go wrong. Selden argued that, in their hunger for sales, companies are often oblivious to the fact that not all customers are profitable ones. Some are very lucrative to deal with, while others cost more to sell to than the business is worth.
Selden called the first group angel customers and the second demons. By catering to the angels, he argued, companies can reward customers, employees and shareholders alike. (Selden is co-author, with FORTUNE's Geoffrey Colvin, of the 2003 book, "Angel Customers & Demon Customers.") Selden's philosophy was just what Anderson had been looking for. In late 2002 he started preaching the gospel of centricity to upper management.
Centricity
In short, here's how it works: Figure out which customers make you the most money, segment them carefully, then realign your stores and empower employees to target those favored shoppers with products and services that will encourage them to spend more and come back often. By the summer of 2003, Best Buy was already testing the concept in a few dozen stores.
To see centricity in action, let's meet Barry, Jill, Buzz, Ray, and a person we'll call Mr. Storefront. They're archetypes of the lucrative angel groups Best Buy covets: Barry is an affluent tech enthusiast; Jill, a busy suburban mom; Buzz, a young gadget fiend; Ray, a price-conscious family guy; and Mr. Storefront owns a small business. Other segments interest Best Buy too, like young single women (Carrie) and empty-nesters (Helen and Charlie), but for now the company is focusing its redesigns on the core five.
Best Buy's researchers comb through reams of sales and demographic data to determine whether a particular location should be tailored to, say, Ray or Buzz. Nearly 40 percent of the 300 stores that have been redone aim at Barry -- in them you'll find a separate department of home-theater systems, expert salesmen, and specialists in mobile electronics.
Jill stores feature personal shopping assistants (PSAs) who know how to steer a homemaker to the right digital camera for her family. Buzz stores have broad assortments of video games. Stores can target more than one segment -- Jill and Barry departments often share a location -- and a handful of Best Buys, like the one in the Dallas suburb of Frisco, have all five segments going at once.
"Centrizing" a store is a big investment -- a typical Barry department alone requires as much as $600,000 for lighting and fixtures. Best Buy also invests in schooling employees in financial metrics such as return on invested capital so that they can gauge for themselves the effectiveness of merchandising displays. (Recent example: Buzz departments have an area where kids can try out Dance Pads, a video game accessory you activate with your feet.) Specialized salespeople, such as PSAs and home-theater experts, get additional training that may last weeks.
When centricity works, it can pay off in unusual ways. Reagan Dobbs, 20, is a lanky, goateed salesman at the Best Buy in Grapevine, Texas, under the flight path of the Dallas/Fort Worth airport. The store was redone in July (it's a Jill/Barry combo store), and Dobbs learned centricity's principles in two weekend workshops.
It didn't take him long to decide his store was neglecting at least one customer need. Megachurches are a hot phenomenon in the Dallas metroplex, yet Best Buy's assortment of contemporary Christian music was anemic. So Dobbs visited churches, learned which bands the faithful liked, and came up with a proposal for a much broader assortment of Christian rock and folk.
His bosses had him take the plan all the way to headquarters. Sales of contemporary Christian music in the Grapevine store have risen from 2 percent of music sales to 6 percent since November, and the idea is being taken up by Best Buy stores across the region. Just as important, empowering people like Dobbs has helped lower Best Buy's employee turnover from 81 percent last year to 69 percent now.
A few bumps in the road
That doesn't make the shift to centricity any less risky, however. Emboldened by the results from the first few dozen stores it segmented, where same-store sales grew at three times the rate of regular stores, Best Buy stepped on the accelerator in last year's third quarter, ended Nov. 30. In just three months it switched 154 stores to centricity -- three times the number converted before.
"There was an impression that we could do no wrong," says Anderson.
It turned out to be wishful thinking. With its earlier conversions Best Buy had carefully laid the groundwork; it then tinkered ceaselessly to get the mix of products and employees just right. Once that investment paid off, Anderson and his executives assumed subsequent stores could just flip a switch and convert to centricity.
"When we gave the operating manual to the stores for the fall," he says ruefully, "it was four inches thick."
Adds executive vice president John Walden, Anderson's point man for centricity: "The way we deployed was too confusing."
Instead of jumping as it had in previous quarters, same-store sales growth at the renovated stores was only slightly better than the chainwide average (5.4 percent vs. 3.3 percent).
When Anderson faced Wall Street analysts on Dec. 13, he tried lamely to rationalize that transformations aren't always smooth. The analysts didn't buy it, and Best Buy's market cap slid almost $3 billion that day.
"It wasn't one of the highlights of my career," Anderson says. The poor results persuaded him to freeze centricity rollouts for the fourth quarter. (They resumed in March.)
Juggling projects
Some analysts also complained that too many projects were competing for Best Buy's attention. Ramping up the Geek Squad was at the top of the list. A bulwark against the likes of Wal-Mart, the business has cashed in on consumers' desire to protect their PCs from nasty viruses and to create wireless home networks. The geeks can do this at your home, in a Best Buy store, over the phone, or online.
Last year, as consumer demand for flat-screen TVs exploded in the U.S., the need for techies to help with installations soared. That put pressure on Best Buy to recruit. Having added almost 10,000 technicians to its ranks last year, the Geek Squad now is more of a Geek Swarm -- it numbers over 12,000. In fiscal 2007 (beginning Feb. 26), it should earn $280 million in operating profits on just over $1 billion in sales, says Piper Jaffray analyst Mitchell Kaiser.
"I like that Best Buy has all these balls in the air, but they are not all going to work," says Morgan Stanley analyst Greg Melich.
Some, like retail investor Howard Davidowitz, fear that Anderson's revolutionizing is a bridge too far. "If they were doing everything without centricity, I would be optimistic."
But with centricity now in 40 percent of U.S. stores (it will extend to all in two years) and shaping all decisions -- each segment has its own finance manager at headquarters -- the commitment is made. "We will not back down from this," says Schulze.
A strong balance sheet
The confidence to gamble comes in part from Best Buy's balance sheet, which is among the strongest in retail and includes a war chest of over $3 billion in cash.
"This is a rich company," says CSFB analyst Gary Balter.
That not only allows Anderson to invest heavily in centricity and the Geek Squad, but also made the third-quarter shock easier to stomach.
Besides, Anderson loves risk. Remember Best Buy's controversial 1989 shift to a salaried work force? Chief operating officer Brian Dunn, then a store manager, recalls pleading with Anderson not to do it -- he was sure major suppliers would pull their wares. "Think about the next 15 years, not the next five," Anderson told Dunn.
Anderson was right, of course, and the move accelerated Best Buy's ascent. Now the stakes are higher, but radical innovation still represents Anderson's best bet to stay among retail's elite.
Read more!
NEW YORK (FORTUNE Magazine) - Wander around the executive suite at the Minneapolis headquarters of Best Buy, and near the CEO's office you'll encounter a strange tableau.
It's a mock "retail hospital"--including a row of truncated beds in which effigies of stricken retailers like Kmart and Woolworth, the old five-and-dimes, lie with their corporate logos propped up on pillows and with their abysmal financial results displayed on bedside charts. Declares a sign nearby: THIS IS WHERE COMPANIES GO WHEN THEIR STRATEGIES GET SICK. Keeping Best Buy (Research) out of those beds -- and staying a jump ahead of scary rivals like Wal-Mart (Research) and Costco (Research) -- is the challenge that Brad Anderson, Best Buy's jolly gambler of a CEO, wants his people to focus on.
The $30-billion-a-year company has ruled consumer electronics retailing for ten years by popularizing the superstore. Today its yellow-tag logo adorns more than 930 spacious, shrewdly located stores amply stocked with the latest flat-panel TVs, game consoles and discs, home-computing gear, and appliances.
Best Buy accounted for fully 17 percent of the consumer electronics market in the U.S. and Canada last year. For investors the payoff has been big: Throughout the 1990s Best Buy's earnings per share grew faster than Microsoft's, and its shareholder returns bested Intel's.
But the mock hospital is a reminder that in the volatile, low-margin retailing realm, complacency brings doom. Because of that awareness, Anderson has been willing to roll the dice again and again throughout a legendary retailing career, junking perfectly good business models in favor of high-risk innovations.
"When most of us say, 'Well, I'm more comfortable where I'm at,' " says CFO Darren Jackson, "Brad pushes us around the next corner."
Changing the business formula -- again
Anderson now is out to blow up Best Buy's entire success formula -- by shifting the company's focus from pushing gadgets to catering to customers. Known internally as customer-centricity, the plan is so far-reaching and risky that last year, when Best Buy announced that clumsy execution had hurt third-quarter results and that same-store sales growth had been sluggish, its stock price plunged 12 percent, to $44, in a single day.
Analysts also fretted that the company might be juggling too much -- Best Buy is preparing to open its first stores in China, seeding U.S. cities with technology boutiques, and recruiting techies by the thousands to expand its Geek Squad service business. Though a post-holiday surge has brought the share price above $57 -- most analysts now recommend the stock -- Anderson's great transformation has only begun.
"Whether we're doing it in the right way is a highly challengeable premise," he says. And he knows the risks: If the strategy fails, Best Buy could end up a consumer electronics also-ran, like those retailers in the mock hospital.
Working his way up the ranks
Brad Anderson does not look like a gambler. At 56, he has warm blue eyes, a hearty laugh, and an easygoing, self-deprecating manner. The son of a Lutheran pastor in Minneapolis, he started at Best Buy when it was a struggling regional chain called Sound of Music, way back in 1973.
Business during that oil-crisis year was so slow that it took Anderson two weeks to make his first sale, a set of Bose 901 speakers he had to drive 70 miles to install for the customer. The measly commission hardly paid for the gas.
But to Anderson that was better than losing the deal. "It was so frustrating to be unsuccessful that I didn't care that it wasn't a rational commitment of time," he recalls.
The company expanded and Anderson worked his way up, becoming founder Dick Schulze's right-hand man in 1981. In the 1980s boom, the two opened superstores and gradually built Best Buy into a Midwestern power. But unlike the long parade of regional players that blossomed and died -- from Crazy Eddie to Highland -- Best Buy changed and grew.
Its most controversial innovation came in 1989, when Best Buy stopped paying commissions to its sales staff and instead put them on salary. Among manufacturers like Toshiba and Hitachi that depended on salespeople to push premium-priced items, the move went over "like a fart in church," a former Best Buy executive recalls. But customers liked the no-pressure atmosphere in Best Buy stores, and overall revenues grew at a 25 percent-a-year clip, enabling Best Buy to far outpace its rivals.
The Schulze and Anderson approach set Best Buy on the path of a 12-year expansion. It entered markets like Chicago, Philadelphia, and Boston and became the biggest seller of home PCs in 1995, just in time for the Internet boom. In 1996 it surpassed Circuit City (Research) to become the nation's top consumer electronics retailer.
But Best Buy's big gambles did not always pay off. Hoping to wield more influence in the music industry, the company paid $696 million to acquire Musicland, a mall-based retailer of CDs, in early 2001. The timing could not have been worse -- Internet downloads soon crippled CD sales, and the acquisition became a financial drag.
Hard times
Schulze had long planned to have Anderson succeed him. But when Anderson became CEO in June 2002 (Schulze became chairman), economic shock waves from 9/11 had sapped demand across the industry, and sluggish sales, combined with a write-off of Musicland's goodwill, sent Best Buy's stock plunging.
Worse for Best Buy, Wal-Mart and Costco were ramping up their consumer electronics offerings. Direct seller Dell (Research) was gaining market share too. Anderson moved quickly to stave off the mass merchants.
That October, Best Buy bought Geek Squad, a Minneapolis startup that specialized in repairing and installing PCs. Though it had just $3 million in revenues and 50 employees, Anderson knew that digital devices and home networks were growing in complexity and that the technical services market had huge potential. (Best Buy today pegs the small-business and home services market at more than $20 billion a year.)
Better still, Anderson figured, Wal-Mart and its ilk were never going to provide the help many customers would need. Within a year Best Buy had Geek Squad "precincts" in more than 20 stores; by 2005 the geeks had set up shop in all Best Buys.
Creative solutions
Anderson faced another huge challenge as CEO: Wall Street had come to expect growth of 20 percent a year. But having saturated North America, Best Buy could no longer rely entirely on adding new stores. To the consternation of his management team, the new CEO would disappear for weeks at a time, going to conferences outside the electronics industry in search of ideas.
Anderson also invited big thinkers to Minneapolis. Among them was Larry Selden, a professor at Columbia's business school, who laid out a theory about where most businesses go wrong. Selden argued that, in their hunger for sales, companies are often oblivious to the fact that not all customers are profitable ones. Some are very lucrative to deal with, while others cost more to sell to than the business is worth.
Selden called the first group angel customers and the second demons. By catering to the angels, he argued, companies can reward customers, employees and shareholders alike. (Selden is co-author, with FORTUNE's Geoffrey Colvin, of the 2003 book, "Angel Customers & Demon Customers.") Selden's philosophy was just what Anderson had been looking for. In late 2002 he started preaching the gospel of centricity to upper management.
Centricity
In short, here's how it works: Figure out which customers make you the most money, segment them carefully, then realign your stores and empower employees to target those favored shoppers with products and services that will encourage them to spend more and come back often. By the summer of 2003, Best Buy was already testing the concept in a few dozen stores.
To see centricity in action, let's meet Barry, Jill, Buzz, Ray, and a person we'll call Mr. Storefront. They're archetypes of the lucrative angel groups Best Buy covets: Barry is an affluent tech enthusiast; Jill, a busy suburban mom; Buzz, a young gadget fiend; Ray, a price-conscious family guy; and Mr. Storefront owns a small business. Other segments interest Best Buy too, like young single women (Carrie) and empty-nesters (Helen and Charlie), but for now the company is focusing its redesigns on the core five.
Best Buy's researchers comb through reams of sales and demographic data to determine whether a particular location should be tailored to, say, Ray or Buzz. Nearly 40 percent of the 300 stores that have been redone aim at Barry -- in them you'll find a separate department of home-theater systems, expert salesmen, and specialists in mobile electronics.
Jill stores feature personal shopping assistants (PSAs) who know how to steer a homemaker to the right digital camera for her family. Buzz stores have broad assortments of video games. Stores can target more than one segment -- Jill and Barry departments often share a location -- and a handful of Best Buys, like the one in the Dallas suburb of Frisco, have all five segments going at once.
"Centrizing" a store is a big investment -- a typical Barry department alone requires as much as $600,000 for lighting and fixtures. Best Buy also invests in schooling employees in financial metrics such as return on invested capital so that they can gauge for themselves the effectiveness of merchandising displays. (Recent example: Buzz departments have an area where kids can try out Dance Pads, a video game accessory you activate with your feet.) Specialized salespeople, such as PSAs and home-theater experts, get additional training that may last weeks.
When centricity works, it can pay off in unusual ways. Reagan Dobbs, 20, is a lanky, goateed salesman at the Best Buy in Grapevine, Texas, under the flight path of the Dallas/Fort Worth airport. The store was redone in July (it's a Jill/Barry combo store), and Dobbs learned centricity's principles in two weekend workshops.
It didn't take him long to decide his store was neglecting at least one customer need. Megachurches are a hot phenomenon in the Dallas metroplex, yet Best Buy's assortment of contemporary Christian music was anemic. So Dobbs visited churches, learned which bands the faithful liked, and came up with a proposal for a much broader assortment of Christian rock and folk.
His bosses had him take the plan all the way to headquarters. Sales of contemporary Christian music in the Grapevine store have risen from 2 percent of music sales to 6 percent since November, and the idea is being taken up by Best Buy stores across the region. Just as important, empowering people like Dobbs has helped lower Best Buy's employee turnover from 81 percent last year to 69 percent now.
A few bumps in the road
That doesn't make the shift to centricity any less risky, however. Emboldened by the results from the first few dozen stores it segmented, where same-store sales grew at three times the rate of regular stores, Best Buy stepped on the accelerator in last year's third quarter, ended Nov. 30. In just three months it switched 154 stores to centricity -- three times the number converted before.
"There was an impression that we could do no wrong," says Anderson.
It turned out to be wishful thinking. With its earlier conversions Best Buy had carefully laid the groundwork; it then tinkered ceaselessly to get the mix of products and employees just right. Once that investment paid off, Anderson and his executives assumed subsequent stores could just flip a switch and convert to centricity.
"When we gave the operating manual to the stores for the fall," he says ruefully, "it was four inches thick."
Adds executive vice president John Walden, Anderson's point man for centricity: "The way we deployed was too confusing."
Instead of jumping as it had in previous quarters, same-store sales growth at the renovated stores was only slightly better than the chainwide average (5.4 percent vs. 3.3 percent).
When Anderson faced Wall Street analysts on Dec. 13, he tried lamely to rationalize that transformations aren't always smooth. The analysts didn't buy it, and Best Buy's market cap slid almost $3 billion that day.
"It wasn't one of the highlights of my career," Anderson says. The poor results persuaded him to freeze centricity rollouts for the fourth quarter. (They resumed in March.)
Juggling projects
Some analysts also complained that too many projects were competing for Best Buy's attention. Ramping up the Geek Squad was at the top of the list. A bulwark against the likes of Wal-Mart, the business has cashed in on consumers' desire to protect their PCs from nasty viruses and to create wireless home networks. The geeks can do this at your home, in a Best Buy store, over the phone, or online.
Last year, as consumer demand for flat-screen TVs exploded in the U.S., the need for techies to help with installations soared. That put pressure on Best Buy to recruit. Having added almost 10,000 technicians to its ranks last year, the Geek Squad now is more of a Geek Swarm -- it numbers over 12,000. In fiscal 2007 (beginning Feb. 26), it should earn $280 million in operating profits on just over $1 billion in sales, says Piper Jaffray analyst Mitchell Kaiser.
"I like that Best Buy has all these balls in the air, but they are not all going to work," says Morgan Stanley analyst Greg Melich.
Some, like retail investor Howard Davidowitz, fear that Anderson's revolutionizing is a bridge too far. "If they were doing everything without centricity, I would be optimistic."
But with centricity now in 40 percent of U.S. stores (it will extend to all in two years) and shaping all decisions -- each segment has its own finance manager at headquarters -- the commitment is made. "We will not back down from this," says Schulze.
A strong balance sheet
The confidence to gamble comes in part from Best Buy's balance sheet, which is among the strongest in retail and includes a war chest of over $3 billion in cash.
"This is a rich company," says CSFB analyst Gary Balter.
That not only allows Anderson to invest heavily in centricity and the Geek Squad, but also made the third-quarter shock easier to stomach.
Besides, Anderson loves risk. Remember Best Buy's controversial 1989 shift to a salaried work force? Chief operating officer Brian Dunn, then a store manager, recalls pleading with Anderson not to do it -- he was sure major suppliers would pull their wares. "Think about the next 15 years, not the next five," Anderson told Dunn.
Anderson was right, of course, and the move accelerated Best Buy's ascent. Now the stakes are higher, but radical innovation still represents Anderson's best bet to stay among retail's elite.
Read more!
Subscribe to:
Posts (Atom)
