Best Buy Co., Inc.: Sustainable Customer Centricity Model? Dr. Alan N. Hoff man / Rotterdam School of Management, Erasmus University and Bentley University The author would like to thank Kevin Clark, Leonard encourages its employees to go out of their way to D’Andrea, Amanda Genesky, Geoff Merritt, Chris help customers understand what these products can Mudarri, and Dan Fowler for their research. Please do and how customers can get the most out of the address all correspondence to Dr. Alan N. Hoffman, products they purchase. Employees must recognize MBA Program Director, LaCava 295, Bentley that each customer is unique and thus determine the University, 175 Forest Street, Waltham, MA 02452; best method to help that customer achieve maxi- [email protected]. mum enjoyment from the product(s) purchased. From a strategic standpoint, Best Buy moved Best Buy Co., Inc.: Sustainable from being a discount retailer (a low-price strategy) Customer Centricity Model? to a service-oriented firm that relies on a differentia- tion strategy. In 1989, it changed the compensation Best Buy, headquartered in Richfield, Minnesota, structure for sales associates from commission based is a specialty retailer of consumer electronics. to noncommission based, which resulted in consum- It operates over 1,100 stores in the United States, ers having more control over the purchasing process accounting for 19 percent of the market. With and in cost savings for the company (the number approximately 155,000 employees, it also operates of sales associates was reduced). In 2005, Best Buy over 2,800 stores in Canada, Mexico, China, and took customer service a step further by moving from Turkey. The company’s subsidiaries include Geek peddling gadgets, to a customer-centric operating Squad, Magnolia Audio Video, Pacific Sales, and in model. It is now gearing up for another change to Canada, it operates under both the Best Buy and focus on store design and providing products and Future Shop labels. services in line with customers’ desire for constant Best Buy’s mission is to make technology deliver connectivity. on its promises to customers. To accomplish this, it helps customers realize the benefits of technology Company History2 and technological changes so they can enrich their lives in a variety of ways through connectivity: “To From Sound of Music to Best Buy make life fun and easy,”1 as Best Buy puts it. This is Best Buy was originally known as Sound of Music. what drives the company to continually increase the Incorporated in 1966, the company started as a tools to support customers in the hope of providing retailer of audio components and expanded to retail- end-to-end technology solutions. ing video products in the early 1980s with the intro- As a public company, Best Buy’s top objectives duction of the videocassette recorder to its product are sustained growth and earnings. This is accom- line. In 1983, the company changed its name to Best plished in part by constantly reviewing its business Buy Co., Inc. (Best Buy). Shortly thereafter, it began model to ensure that it is satisfying customer needs operating its existing stores under a “superstore” con- and desires as effectively and completely as possi- cept by expanding product offerings and using mass ble. The company strives to have not only extensive marketing techniques to promote those products. product offerings but also highly trained employees In 1989 Best Buy dramatically altered the func- with extensive product knowledge. The company tion of its sales staff. Previously, the sales staff C-1 776812_Best6812_Best Buy.inddBuy.indd C-1C-1 88/6/11/6/11 111:101:10 AAMM C-2 Best Buy Co. Inc.: Sustainable Customer Centricity Model? worked on a commission basis and as a result was also acquired a 75 percent stake in Jiangsu Five more proactive in assisting customers coming into Star Appliance Co. Ltd., a China-based appliance the stores. Since 1989, when the commission struc- and consumer electronics retailer. This enabled ture was terminated, sales associates have developed the company to access the Chinese retail market into educators assisting customers in learning about and led to the opening of the first Best Buy China the products offered in the stores. The customer, to store on January 26, 2007. a large extent, takes charge of the purchasing pro- 2007—Best Buy acquired Speakeasy, Inc., a pro- cess. The sales staff’s mission became to answer cus- vider of broadband, voice, data, and information tomer’s questions so that the customer could decide technology services, to further its offering of tech- which product(s) fit his or her needs. This differed nological solutions for customers. greatly from their former mission of simply generat- ing sales. 2008—Through a strategic alliance with the In 2000, the company launched its online retail Carphone Warehouse Group, a UK-based pro- store: BestBuy.com. This allowed customers a choice vider of mobile phones, accessories, and related between visiting a physical store and purchasing services, Best Buy Mobile was developed. products online, thus expanding Best Buy’s reach After acquiring a 50 percent share in Best Buy among consumers. Europe (with 2,414 stores) from the Carphone Warehouse, Best Buy intends to open small-store Expansion through Acquisitions formats across Europe in 2011.3 Best Buy also Since 2000, Best Buy has begun a series of acquisi- acquired Napster, a digital downloads provider, tions to expand their offerings and enter interna- through a merger, to counter the falling sales of tional markets: compact discs. 2000—Best Buy acquired Magnolia Hi-Fi, Inc., a The first Best Buy Mexico store was opened. high-end retailer of audio and video products and 2009—Best Buy acquired the remaining 25 per- services, which became Magnolia Audio Video in cent of Jiangsu Five Star. Best Buy Mobile moved 2004. This acquisition allowed Best Buy access to into Canada. a set of upscale customers. 2001—Best Buy entered the international mar- Industry Environment ket with the acquisition of Future Shop Ltd., a leading consumer electronics retailer in Canada. Industry Overview This helped Best Buy increase revenues, gain Despite the negative impact the financial crisis has market share, and leverage operational expertise. had on economies worldwide, in 2008 the consumer The same year, it also opened its first Canadian electronics industry managed to grow to a record store. In the same year, the company purchased high of US$694 billion in sales—a nearly 14 per- Musicland, a mall-centered music retailer cent increase over 2007. In years immediately prior, throughout the United States (divested in 2003). the growth rate was similar: 14 percent in 2007 and 17 percent in 2006. This momentum, however, did 2002—Best Buy acquired Geek Squad, a com- not last. Sales dropped 2 percent in 2009, the first puter repair service provider, to help develop a decline in 20 years for the electronics giant. technological support system for customers. The A few product segments, including televisions, retailer began by incorporating in-store Geek gaming, mobile phones, and blu-ray players, drive Squad centers in its 28 Minnesota stores and sales for the company. Television sales, specifically expanding nationally and then internationally in LCD units, which account for 77 percent of total subsequent years. television sales, were the main driver for Best Buy as this segment alone accounts for 15 percent of 2005—Best Buy opened the first Magnolia Home total industry revenues. The gaming segment con- Theater “store-within-a-store” (located within tinues to be a bright spot for the industry, as sales the Best Buy complex). are expected to have tremendous room for growth. 2006—Best Buy acquired Pacific Sales Kitchen Smartphones are another electronics industry seg- and Bath Centers Inc. to develop a new customer ment predicted to have a high growth impact on the base: builders and remodelers. The same year, it entire industry. 776812_Best6812_Best Buy.inddBuy.indd C-2C-2 88/6/11/6/11 111:111:11 AAMM Best Buy Co. Inc.: Sustainable Customer Centricity Model? C-3 The consumer electronics industry has sig- the ability to spend heavily on advertising will help nificant potential for expansion into the global increase foot traffic to these stores. marketplace. There are many untapped markets, especially newly developing countries. These mar- Internal Environment kets are experiencing the fastest economic growth while having the lowest ownership rate for gad- Finance gets.4 Despite the recent economic downturn, the While Best Buy’s increase in revenue is encouraging future for this industry is optimistic. A consumer (see Exhibit 1), recent growth has been fueled largely electronics analyst for the European Market by acquisition, especially Best Buy’s 2009 revenue Research Institute predicts that the largest growth growth. At the same time, net income and operating will be seen in China (22 percent), the Middle East margins have been declining (see Exhibits 2 and 3). (20 percent), Russia (20 percent), and South America Although this could be a function of increased costs, (17 percent).5 it is more likely due to pricing pressure. Given the current adverse economic conditions, prices of many Barriers to Entry consumer electronics products have been forced As globalization spreads and use of the Internet down by economic and competitive pressures. These grows, barriers to entering the consumer electron- lower prices have caused margins to decline, nega- ics industry are diminished. When the industry was tively affecting net income and operating margins. dominated by brick-and-mortar companies, obtain- Best Buy’s long-term debt increased substan- ing the large capital resources needed for entry tially from 2008 to 2009 (see Exhibit 4), which is into the market was a barrier for those looking primarily due to the acquisition of Napster and Best to gain any significant market share.