76812 Best Buy.Indd

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 AMAM 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 AMAM 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. Expanding a Buy Europe. The trend in available cash has been business meant purchasing or leasing large stores a mirror image of long-term debt. Available cash that incurred high initial and overhead costs. increased from 2005 to 2008 and then was substan- However, the Internet has significantly reduced the tially lower in 2009 for the same reason. capital requirements needed to enter the industry. While the change in available cash and long-term Companies like Amazon.com and Dell have utilized debt are not desirable, the bright side is that this situ- the Internet to their advantage and gained valuable ation is due to the acquisition of assets, which has led market share. to a significant increase in revenue for the company. The shift toward Internet purchasing has also Ultimately, the decreased availability of cash would negated another once strong barrier to entry— seem to be temporary due to the circumstances. The customer loyalty. The trend today is that consum- more troubling concern is the decline in net income ers will research products online to determine which and operating margins, which Best Buy needs to find a one they intend to purchase and then shop around way to turn around. If the problems with net income on the Internet for the lowest possible price. and operating margins are fixed, the trends in cash and Even though overall barriers are diminished, long-term debt will also begin to turn around. there are still a few left, which a company like Best At first blush, the increase in accounts receiv- Buy can use to their advantage. The first, and most able and inventory is not necessarily alarming since significant, is economies of scale. With over 1,000 revenues are increasing during this same time period locations, Best Buy can use their scale to obtain cost (see Exhibit 5). However, closer inspection reveals a advantages from suppliers due to high quantity of 1 percent increase in inventory from 2008 to 2009 orders. Another advantage is in advertising. Large and a 12.5 percent increase in revenue accompanied firms have the ability to increase advertising budgets by a 240 percent increase in accounts receivable. This to deter new entrants into the market. Smaller com- creates a potential risk for losses due to bad debts. panies generally do not have the marketing budgets for massive television campaigns, which are still one Marketing of the most effective marketing strategies available Best Buy’s marketing objectives are fourfold: (a) to to retailers. Although Internet sales are growing, market various products based on the customer cen- the industry is still dominated by brick-and-mortar tricity operating model, (b) to address the needs of stores. Most consumers looking for electronics— customer lifestyle groups, (c) to be at the forefront especially major electronics—feel a need to actually of technological advances, and (d) to meet customer see their prospective purchases in person. Having needs with end-to-end solutions.

776812_Best6812_Best Buy.inddBuy.indd C-3C-3 88/6/11/6/11 111:111:11 AMAM C-4 Best Buy Co. Inc.: Sustainable Customer Centricity Model?

Exhibit 1 Quarterly Sales

Fiscal Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2005 $5,479 $6,080 $6,647 $9,227 2006 $6,118 $6,702 $7,335 $10,693 2007 $6,959 $7,603 $8,473 $12,899 2008 $7,927 $8,750 $9,928 $13,418 2009 $8,990 $9,801 $11,500 $14,724 2010 $10,095

Exhibit 2 Quarterly Net Income

Fiscal Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2005 $114 $150 $148 $572 2006 $170 $188 $138 $644 2007 $234 $230 $150 $763 2008 $192 $250 $228 $737 2009 $179 $202 $52 $570 2010 $153

776812_Best6812_Best Buy.inddBuy.indd C-4C-4 88/6/11/6/11 111:111:11 AMAM Best Buy Co. Inc.: Sustainable Customer Centricity Model? C-5

Exhibit 3 Operating Margin

Fiscal Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 2005 3.36% 3.98% 3.51% 8.49% 2006 3.91% 3.89% 2.58% 8.97% 2007 4.84% 4.34% 2.31% 8.81% 2008 3.36% 4.58% 3.54% 8.52% 2009 3.08% 3.46% 2.38% 7.63% 2010 3.45%

Exhibit 4 Long-Term Debt and Cash

Fiscal Year 2005 2006 2007 2008 2009 Long-Term Debt (LTD) $528 $178 $590 $627 $1,126 Cash $354 $748 $1,205 $1,438 $498 LTD/Equity 0.12 0.03 0.10 0.14 0.24 LTD/Total Assets 0.05 0.02 0.04 0.05 0.07

776812_Best6812_Best Buy.inddBuy.indd C-5C-5 88/6/11/6/11 111:111:11 AMAM C-6 Best Buy Co. Inc.: Sustainable Customer Centricity Model?

Exhibit 5 Accounts Receivable and Inventory

Fiscal Year 2005 2006 2007 2008 2009 Inventory $2,851 $3,338 $4,028 $4,708 $4,753 Accounts Receivable $375 $449 $548 $549 $1,868

Best Buy prides itself on customer centricity that which was completed in 2007. Prior to 2005, the caters to specific customer needs and behaviors. company focused on customer groups such as afflu- Over the years, the retailer has created a portfolio of ent professional males, young entertainment enthusi- products and services that complement one another asts, upscale suburban mothers, and technologically and have added to the success of the business. These advanced families.6 After the transition, it focused products include seven distinct brands domestically, more on customer lifestyle groups such as affluent as well as other brands and stores internationally: suburban families, trend-setting urban dwellers, and the closely knit families of Middle America.7 To tar- Best Buy—offers a wide variety of consumer elec- get these various segments, Best Buy acquired firms tronics, home office products, entertainment soft- with aligned strategies, which could be used as a ware, appliances, and related services. competitive advantage against its strongest competi- Best Buy Mobile—stand-alone stores offer a tion, such as Circuit City and Walmart. The acquisi- wide selection of mobile phones, accessories, and tions of Pacific Sales, Speakeasy, and Napster, along related services in small-format stores. with the development of Best Buy Mobile, created more product offerings, which led to more profits. Geek Squad—provides residential and commer- To market all these different types of prod- cial product repair, support, and installation ser- ucts and services is a difficult task. That is why vices both in-store and on-site. Best Buy’s employees have more training than that Magnolia Audio Video—offers high-end audio of their competitors. This knowledge service is a and video products and related services. value-added competitive advantage. Since the sales employees no longer operate on a commission-based Napster—an online provider of digital music. pay structure, consumers can obtain knowledge Pacific Sales—offers high-end home improvement from sales people without being subjected to high- products primarily including appliances, con- pressure sales techniques. This is generally seen to sumer electronics, and related services. enhance customer shopping satisfaction. Speakeasy—provides broadband, voice, data, and Operations information technology services to small businesses. Best Buy’s operating objectives include increas- Starting in 2005, Best Buy initiated a strategic ing revenues by growing its customer base, gain- transition to a customer-centric operating model, ing more market share internationally, successfully

776812_Best6812_Best Buy.inddBuy.indd C-6C-6 88/6/11/6/11 111:111:11 AMAM Best Buy Co. Inc.: Sustainable Customer Centricity Model? C-7

implementing marketing and sales strategies in “price match guarantee.”11 The suit also alleges that Europe, and having multiple brands for different Best Buy has an undisclosed “Anti-Price Matching customer lifestyles through mergers and acquisitions Policy,” where it tells its employees not to allow price (M&A). matches and gives financial bonuses to employees Domestic Best Buy store operations are organized who do this. into eight territories, with each territory divided into districts. A retail field officer oversees store perfor- Competition mance through district managers, who meet with store employees on a regular basis to discuss operations Brick-and-Mortar Competitors strategies such as loyalty programs, sales promotion, Walmart Stores Inc., the world’s largest retailer with and new product introductions.8 Along with domestic revenues over US$405 billion, has operations world- operations, Best Buy has an international operation wide and offers a diverse product mix with a focus on segment, originally established in connection with the being a low-cost provider. In recent years, Walmart acquisition of Canada-based Future Shop.9 has increased its focus on grabbing market share in In 2009, Best buy opened 285 new stores in the consumer electronics industry. In the wake of addition to the European acquisition of 2,414 Best Circuit City’s liquidation,12 it is stepping up efforts Buy Europe stores, relocated 34 stores, and closed by striking deals with Nintendo and Apple that 67 stores. will allow each company to have their own in-store displays. Walmart has also considered using smart- Human Resources phones and laptop computers to drive growth.13 It The objectives of Best Buy’s human resources depart- is refreshing 3,500 of its electronics departments ment are to select employees that give consumers and will begin to offer a wider and higher range of the best knowledge of products and services, which electronic products. These efforts will help Walmart portrays the company’s vision and strategy on an appeal to the customer segment looking for high everyday basis, and to educate employees on the ins quality at the lowest possible price.14 and outs of new products and services. GameStop Corp. is the leading video game retailer Best Buy employees are required to be ethical with sales of almost US$9 billion as of January 2009, and knowledgeable. This principle starts within the in a forecasted US$22 billion industry. It operates top-management structure and filters down from over 6,000 stores throughout the United States, the retail field officer through district managers, Canada, Australia, and Europe, as a retailer of both and through store managers to the employees on new and used video game products including hard- the floor. Every employee must have the company’s ware, software, and gaming accessories.15 vision embedded in his or her service and attitude. The advantage GameStop has over Best Buy is Despite Best Buy’s efforts to train an ethical and the number of locations: 6,207 GameStop locations knowledgeable employee force, there have been some compared to 1,023 Best Buy locations. However, allegations and controversy over Best Buy employ- Best Buy seems to have what it takes to overcome ees, which has given the company a bad black eye this advantage—deep pockets. With significantly in the public mind. One lawsuit claimed that Best higher net income, Best Buy can afford to take a hit Buy employees had misrepresented the manufactur- to their margins and undercut GameStop prices.16 er’s warranty in order to sell its own product ser- RadioShack Corp. is a retailer of consumer vice and replacement plan. It accused Best Buy of electronic goods and services including flat panel “entering into a corporate-wide scheme to institute televisions, telephones, computers, and consumer high-pressure sales techniques involving the extended electronic accessories. Although the company warranties” and “using artificial barriers to discour- grosses revenues of over US$4 billion from 4,453 age consumers who purchased the ‘complete extended locations, RadioShack has consistently lost market warranties’ from making legitimate claims.”10 share to Best Buy. Consumers have a preference for In a more recent case (March 2009), the U.S. RadioShack for audio and video components, yet District Court granted Class Action certification to prefer Best Buy for their big box purchases.17 allow plaintiffs to sue Best Buy for violating its “Price Second-tier competitors are rapidly increasing. Match” policy. According to the ruling, the plaintiffs Wholesale shopping units are becoming more popu- allege that Best Buy employees would aggressively lar, and companies such as Costco and BJ’s have, deny consumers the ability to apply the company’s over the past few years, increased their piece of the

776812_Best6812_Best Buy.inddBuy.indd C-7C-7 88/6/11/6/11 111:111:11 AMAM C-8 Best Buy Co. Inc.: Sustainable Customer Centricity Model?

consumer electronics pie. After Circuit City’s bank- however, has taken a different approach by provid- ruptcy, mid-level electronics retailers like HH Gregg ing customers with highly trained sales associates and Ultimate Electronics are scrambling to grab who are available to educate customers regarding Circuit City’s lost market share. Ultimate Electronics, product features. This allows customers to make owned by Mark Wattles, who was a major inves- informed buying decisions on big-ticket items. In tor in Circuit City, has a leg up on its competitors. addition, with the Geek Squad, Best Buy is able Wattles was on Circuit City’s board of executives to offer and provide installation services, product and had firsthand access to profitable Circuit City repair, and ongoing support. In short, it can provide stores. Ultimate Electronics has plans to expand its an end-to-end solution for its customers. operations by at least 20 stores in the near future. Best Buy has used their customer centricity model, which is built around a significant database Online Competitors of customer information, to construct a diversified Amazon.com, Inc. has, since 1994, grown into the portfolio of product offerings. This allows the com- United States’ largest online retailer with revenues of pany to offer different products in different stores in over US$19 billion in 2008 by providing just about a manner that matches customer needs. This in turn any product imaginable through its popular Web helps keep costs lower by shipping the correct inven- site. Begun as an online bookstore, Amazon soon tory to the correct locations. Since Best Buy’s costs ventured into various consumer electronic product are increased by the high level of training needed categories including computers, televisions, soft- for sales associates and service professionals, it has ware, video games and much more.18 been important that the company remain vigilant Amazon.com gains an advantage over its super- in keeping costs down wherever they can without center competitors as it is able to maintain a lower sacrificing customer experience. cost structure compared to brick-and-mortar com- The tremendous breadth of products and ser- panies such as Best Buy. It is able to push those sav- vices Best Buy is able to provide allows customers ings through to their product pricing and selection/ to purchase all components for a particular need diversification. With an increasing trend in the con- within the Best Buy family. For example, if a cus- sumer electronics industry to shop online, Amazon. tomer wants to set up a first-rate audio-visual room com is positioned perfectly to maintain strong at home, he or she can go to the Magnolia Home market growth and potentially steal some market Theater store-within-a-store at any Best Buy loca- share away from Best Buy. tion and use the knowledge of the Magnolia or Best Netflix, Inc. is an online video rental service, Buy associate in the television and audio areas to offering selections of DVDs and Blu-ray discs. Since determine which television and surround sound the- its establishment in 1997, it has grown into a US$1.4 ater system best fits his or her needs. The customer billion company. With over 100,000 titles in its col- can then employ a Geek Squad employee to install lection, it ships for free to approximately 10 mil- and set up the television and home theater system. lion subscribers. It has also begun offering streaming None of Best Buy’s competitors offer this extensive downloads through its Web site, which eliminates level of service. the need to wait for a DVD to arrive. Netflix is quickly changing the DVD market, Successful Acquisitions which has dramatically impacted brick-and-mortar Through its series of acquisitions, Best Buy has stores such as Blockbuster and Hollywood Video gained valuable experience in the process of inte- and retailers who offer DVDs for sale. In a respon- grating companies under the Best Buy family. The sive move, Best Buy has partnered with CinemaNow ability to effectively determine where to expand has to enter the digital movie distribution market and been and will be key to the company’s ability to counter Netflix and other video rental providers.19 differentiate itself in the marketplace. Additionally, Best Buy has also been successfully integrating Core Competencies employees from acquired companies. Due to the importance of high-level employees to company Customer Centricity Model strategy and success, retaining this knowledge Most players in the consumer electronics industry focus base is invaluable. Best Buy now has a significant on delivering products at the lowest cost (Walmart— global presence, which is important because of the brick-and-mortar, Amazon—Web-based). Best Buy, maturing domestic market. This global presence has

776812_Best6812_Best Buy.inddBuy.indd C-8C-8 88/6/11/6/11 111:111:11 AMAM Best Buy Co. Inc.: Sustainable Customer Centricity Model? C-9

provided the company with insights into worldwide does not compete strictly on price structure alone trends in the consumer electronics industry and makes this an even bigger concern. Given the higher afforded access to newly developing markets. Best costs that Best Buy incurs training employees, any Buy uses this insight to test products in different pricing pressure that decreases margins puts stress markets in its constant effort to meet and anticipate on Best Buy’s financial strength. In addition, the customer needs. recent acquisition of Napster and the 50 percent stake in Best Buy Europe have significantly increased Retaining Talent Best Buy’s debt and reduced available cash. Even in Analyzing Circuit City’s demise, many experts have prosperous times, debt management is a key factor concluded one of the major reasons for the compa- in any company’s success, and it becomes even more ny’s downfall is that Circuit City let go of their most of a concern during economic downturn. senior and well-trained sales staff in order to cut costs. Best Buy, on the other hand, has a reputation Products and Service for retaining their talent and is widely recognized for As technology improves, product life cycles, as well its superior service. Highly trained sales profession- as prices, decrease and as a result, margins decrease. als have become a unique resource in the consumer Under Best Buy’s service model, shorter product electronics industry, where technology is changing life cycles increase training costs. Employees are at an unprecedented rate, and can be a significant forced to learn new products with higher frequency. source of competitive advantage. This is not only costly but also increases the likeli- hood that employees will make mistakes, thereby Challenges Ahead tarnishing Best Buy’s service record and potentially damaging one of its most important, if not the Economic Downturn most important, differentiators. In addition, more Electronics retailers like Best Buy sell products that resources must be directed at research of new prod- can be described as “discretionary items, rather than ucts to make sure Best Buy continues to offer the necessities.”20 During economic recessions, however, products consumers desire. consumers have less disposable income. While there One social threat to the retail industry is the has been recent optimism about a possible economic growing popularity of the online marketplace. turnaround, if the economy continues to stumble, Internet shoppers can browse sites searching for the this presents a real threat to sellers of discretionary best deals on specific products. This technology has products. allowed consumers to become more educated about In order to increase sales revenues, many retail- their purchases, while creating increased downward ers, including Best Buy, offer customers low-interest price pressure. Ambitious consumers can play the financing through their private-label credit cards. role of a Best Buy associate themselves by doing These promotions have been tremendously success- product comparisons and information gathering ful for Best Buy. From 2007 to 2009, these private- without a trip to the store. This emerging trend cre- label credit card purchases accounted for 16 percent ates a direct threat to companies like Best Buy, which to 18 percent of Best Buy’s domestic revenue. Due has 1,023 stores in its domestic market alone. One to the current credit crisis, however, the Federal way Best Buy has tried to continue the demand for Reserve has issued new regulations that could brick-and-mortar locations and counter the threat restrict companies from offering deferred inter- of Internet-based competition is by providing value- est financing to customers. If Best Buy and other added services in stores. Customer service, repairs, retailers are unable to extend these credit lines, it and interactive product displays are just a few exam- could have a tremendous negative impact on future ples of these services.22 revenues.21 Leadership Pricing and Debt Management The two former chief executive officers (CEOs) The current economic conditions, technological of Best Buy, Richard Shultze and Brad Anderson, advances, and increased competition have put a tre- were extremely successful at making the correct mendous amount of pricing pressure on many con- strategic moves at the appropriate times. With Brad sumer electronics products. This is a concern for all Anderson stepping aside in June 2009, Brian Dunn companies in this industry. The fact that Best Buy replaced him as the new CEO. Although Dunn has

776812_Best6812_Best Buy.inddBuy.indd C-9C-9 88/6/11/6/11 111:111:11 AMAM C-10 Best Buy Co. Inc.: Sustainable Customer Centricity Model?

worked for the company for 24 years and held the 4. G. Keller, 2009, May 18, “Threat Grows by Ipod and Laptop,” The Columbus Dispatch, 2009, http://www.dispatch.com/live/content/business/ key positions of COO and president during his stories/2009/05/18/greener_gadgets.ART_ART_05-18-09_A9_TMDSJR8.html, tenure, the position of CEO brings him to a whole July 10 new level and presents new challenges, especially dur- 5. L. Magid, 2008, May 2, “Consumer Electronics: The Future Looks Bright,” CBSNews.com, 2009, http://www.cbsnews.com/stories/2008/05/02/scitech/ ing the current economic downturn. He is charged pcanswer/main4067008.shtml, July 10 with leading Best Buy into the world of increased 6. Best Buy Co., Inc., 2009, Form 10-K. connectivity. This requires a revamping of products 7. Ibid. 8. Ibid. and store setups to serve customers in realizing their 9. Ibid. connectivity needs. This is a daunting task for an 10. Manhattan Institute for Policy Research, “They’re Making a Federal Case Out of experienced CEO, let alone a new CEO who has It…in State Court,” Civil Justice Report 3, 2001, http://www.manhattan-institute .org/html/cjr_3_part2.htm, September. never held the position. 11. “Best Buy Bombshell,” HD Guru, 2009, http://hdguru.com/best-buy-bombshell/ 400/, March 21 Walmart 12. Circuit City Stores, Inc. was an American retailer in brand-name consumer electronics, personal computers, entertainment software, and (until 2000) Best Buy saw its largest rival, Circuit City, go down large appliances. The company opened its first store in 1949 and liquidated for good. A new archrival, Walmart, however, is its final American retail stores in 2009 following a bankruptcy filing and expanding into consumer electronics and stepping up subsequent failure to find a buyer. At the time of liquidation, Circuit City was the second-largest U.S. electronics retailer, after Best Buy. competition in a price war it hopes to win. Best Buy 13. Z. Bissonnette, “Wal-Mart Looks to Expand Electronics Business,” Bloggingstocks. needs to face the competition not by lowering prices, com, 2009, http://www.bloggingstocks.com/2009/05/18/wal-mart-looks-to- but by coming up with something really different. expand-electronics-business/, May 18 14. N. Maestri, “Wal-Mart Steps Up Consumer Electronics Push,” Reuters, 2009, It has to determine the correct path to improve http://www.reuters.com/article/technologyNews/idUSTRE54I4TR20090519, its ability to differentiate itself from competitors, May 19 which is increasingly difficult given an adverse eco- 15. Capital IQ, “GameStop Corp. Corporate Tearsheet,” Capital IQ, 2009, https:// www.capitaliq.com/ nomic climate and the company’s financial stress. 16. E. Sherman, “GameStop Faces Pain from Best Buy, Downloading,” BNET How Best Buy can maintain innovative products, Technology, 2009, http://industry.bnet.com/technology/10002329/gamestop- top-notch employees, and superior customer service faces-pain-from-best-buy-downloading/, June 24 17. T. Van Riper, “RadioShack Gets Slammed,” Forbes.com, 2006, http://www.forbes. while facing increased competition and operational com/2006/02/17/radioshack-edmondson-retail_cx_tr_0217radioshack.html, costs is an open question. February 17 18. Capital IQ, “Amazon.com Corporate Tearsheet,” Capital IQ, 2009, https://www. capitaliq.com/ NOTES 19. T. Kee, “Netflix Beware: Best Buy Adds Digital Downloads with CinemaNow Deal,” paidContent.org, 2009, http://paidcontent.org/article/419-best-buy- 1. Best Buy Co., Inc., 2009, February 28, Form 10-K. Securities and Exchange adds-digital-movie-downloads-with-cinemanow-deal/, June 5 Commission. 20. Best Buy Co., Inc., 2009, Form 10-K. 2. Ibid. 21. Ibid . 3. Ibid. 22. Ibid .

776812_Best6812_Best Buy.inddBuy.indd C-10C-10 88/6/11/6/11 111:111:11 AMAM