BEST BUY IN A GLOBAL GROWTH MODE*
INTRODUCTION
Best Buy (www.bestbuy.com) continues to weather a difficult business environment better than most consumer electronics retailers. Despite the tough environment, the retailer will con-tinue to move forward with aggressive growth plans. New stores, new countries, a new partnership with Carphone Warehouse, and new categories and services are all part of Best Buy’s strategy to expand its dominance in consumer electronics and increase its total annual sales to $80 billion within five years.
Industry Outlook and Structure
Total consumer electronics spending is forecast to grow at a slower compound annual rate through 2012. Growth was
weak in 2008, buffeted by a potent combination of negative drivers: the housing market slump, a credit crunch, record high gasoline prices, rising food costs, and job and income concerns. Yet a couple of key factors buoyed the otherwise soft near-term outlook: Government economic stimulus payments and purchases related to the 2009 all-digital TV broadcast conversion provided a boost for retailers. Strong price deflation will persist and continue to stimulate demand, although it will temper near-term growth amid a weak economy and competitive pressures.
Consumer electronics/appliance stores and big-box stores hold the lead in U.S. consumer electronics sales.
Electronics-only and computer stores continue to lose share of electronics spending, key victims of the growing domina-tion of Best Buy and Wal-Mart (www.walmart.com) in the category. The nonstore channel is showing signs of aging as its share gains in electronics have leveled off. See Figure 1.
Dell (www.dell.com) remains the leading online retailer of electronics by a wide margin, but it experienced double-digit sales declines for the second year in a row in 2007. Dell is aggressively adjusting its go-to-market strategies in order to sell more products in the United States and other countries.
The major pure-play Internet retailers, Amazon.com (www.
amazon.com) and Newegg.com (www.newegg.com), have continued their strong growth trends. Amazon.com has added new services, while Newegg.com continues to expand its
*The material in this case is adapted by the authors from TNS Retail Forward (www.retailforward.com), Industry Outlook:
Consumer Electronics (Columbus, OH: TNS Retail Forward, July 2008). Reprinted by permission.
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online presence to bolster its Web site traffic. Most of the other leading online consumer electronics retailers also posted strong growth in 2007, although they remain relatively small players.
Spending in the overall consumer electronics category increased 4.0 percent in 2007, a sharp slowdown compared with the strong gains in prior years. Growth was expected to slow to a 3.4 percent increase in 2008 (dragged lower primarily by weaker computer spending growth) then accelerate slightly
to a still-subpar 4.0 percent increase in 2009. Growth should pick up again in 2010 to 6.1 percent before tapering off slightly in the final two years of the forecast period. Category price deflation should ease a bit throughout the forecast period but remain steep. (Note: The government calculates quality enhancements as price declines in the consumer electronics and computer categories, which contributes to the downward price trends for these categories.) Table 1 shows annual U.S.
consumer spending on consumer electronics.
TABLE 1 U.S. Spending on Consumer Electronics (Audio and Video Products and Computers)
$ Millions % Ch Prices 2000=1.00 % Ch
1985 35,908 12.2% 3.513 -5.4%
1986 41,809 16.4% 3.277 -6.7%
1987 46,155 10.4% 3.171 -3.2%
1988 50,956 10.4% 3.055 -3.7%
1989 52,499 3.0% 2.973 -2.7%
1990 53,039 1.0% 2.846 -4.3%
1991 55,371 4.4% 2.724 -4.3%
1992 57,040 3.0% 2.537 -6.8%
1993 63,865 12.0% 2.359 -7.0%
1994 73,667 15.3% 2.246 -4.8%
1995 81,501 10.6% 2.063 -8.1%
1996 87,575 7.5% 1.793 -13.1%
1997 92,340 5.4% 1.530 -14.7%
1998 99,716 8.0% 1.301 -15.0%
1999 108,144 8.5% 1.117 -14.2%
2000 116,598 7.8% 1.000 -10.5%
2001 115,513 -0.9% 0.874 -12.6%
2002 120,010 3.9% 0.771 -11.7%
2003 123,095 2.6% 0.688 -10.8%
2004 133,269 8.3% 0.629 -8.5%
2005 142,258 6.7% 0.568 -9.6%
2006 151,513 6.5% 0.511 -10.1%
2007 157,567 4.0% 0.461 -9.7%
2008 162,927 3.4% 0.419 -9.2%
2009 169,515 4.0% 0.381 -9.1%
2010 179,848 6.1% 0.347 -8.7%
2011 190,716 6.0% 0.318 -8.6%
2012 201,387 5.6% 0.291 -8.5%
Compound Annual Growth Rate
1997–2002 5.4% -12.8%
2002–2007 5.6% -9.8%
2007–2012 5.0% -8.8%
Note: Category includes spending on video equipment (TVs, VCRs, DVD players, video media, etc.), audio equipment (stereo components, speakers, audio media, musical instruments, etc.) and computer hardware and software.
Sources: TNS Retail Forward and U.S. Department of Commerce.
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TABLE 2 The Leading U.S. Retailers of Consumer Electronics, 2007
Share of Total CE Sales
Rank Retailer
2 Wal-Mart2 $24,000 6.1% 11.2% 12.7% 14.9% 15.2%
3 Circuit City3 $10,318 - 5.7% 2.0% 7.7% 7.2% 6.5%
4 Target $6,384 23.8% 15.1% 3.0% 3.4% 4.1%
5 Dell4 $6,224 -12.0% - 1.9% 5.5% 4.7% 4.0%
6 GameStop5 $5,439 27.4% 36.6% 1.3% 2.8% 3.5%
7 Costco Wholesale $4,914 28.6% 24.8% 1.6% 2.5% 3.1%
8 Apple Stores $3,956 19.8% 58.9% 0.5% 2.2% 2.5%
9 RadioShack6 $3,904 -10.8% - 1.8% 3.4% 2.9% 2.5%
10 Sears $2,965 1.9% - 2.4% 2.7% 1.9% 1.9%
Total Top 10 $97,432 6.2% 9.6% 54.8% 60.6% 61.8%
Total CE Sales $157,567 4.0% 6.4% 100.0% 100.0% 100.0%
1Best Buy domestic sales exclude appliances and services; sales include Best Buy Mobile (launched 2006), Magnolia Audio Video (acquired 2000), Pacific Sales Kitchen and Bath Centers (acquired 2006), and Speakeasy (acquired 2007).
2Wal-Mart’s sales estimate has been revised to improve comparability with other CE retailers. For example, the estimate now includes prerecorded audio and video media. The sales estimate does not include sales at Sam’s Club.
3Circuit City sales exclude services and warranties.
4Dell sales include sales through its retail partners in the United States. Dell began selling through Best Buy, Staples, and Wal-Mart in the second half of 2007.
5GameStop revenue includes sales of Game Informer, the retailer’s monthly gaming magazine.
6RadioShack sales exclude services.
Note: Includes sales of video and audio hardware, video and audio media, computers and software, and related accessories. Sales are for United States only.
Sources: Company reports, TWICE, U.S. Department of Commerce, and TNS Retail Forward.
The consumer electronics channel will continue to become increasingly competitive as mass retailers step up efforts to grow their consumer electronics business and consumers become more comfortable with purchasing consumer electronics products online. As retailers such as Wal-Mart add more popular brands to the assortment, consumer electronics products including high-definition (HD) TVs are becoming commoditized at a quicker pace, and price becomes even more important as shoppers balance the price–selection equation when selecting a retailer. This has led to increased pressure on specialty consumer electronics retailers to find the niches where they can compete effec-tively. It also is causing them to slash prices and increase pro-motions, which will continue to feed consumer electronics deflation in the coming years. Additionally, the continuing shift in global sourcing to the most cost-effective countries will shape price trends.
Best Buy’s Global Strategy
As shown in Table 2, Best Buy, Wal-Mart, Circuit City, Target, and Dell were the five largest U.S. sellers of con-sumer electronics during 2003 to 2007. Both Circuit City and
Dell lost market share, while Best Buy, Wal-Mart, and Target (www.target.com) increased market share. Things contin-ued to go quite badly through 2008 for Circuit City, so much so that it went out of business in 2009.
A Multi-Pronged Global Growth Strategy
Big Store-Growth Plans Home and Abroad The company planned to open about 140 stores in 2008. In the United States, plans included 85 to 100 Best Buy stores and four relocations.
During 2007, Best Buy opened 101 net new Best Buy stores in the United States; 5 to 10 new Pacific Sales Kitchen and Bath stores in Western states were slated for 2008, with plans to eventually expand the format nationwide.
In China, the company planned to open up to three Best Buy stores and up to 16 Five Star Appliance stores during 2008. These plans were pared down from the start of the year given weaker-than-expected profits and the Chinese government’s delay in approving new stores. For the Best Buy format, the goal was to open 10 Chinese stores in 2009 and 10 to 12 stores a year there-after. The retailer currently operates 175 Five Star stores in China.
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In Canada, six new Future Shop stores, along with one closure and six relocations, and six Best Buy stores were scheduled for 2008. Best Buy entered Mexico with two to five stores in the latter part of 2008 and intended to open one or two stores in Turkey in 2010. India is also being studied, as are other countries that the company won’t disclose.
Making Chinese Customers Happy Best Buy says it is moving slowly in China as it continues to study the market to find out what Chinese consumers expect and want. The new Best Buy stores will all be located in and around Shanghai, where the first Chinese Best Buy opened in early 2007. That first Chinese store already ranks among the company’s top 50 in revenue globally. The company will maintain its dual-brand strategy with Best Buy and Five Star as it has in Canada with Best Buy and Future Shop. The company says it wants to maintain separate cultures, but offer the same value, believing this is the best way to meet local needs. Best Buy expects to launch online sales in China within the next two years.
New Plans for Canada’s Future Shop Best Buy’s other banner in Canada, Future Shop, is going after appliance and game sales more aggressively. Also, Best Buy plans to test a new Future Shop prototype that focuses on home networking:
䉴 Future Shop has launched a strategy to double its market share in appliances. The retailer is investing in new asso-ciate training initiatives to boost service levels by bring-ing in new regional appliance managers and certified product experts. Additionally, appliance departments are being enhanced to improve the shopping experience.
Future Shop also has added KitchenAid to its appliance lineup both in stores and online to beef up its premium appliance offer.
䉴 Following a trial at six Future Shop stores in Calgary, Best Buy said it plans to expand its used games test offering to all of its Future Shop stores in Canada.
䉴 In summer 2008, Future Shop introduced a new proto-type store designed to help customers connect all the gadgets in their homes. A feature of the new store will be an area that demonstrates, for example, how a computer in the bedroom can be linked to the TV in the living room along with the audio system throughout the house. To support home-network project sales, associates are being trained to provide more customized service in home networking. If tests are successful, Best Buy has said it will export the upgraded Future Shop store internation-ally, including the United States.
䉴 Also in 2008, Future Shop announced that it was launching its own installation service for home theaters, computers, and car audio systems. The service, called ConnectPro, provides expert staff to help customers optimize electronics purchases and ensure that all com-ponents work together seamlessly.
Setting the Stage for European Entry As a first step toward launching consumer electronics stores in Europe, Best Buy in June 2008 closed on a 50 percent joint venture interest in Carphone Warehouse, the company’s British-based partner in its Best Buy Mobile rollout in the United States. The two companies believe the new venture provides the best platform for Carphone Warehouse (www.carphonewarehouse.com) to expand its business model into new geographic areas and for Best Buy to enter the European consumer electronics market, the fastest-growing category in European retailing for the last five years according to Best Buy.
Carphone Warehouse currently operates more than 2,400 stores in nine European countries under the Carphone Warehouse and Phone House nameplates. The venture was subject to approval by Carphone Warehouse shareholders and went into effect in August 2008.
Locations of First British Stores Announced Best Buy opened the first four locations in London as the initial phase of its entry into Great Britain. The retailer chose Bath Road Retail Park in Slough, Two Rivers Retail Park in Staines, Thurrock Retail Park in Essex, and Enfield Retail Park in north London as the locations for the first phase of its British entry. Press reports in Great Britain indicated that Best Buy could open up to 20 stores in that country during 2009–2010, with a focus on out-of-town stores in retail parks, although the retailer did not rule out a flagship store in central London.
Loyalty and Service Programs Go International In 2008, Best Buy expanded its Geek Squad (www.geeksquad.com) service to Great Britain through its relationship with Carphone Warehouse. Additionally, the Best Buy Reward Zone loyalty program was recently extended to Canada.
Points are earned that can be cashed in on future purchases.
Exclusive offers, sweepstakes, and members-only sales are other perks of the program. As in the United States, where the program has operated since 2003, there is no membership fee, but one purchase per year is required to keep the account active.
Other Best Buy Growth Initiatives
Mobile Format Sees Heavy Investment Best Buy Mobile, developed in concert with Carphone Warehouse, continues to be a key strategic platform for Best Buy. There were 14 standalone Best Buy Mobile stores in operation as of mid-2008. Best Buy planned to open about 400 Mobile stores in the United States by the end of 2009. Most are in locations close to Best Buy stores. There were 599 Best Buy Mobile areas inside U.S. Best Buy stores at the end of May 2008, compared with 181 at the end of 2007. The company expanded the store-within-a-store concept to the majority of U.S. Best Buy stores as of the end of 2008. Best Buy Mobile is based on the European model, wherein multiple service providers and expanded cell phone choices are available under one roof. The company’s goal is to grow its share of the mobile market from about 2 percent to double digits
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within the next five years, and it reported that same-store sales of mobile phones in upgraded stores grew 50 percent in the first quarter of fiscal 2009.
Apple Departments Grow in U.S. Stores and China Apple (www.apple.com) and Best Buy got back together in 2007 after an eight-year hiatus. As of mid-2008, Best Buy operated about 500 store-within-a-store Apple areas in the United States, up from about 200 the year before, and approached the 600-boutique goal announced at the start of 2008, or about two-thirds of Best Buy’s U.S.
stores. The remaining stores, at about 30,000 square feet, apparently are too small for the Apple areas. Stores that include the areas range from about 35,000 to 50,000 square feet. The Apple shops vary in design by store and are designed much like Apple’s own stores, with light wood displays housing an embedded display screen. The latest layouts feature mini-theaters embedded in black walls with glowing Apple logos and stereo sound systems. In April 2008, Best Buy opened its first Apple store-within-a-store in China, inside the four-floor, 80,000-square-foot Shanghai store. Apple sent two technical consultants to the store to provide support.
Dell Completes the Computer Assortment In January 2008, Best Buy began selling a wide assortment of Dell computers in all its U.S. stores. With the addition of Dell, Best Buy’s computer offer includes the five leading computer brands in the United States under one roof. In April 2008, Dell products also were added to the assortment at Best Buy Canadian stores.
Exploring New Categories and More Private Brands Best Buy plans to move further into product categories and brands that are outside its traditional consumer electronics offer:
䉴 The retailer has opened store-within-a-store formats inside stores in the Twin Cities area of Minnesota and several other locations around the country that are focused on musical instruments beyond the basic electronic keyboards available in all its stores, such as guitars, drums, microphones, and amplifiers. The first opened in November 2007 and the second in February 2008. The company planned to extend the concept to about 85 stores by the end of fiscal 2008.
The in-store shops occupy about 2,500 square feet of retail space and offer about 1,000 products.
䉴 The company is expanding its private-brand business, providing more affordable alternative products in cat-egories such as home theater, computers, and MP3 players. Best Buy also is increasing its range of private-label Insignia brand flat-panel TVs, including smaller, value-oriented TVs. It has said it will begin selling its private-brand products to other retailers internation-ally, including retailers in countries where Best Buy currently does not operate.
䉴 In 2007, to attract more women to the stores, Best Buy introduced new exclusive product lines such as Liz Claiborne accessory bags and cases and home theater furniture designed by Maria Yee. This idea is being extended with the addition of upscale accessories from designer Steve Madden and the Betseyville collection by Betsey Johnson. The collections include edgy designs for cell phone, digital camera, and iPod cases.
Better Serving Hispanics During 2007, Best Buy made several changes to better serve its growing Hispanic customers. In September, the company launched a trans-actional, bilingual Web site. On the new site, Hispanic customers can browse, research, and order products in their preferred language. A click-to-call feature connects customers with a Spanish-speaking customer service rep-resentative if personal help is needed. The company also has added bilingual signage at more than 220 stores, developed Spanish advertising materials, and hired more sales and call center associates who are fluent in Spanish.
Free Help for CustomersBest Buy has partnered with FixYa.com (www.fixya.com), a Web site that allows customers to seek help with technology issues. Customers can access FixYa.com from the Best Buy Web site and post questions for experts in troubleshooting forums. The site also has manuals and troubleshooting guides for more than a half-million products. The FixYa technical support community provides customers with a way to resolve many issues without having to pay for Geek Squad service.
E-Waste Recycling Tested Best Buy has been testing a free electronics recycling program in more than 100 stores.
Beginning in June 2008, consumers could bring up to two products per day into the stores for recycling at no charge.
TVs, microwaves, and air conditioners were among the items accepted in the program. Best Buy is evaluating the test before deciding about adding the program to other stores.
Wal-Mart’s Consumer Electronics Expansion
Today, Best Buy’s marketing-leading position faces an ever-stronger challenge from Wal-Mart for the sales of consumer electronics in the United States. Wal-Mart is pulling out all the stops to dominate the consumer electronics business.
The retailer has completed the rollout of its new consumer electronics department configuration and continues to add new brands. The company also is exploring the addition of an installation component to its offer. The rollout is designed in part to lure more mid-to-higher-income shoppers—customers the retailer needs if it wants to overtake Best Buy as the largest U.S. electronics retailer.
The chainwide rollout of the new configuration began in May 2007; the company announced in 2008 that the redesign had been completed. The redesign efforts were
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focused on improving the customer CE experience in the stores and included:
䉴 Wider, more navigable aisles.
䉴 A large increase in the assortment of HD TVs, including more full-HD (1080p resolution) and larger models.
䉴 A wider assortment of Blu-ray players and media, including brands such as Magnavox, Panasonic, and Samsung to go along with the Sony brand.
䉴 A new computer display center, along with an expanded assortment of accessories and signage designed to help shoppers choose the right computer for their needs.
䉴 An increased assortment of global positioning system (GPS) devices, including the addition of the Magellan brand to go along with the previous offering of Garmin and TomTom devices.
䉴 A wider assortment of digital picture frames.
䉴 Improved product information to provide customers with basic information about consumer electronics, neces-sary add-ons, and developments such as the conversion to all-digital signals.
䉴 A social gaming area where game players can try out
䉴 A social gaming area where game players can try out