Best Buy Co., Inc.

views updated

Best Buy Co., Inc.

founded: 1966

Contact Information:

headquarters: 7075 flying cloud dr.
eden prairie, mn 55344 phone: (612)947-2000 fax: (612)947-2422 url: http://www.bestbuy.com

OVERVIEW

Best Buy is the largest consumer electronics retailer in the United States with 290 stores nationwide. The company's growth was based on low pricing and efficiency in operation. Best Buy's sales strategy is a no hassle approach that allows customers to choose their purchases with minimal sales help. Stores have a warehouse look and the size allows for a wide assortment of brand name merchandise. Best Buy's core businesses are home entertainment software, consumer electronics, and PCs/home office equipment.

Best Buy's most direct competitor is Circuit City. The competition is most intense in entertainment software and computers. Best Buy has also dealt with a changing target market and product mix over the years, and has been successful in adapting to the new trends.

COMPANY FINANCES

Best Buy reported revenues of $8.36 billion for fiscal year 1998 (ended February 28, 1998), an increase of 8 percent over 1997 revenues of $7.77 billion. Net income for the year was $94.5 million, compared to $1.7 million in 1997 (an increase of more than 5,000 percent). Earnings per share were $1.04, compared to $.02 in 1997). For the first quarter of fiscal year 1999, Best Buy reported net income of $15.7 million, or $.16 per share, compared to a net loss in the first quarter of 1998 of $2.6 million.

In 1998, Best Buy's PC and Home Office Equipment product group accounted for the majority of the company's sales, 38 percent—a decrease of 1 percent compared to its share of revenues in 1997. Entertainment Software accounted for 20 percent (up 1 percent from 1997); Appliances accounted for 9 percent; and in the Consumer Electronics Division, the video segment generated 15 percent of sales, while audio generated 11 percent. The remaining 7 percent of sales was generated by other miscellaneous products and services.

ANALYSTS' OPINIONS

Critics believe Best Buy relies too much on computer products and fails to pay attention to profitable areas such as major appliances and big screen TVs. Best Buy's rapid growth and slim margins have other proponents believing that the company has the potential to become another Phar-Mor, a drug discount chain whose quick expansion caused the company to go bankrupt. Investment analysts were of varying opinions, some seeing the company's growth as cause to grant it a "strong buy" rating, while others were more skeptical and recommended a "hold" rating on Best Buy stock for the moment. Analysts who were skeptical about Best Buy's performance were in part basing their views on the declining numbers in overall consumer sales of personal computers.

HISTORY

In 1966 Richard Schulze opened Sound of Music, a home and car stereo store in Minnesota targeted to teenage boys. Schulze and his partner operated the store for five years, but in 1997 Schulze bought out his partner and began expanding the chain. By 1974, Sound of Music had six stores in Minnesota. In the early 1980s consumer demands were changing. Realizing the need to diversify, Sound of Music began offering other consumer electronic equipment and appliances as part of an effort to target more affluent consumers. In 1983 Schulze changed the company name to Best Buy, and in 1984 he opened the first superstore.

Best Buy grew rapidly with $28.5 million in sales in 1984—compared to $9.9 million in 1983. In 1985, with 9 stores, Best Buy became a public company. By 1987, Best Buy had 24 stores and sales of $240 million, but it was beginning to feel the crunch as other rapidly expanding consumer electronics retailers pushed their way into the market. In order to set his stores apart, Schulze billed Best Buy as a store that allowed consumers to browse without high pressure from sales staff. He reduced employees and eliminated commission-based sales practices.

Best Buy continued to expand during the late 1990s. In 1994 Best Buy decided to expand into the Pacific Northwest where other consumer electronics chains were strong. In 1995, Best Buy became the number three electronic retailer with its 14 stores in Detroit, Michigan. By the end of 1996 the company had 251 stores; that number rose to 272 stores in 1997, and 285 in 1998. The company planned to open another 25 stores during fiscal year 1999. Best Buy operates solely in the United States and by mid-1998 was operating in 32 of them. Most of the stores are located in the Midwest, although Best Buy is expanding elsewhere.

STRATEGY

Best Buy's marketing strategy includes aggressive advertising and competitive pricing, as well as its pursuit of cost saving strategies. The company's Concept II store format was introduced in 1989. Sales people were taken off commission and given straight salary, thereby cutting payroll costs. Also, the store's entire inventory was out on the floor, allowing customers to choose products off the shelf and proceed directly to the cashier. The concept worked so well that a major competitor in Minnesota, Highland Appliance, was forced to close. With this new warehouse atmosphere, however, some vendors were displeased and pulled their products from the stores' shelves. Despite this, Best Buy continued its rapid expansion.

Best Buy also upgrades its facilities and re-organizes its stores to best meet the consumers needs. In 1994, the Concept III store format was introduced, calling for 60,000 square feet of space per store. In keeping with the hands-off attitude, the company installed interactive answer centers offering customers "touch-screen access to product functions, features and prices." In addition, Best Buy increased its assortment of high-end products, added to its parts and accessory departments, and introduced a more appealing color scheme to its stores.

In 1996 Best Buy decided to promote its home video business by ordering direct with Buena Vista, Disney's home video subsidiary. The decision was not only based on cutting costs but also on being more competitive in home video sales. Best Buy would continue to purchase other videos through distribution since distributors are able to offer quick turnaround on orders and are able to warehouse inventory.

Best Buy's new target market is highly-educated, mature, and 36 years old with a household income averaging $50,000 per year. Best Buy has started to market a wider assortment of high quality merchandise. The company's management believed specialty retailers would continue to consolidate during the late 1990s, but that competition from other mass retailers and other sources such as the Internet and mail order companies would continue. To grow in this competitive environment, Best Buy was focused on profit improvement. The company hoped to do this through increased sales of Performance Service Plans (PSPs), more selective use of financing plans, and dedicating more selling space to high profit margin products. Best Buy also hired Andersen Consulting to help further improve corporate systems and strategies.

INFLUENCES

Best Buy has influenced the electronics industry. Along with Circuit City, it has forced several department stores out of the electronics business or has forced electronic retailers to re-evaluate sales strategies. With its low-cost, low-price, low-margin strategy, Best Buy has set a "new standard for marketing electronic products in a retail environment." However, the company has also experienced the negative impact of industry downturns. In 1997, there was a notable lack of new products and technology with widespread appeal. Prices of personal computers declined as well. As a result, Best Buy's personal computer revenues were down. Helping the company slightly was increased consumer interest in video products such as digital satellite systems (DSS) and digital versatile discs (DVDs). Even with these new systems, the consumer video segment of Best Buy's sales decreased from 17 to 15 percent of overall sales from 1997 to 1998.

Expansion seemed to be working well for the company. Best Buy attributed its 8-percent increase in sales in 1997 to the opening of 21 new stores, as well as the ability to count a complete year of operations for each of the 47 new stores opened in 1996. However, due to slow industry growth and its impact on profits, expansion was slowed during 1997 and 1998.

CURRENT TRENDS

In June 1998, Best Buy hired James Damian as Vice President of Visual Merchandising. The company created the new position in which Damian will be responsible for creating a new "in-store visual advertising strategy," according to the company's press release. "Over the past year, Best Buy has focused on incorporating our brand identity from our inserts, to broadcast ads and into our retail stores," said Julie Engel, senior vice president of advertising. "Damian's specialization in themed environments will help create memorable Best Buy in-store elements for our customers."

In addition to refining its advertising tactics, Best Buy found new video technology was helping the store gain market share. In April 1998, Best Buy marked its first $1-million week in movie sales and a significant 35 percent of the DVD movie market. The company attributes its successful sales of DVD products to its "enhanced retail presentation and consumers' continued acceptance of this new product," said Best Buy Merchandise Manager Joe Pagano. Best Buy continued adding DVD movie titles and planned to continue expanding its DVD movie area over 1998.

PRODUCTS

When Best Buy was originally opened as Sound of Music, the store strictly carried audio equipment. As the company's target market (teenage boys aged 15-18) began to decrease in the early 1980s, appliances and VCRs were added to the product mix targeting more mature and affluent customers.

In 1986, Best Buy began to offer entertainment software, adding video rental departments and CDs. Music departments were expanded with each new store that opened, since music proved to be a popular sales item. With sales staggering, Best Buy needed to diversify once again. In 1996, it introduced gourmet kitchen appliances to its outlets offering cookware, small electronics, cutlery, and spices. In addition, Best Buy added several topend major appliances from such manufacturers as GE, Tappan, Amana, Hotpoint, Roper, White-Westinghouse, Maytag, Sunray, and Gallery. Best Buy also sold personal computers and home office products. It was the first major retailer to sell digital versatile disks (DVDs) and related software beginning in 1998. Plans for the future included products such as flat screen televisions, cellular communications, and the linking of personal computers and consumer electronics.

Additionally, Best Buy offers services such as delivery, installation, and repair of products sold in the store. Computer support and training services are also available on an individual or corporate level.

FAST FACTS: About Best Buy Co., Inc.

Ownership: Best Buy is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: BBY

Officers: Richard M. Schulze, Founder, Chmn. & CEO, 56, $750,000; Bradbury H. Anderson, Pres. & COO, 47, $565,000; Allen U. Lenzmeier, Exec. VP & CFO, 53, $435,000; Wade R. Fenn, Exec. VP, Merchandising, 38, $380,000

Employees: 39,000 (1997)

Chief Competitors: Best Buy's most direct competitor is Circuit City. Others include: Tandy Corp. (Radio Shack); Sears (Brand Central); Wal-Mart; CompUSA; Kmart; Target; Office Depot; and Service Merchandise.

CHRONOLOGY: Key Dates for Best Buy Co., Inc.

1966:: Richard Schulze opens a home and car stereo store called Sound of Music
1983:: Schulze changes the company name to Best Buy
1984:: The first Best Buy superstore opens
1989:: Best Buy launches its Concept II stores, with bigger show rooms, fewer sales people, and more self-help product information
1993:: Best Buy reports its greatest financial performance
1998:: Best Buy has its first $1 million week in movie sales

CORPORATE CITIZENSHIP

Since 1994 Best Buy has sponsored the annual Best Buy Children's Foundation LPGA Golf Tournament. The company is also seeking vendors to participate in a program for at-risk and chronically ill children. The program would provide scholarships for attending summer camps and seminars in order to promote personal growth and instill leadership qualities. Also a supporter of the arts, Best Buy was a sponsor of the 1998 Chicago Blues Festival. There the company presented a check for $2,400 to the Chicago Blues Archives for the "Speakin' of the Blues" Program, a performance series featuring oral histories of remarkable Blues' musicians. In summer of 1997, Best Buy raised funds by donating $1 for each T-shirt sold at the 1997 Chicago Blues Festival.

EMPLOYMENT

Best Buy takes an active interest in its employees. The company recruits through colleges and job fairs. Best Buy offers career development through training practices and offers tuition reimbursement to increase employee knowledge and improve skills. Sales personnel are involved in all aspects of store operations, and the company's policy is to promote from within.

SOURCES OF INFORMATION

Bibliography

best buy 1997 annual report. minneapolis, mn: best buy co., inc., 1998.

"best buy co., inc." hoover's online, 21 june 1998. available at http://www.hoovers.com.

"best buy, circuit city downsize." television digest, 23 september 1996.

"best buy presents check to benefit 'speakin' of the blues' program." pr newswire, 20 april 1998.

"best buy reports record fourth quarter & fiscal 1998 earnings." minneapolis, mn: best buy co., inc., 2 april 1998. "best buy revamps stores sales." television digest, 16 september 1996.

"best buy's dvd marketshare reaches 35%, best buy hits first $1 million post-holiday week for dvd movies." prnewswire, 10 april 1998.

"career direction through training." chain store age, october 1987.

christman, ed. "best buy, circuit city a potent combo; 2 chains change entertainment retailing." billboard, 17 june 1995.

haran, leah. "best buy, circuit city raising the stakes in electronics warfare." advertising age, 27 september 1995.

hisey, pete. "best buy to rely on software, appliances." discount store news, 1 july 1996.

"power retailers move northwest." television digest, 14 november 1994.

scally, robert. "best buy goes direct with disney, blockbuster to self-distribute." discount store news, 2 september 1996.

"visual merchandising exec joins best buy." pr newswire, 9 june 1998.