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Best Buy Co., Inc.

Best Buy Co., Inc.

7075 Flying Cloud Drive
Eden Prairie, Minnesota 55344
U.S.A.
(612) 947-2200
Fax: (612) 947-2422
Web site: http://www.bestbuy.com

Public Company
Incorporated: 1966 as Sound of Music Inc.
Employees: 36,300
Sales: $7.7 billion (1997)
Stock Exchanges: New York
SICs: 5722 Household Appliance Stores; 5731 Radio, Television & Electronics Stores; 5734 Computer & Software Stores; 5735 Record & Prerecorded Tape Stores; 5946 Camera & Photographic Supply Stores

One of two powerhouses among consumer electronics retailers, Minnesota-based Best Buy Co., Inc., dominates the central U.S. market through a network of more than 280 stores in 32 states. In addition to personal computers and consumer video and audio products, the company offered large and small appliances, ranging from refrigerators to coffeemakers, and entertainment software, including compact discs, audio and video cassettes, and computer software. Although the company had overtaken archrival Circuit City in the late 1990s to become the largest consumer electronics retailer in the United States, its victory was marginal and the price reductions needed to capture market share had hurt Best Buys profit margins.

Early History

Best Buy is the brainchild of the companys founder, chairman, and CEO, Richard M. Schulze. In 1966 Schulze and a partner opened Sound of Music Inc. in an attempt to capture a share of the Twin Cities home and car stereo retail market. First year sales reached $173,000. Four years later Schulze bought out his partner and proceeded to expand his retail chain; his product line, however, was limited to audio components until the early 1980s. Then, according to an Executive of the Year cover story for Corporate Report Minnesota, Schulze said, The lights began to turn on. Writer S. C. Biemesderfer explained: Schulze had come to realize that there wasnt much of a future in a market glutted with vendors, serving a shrinking audience of 15- to 18-year-olds with limited resources. His ability to alter the course of his company was enhanced by a week-long management seminar he attended in 1981. Departing the seminar as a reformed controller, Schulze saw the dynamic possibilities that lay ahead and turned them into reality.

His first step was to expand Sound of Musics offerings to include appliances and VCRs. Schulze saw sales quickly climb. In 1982 revenues reached $9.3 million; the following year the company renamed itself Best Buy and firmly oriented itself toward an older, broader, and more affluent customer base. Then, in 1984, Schulze took another major step by introducing the superstore format and quickly capturing 42 percent of the local market. At the time the company operated just eight stores in the Midwest, but by 1987 this number had tripled, while sales and earnings had spi-raled upward to $239 million and $7.7 million, respectively. In addition to greatly expanded warehouse size and product offerings, the superstore format meant significantly smaller margins to maintain its good service, low prices image.

Price Wars in the Late 1980s

Of course Best Buy was not alone among upstart chains during the 1980s in capitalizing on the superstore format and such hot-ticket consumer items as VCRs. But after a raft of these chains went public, wrote Mary J. Pitzer in 1987, they expanded rapidly and began colliding head-on. As a result, many companies took a beating on profit margins and are now gravely wounded. It was, in a very real sense, the best of times and the worst of times for Best Buy. Although sales had practically doubled to $439 million in fiscal 1988, net earnings had declined by 64 percent. Price wars were the chief culprit, and they were still escalating to a frenzied pitch in Best Buys core Twin Cities market, which Highland Superstores had boldly entered in early 1987.

For a while, both companies benefited from market share increases, if not profit gains, by the battle. Then, finally, a

Saturation point was reached, with too many stores in the same area competing for the same dollars. According to Biemes-derfer, Rumor had it that, as Best Buy limped into the fall of 1988 Schulze tried to sell his company to Sears and failed because of his demands for certain perks. Biemesderfer went on to write, Schulze denies the allegation, but to this day, even his backers question his version of the story. Schulzes own explanation was as follows: At no point in time were there ever any concerns or fears about the future of the company. Our discussion with Sears Roebuck was simply an attempt to understand the interest they would have in supplying capital necessary to grow the company independently.

Despite the earnings downturn in fiscal 1989 (net profits for the year ending March 31 slumped 26 percent, to just $2 million) and the looming presence of Highland, revenues were still climbing, albeit more slowly. In Schulzes mind, the key to regaining the momentum of the mid-1980s was to stand out from the competition, for the average customer recognized little difference among superstores, with their discount prices, multiple-step purchase processes, commissioned salespeople, and ubiquitous service plan and extended warranty packages. Schulzes answer? Concept II stores.

The unveiling of Best Buys first Concept II stores in 1989 was the culmination of a daring new advance by Schulze. The idea behind Concept II was that the traditional superstore format was out of sync, in large part, with the needs or preferences of most shoppers. Shoppers were entering electronics discount stores with only a limited need for sales help and a desire for hassle-free buying (no service plan contracts, no waiting for merchandise from the back room, no switching from counter to counter). Thus the revamped Best Buy stores would feature well-stocked showrooms averaging around 36,000 square feet, fewer salespeople, more self-help product information, Answer Centers for those requiring personal assistance, and one-stop purchasing. As a veteran Best Buy analyst, quoted by Biemesderfer, proclaimed: Concept II is the most innovative thing to happen in this industryever. The revenue Best Buy sacrificed in de-emphasizing service plans was compensated for by lowered employee costs. Stores without commissioned sales help now were able to operate at two-thirds of the work force required in the past.

Continued Expansion in the Early 1990s

In April 1991, even before Best Buy had gotten around to converting its ten Twin Cities stores, loss-ravaged Highland exited the metropolitan area, conceding defeat and closing all six of its stores there. Best Buy itself reported a loss of $9.4 million for fiscal 1991, but this was due to a $14 million change in its method of accounting for extended service plans. From fiscal 1992 to fiscal 1993, Best Buy reported the best financial performance in the companys 27-year history. In addition to its stunning increases in revenues and earnings, the fast-growing retailer opened 38 new stores and saw comparable store sales (sales from stores open at least 14 months) increase by 19.4 percent.

During the calendar year 1993, Best Buy opened nine more stores in Chicago, for a total of 23, to solidify its leadership position in the Midwest, and entered the key Circuit City markets of Atlanta and Phoenix with an additional 13 stores. Numerous other openings, including a small number of megastores (40,000- to 50,000-square-foot self-service warehouses emphasizing the emerging growth lines of prerecorded music and computers), brought Best Buys tally to 151 stores by year-end 1993. At that point the only internal factor seriously saddling the company was a hefty 43 percent debt-to-capital ratio. Best Buys push distribution system, however, in which products are automatically shipped to outlets based on computer analysis of past sales trends, along with its rapid turnover time and its expectation of rising sales per store, indicated that the company could hold its costs while continuing to expand.

Its greatest concern for the future was the bottom line impact of Circuit Citys latest moves. Just as Best Buy had looked to the outer corridors of the country, Circuit City had looked inward. It, too, had embraced Chicago, where price wars began anew. The Virginia company also had plans to enter Kansas City, Missouri and the Twin Cities in 1994. Whether the two would be able to operate side by side for long was unknown. Whatever the case, the stakes were high, not only for the companies but for related retailers and manufacturers. Such high-image manufacturers as Mitsubishi already had retreated from both store chains, complaining of poor price and sales support. And, wrote Berss, The last thing retailers need this Christmasthe biggest selling period of the yearis a price war. But thats what theyre getting.

Company Perspectives:

Best Buys mission is to profit and grow as a team by providing our customers exceptional value and a great shopping experience. The companys vision is Best Buy as the worlds favorite and best performing entertainment and technology retailer. Best Buys success can be attributed to five Company values: customer service, mutual respect between employees, protection of company assets, receptiveness to change, and commitment to excellence.

By 1993 both superstore titans had virtually vanquished the remaining competition, which included such former number two retailers as Highland Superstores (forced to liquidate) and Dixons Groups Silo Holdings (forced to downsize and sell to Fretter Inc.). Best Buys growth had been nothing short of spectacular. From 1989 to 1992 corporate sales rose annually by 23 percent, while the industry as a whole expanded by a yearly average of just three percent. From 1992 to 1993 revenues catapulted for the first time beyond the $1 billion mark, from $929 million to $1.6 billion, for an increase of 74 percent. During this same period net earnings soared 107 percent to just less than $20 million. Although Circuit City was a significantly larger and more stable company in the eyes of investors, with a history of wider profit margins and negligible debt, it was Best Buy that generated the most excitement on Wall Street. For the first half of 1991, Best Buy outshone all other New York Stock Exchange stocks in percentage appreciation. With excitement, however, came volatility: in 1993 the stock nearly doubled within a three-month period but then dropped by ten percent in a single day in mid-November. Part of this roller coaster pattern was due to Best Buys increasingly heated battle with Circuit City, which had many analysts wary.

The roller coaster ride continued into 1994, with Best Buys stock hitting a high of $37 a share in April, then falling almost 40 percent in the next five months to $22. It rose again to $45 only to drop by December to $34. Competition with Circuit City remained fierce, with Best Buy challenging its archrival by entering its traditional strongholds in California, Washington, D.C., and Ohio. The head-on clash prompted renewed price wars, which Best Buy was positioned to withstand because of its low cost structure. Lowered prices, however, meant lower earnings for Best Buy.

The companys strategy of cutting service to help offer lower prices continued to cost the company suppliers. By 1995 the electronics manufacturer Hitachi had stopped supplying Best Buy, as had the appliance maker Kenwood. In addition, Whirlpool pulled its top-line Whirlpool brand from the store, although it continued to supply its lower-priced Roper brand. President of Mitsubishi Consumer Electronics America Jack Osborn explained to Forbes in 1995 that his company chose to sell through smaller retailers because they offer better service and cannot use their size to pressure Mitsubishi into offering lower wholesale prices. Osborn said at the time, We will not be in a national chain.

In an effort to reverse this trend, Best Buy announced in 1995 that it would revamp its merchandising format for high-quality audio products. Brad Anderson, the president of Best Buy, told Forbes that the move was needed because, We could not land some of the products we wanted.

Expanding Territory and Market Share in the Late 1990s

Despite these problems, Best Buy continued to expand its territory and to take over market share. In 1995 the company added 47 new stores and moved into new areas, including Miami and Cincinnati. By late 1995 Best Buy was breathing down the neck of Circuit City in terms of market share. With 8.7 percent of the consumer electronics market, Best Buy stood only a tenth of a percent behind Circuit City.

The company added almost 50 new stores in its fiscal year 1996 and moved into additional new territories, including Philadelphia. Revenues rose to more than $7 billion in fiscal year 1996 from 1995 revenues of $3 billion. Earnings, however, actually dropped, from about $58 million in 1995 to $48 million in 1996. The downward earnings spiral continued in 1997. Although revenues rose slightly in fiscal 1997 to 7.7 billion, earnings had plummeted to $1.7 million. The company cited falling computer prices and a soft consumer electronics market as reasons for its poor performance.

The drastic cut in profit margins forced Best Buy to rethink its product offerings. For instance, the company began offering cut-rate compact discs in 1988 as a loss leader and pushed the idea in the mid-1990s. Although people bought the low-priced discs, they did not stay to purchase the big-ticket, high-margin items. In 1997 the company cut back its CD selection and raised the remaining titles prices slightly. It also added an assortment of books and magazines to its entertainment section. In addition, it decided to concentrate on higher margin items, such as computer peripherals, high-end appliances, and service plans.

By 1997 Best Buy had achieved its goal of becoming the industry leader, but it paid the price in profits, which had fallen to a dismal 0.02 percent of sales. With computer prices continuing to fall, 1998 would test the efficacy of Best Buys adjustments to its product offerings. The first three quarters of fiscal 1998 did indeed show improvement: net earnings had passed $30 million, compared with a net loss of almost $11 million for the same nine months in fiscal 1997.

Further Reading

Apgar, Sally, Best Buy Planning To Spend $5 Million To Upgrade Stores in Twin Cities Area, Star Tribune, March 31, 1993, p. 1D.

Best Buy Files for New Stock Offering, Star Tribune, April 21, 1993, p. 1D.

Bernstein, Elizabeth, Best Buy Breaks into Book Market, Publishers Weekly, September 1, 1997, p. 9.

Berss, Marcia, High Noon, Forbes, December 20, 1993, pp. 4445.

, We Will Not Be in a National Chain, Forbes, March 27, 1995, p. 50.

Best Buy Co., Wall Street Journal, January 9, 1992, p. B8.

Best Buy Earnings Soar 114 Percent for Quarter, Star Tribune, December 17, 1993, p. 4D.

Best Buy Inc., Chain Store Age Executive with Shopping Center Age, December 1992, pp. 64, 66.

Biemesderfer, S. C., Laughing Last (Executive of the Year: Richard M. Schulze), Corporate Report Minnesota, January 1992, pp. 3342.

Carvell, Tim, The Crazy Record Business: These Prices Really Are Insane, Fortune, August 4, 1997, pp. 108115.

Harán, Leah, Best Buy, Circuit City Raising the Stakes in Electronics Warfare, Advertising Age, September 27, 1995, p. 4.

Kennedy, Tony, Best Buy Predicting Flat Earnings for First Half, Star Tribune, June 17, 1993, p. 3D.

Marcotty, Josephine, Best Buy Co. Stock Takes a Beating as Possible Price War with Circuit City Looms, Star Tribune, November 12, 1993, pp. 12D.

Pitzer, Mary J., Electronics Superstores May Have Blown a Fuse, Business Week, June 8, 1987, pp. 90, 94.

Sales at Best Buy Coincide with Rally of Its Stock, Star Tribune, July 9, 1993, pp. 1D, 7D.

Sullivan, R. Lee, Appealing to the Technophiles, Forbes, April 27, 1992, pp. 52, 54.

Voskoboynik, Henry, Best Buy: A Best Buy Indeed, Financial World, September 1, 1994, p. 12.

Jay P. Pederson
updated by Susan Windisch Brown

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Best Buy Co., Inc.

Best Buy Co., Inc.

7075 Flying Cloud Drive
P.O. Box 9312
Eden Prairie, Minnesota 55437
U.S.A.
(612) 947-2200
Fax: (612) 947-2422

Public Company
Incorporated: 1966 as Sound of Music Inc.
Employees: 16,000
Sales: $2.1 billion
Stock Exchanges: New York
SICs: 5722 Household Appliance Stores; 5731 Radio, TV & Electronics Stores; 5734 Computer & Software Stores; 5735 Record & Prerecorded Tape Stores; 5946 Camera & Photographic Supply Stores

One of two powerhouses among consumer electronics retailers, Minnesota-based Best Buy Co., Inc., dominates the central U.S. market through a network of more than 150 stores in 18 states. The companys arch-rival is Virginia-based Circuit City, with $3.6 billion in sales and strongholds on both the east and west coasts. By 1993 both superstore titans had virtually vanquished the remaining competition, which included such former number two retailers as Highland Superstores (forced to liquidate) and Dixons Groups Silo Holdings (forced to downsize and sell to Fretter Inc.). Best Buys recent growth has been nothing short of spectacular. From 1989 to 1992 corporate sales rose annually by 23 percent, while the industry as a whole expanded by a yearly average of just 3 percent. From 1992 to 1993 revenues catapulted for the first time beyond the $1 billion mark, from $929 million to $1.6 billion, for an increase of 74 percent. During this same period, net earnings soared 107 percent to just under $20 million. Although Circuit City is a significantly larger and more stable company in the eyes of investors, with a history of wider profit margins and negligible debt, it is Best Buy that has generated the most excitement on Wall Street. For the first half of 1991, Best Buy outshone all other New York Stock Exchange stocks in percentage appreciation. However, with excitement comes volatility: in 1993 the stock nearly doubled within a three-month period but then dropped by 10 percent in a single day in mid-November. Part of this roller coaster pattern is due to Best Buys increasingly heated battle with Circuit City, which has many analysts wary. In the notoriously competitive industry of consumer electronics, Best Buy has proven itself an expert player. The only question that remains is whether two giants can remain healthy at the top of the heap, as each tries to usurp market share within the others established domain.

Best Buy is the brainchild of the companys founder, chairman, and CEO, Richard M. Schulze. In 1966 Schulze and a partner opened Sound of Music Inc. in an attempt to capture a share of the Twin Cities home and car stereo retail market. First year sales reached $173,000. Four years later Schulze bought out his partner and proceeded to expand his retail chain; his product line, however, was limited to audio components until the early 1980s. Then, according to an Executive of the Year cover story for Corporate Report Minnesota, Schulze said, the lights began to turn on. Writer S. C. Biemesderfer explained: Schulze had come to realize that there wasnt much of a future in a market glutted with vendors, serving a shrinking audience of 15- to 18-year-olds with limited resources. His ability to alter the course of his company was enhanced by a week-long management seminar he attended in 1981. Departing the seminar as a reformed controller, Schulze saw the dynamic possibilities that lay ahead and turned them into reality.

His first step was to expand Sound of Musics offerings to include appliances and VCRs. Schulze saw sales quickly climb. In 1982 revenues reached $9.3 million; the following year the company renamed itself Best Buy and firmly oriented itself toward an older, broader, and more affluent customer base. Then, in 1984, Schulze took another major step by introducing the superstore format and quickly capturing 42 percent of the local market. At the time the company operated just eight stores in the Midwest, but by 1987 this number had tripled, while sales and earnings had spiraled upward to $239 million and $7.7 million, respectively. In addition to greatly expanded warehouse size and product offerings, the superstore format meant significantly smaller margins in order to maintain its good service-low prices image.

Of course Best Buy was not alone among upstart chains during the 1980s in capitalizing on the superstore format and such hot-ticket consumer items as VCRs. But after a raft of these chains went public, wrote Mary J. Pitzer in 1987, they expanded rapidly and began colliding head-on. As a result, many companies took a beating on profit margins and are now gravely wounded. It was, in a very real sense, the best of times and the worst of times for Best Buy. Although sales had practically doubled to $439 million in fiscal 1988, net earnings had declined by 64 percent. Price wars were the chief culprit, and they were still escalating to a frenzied pitch in Best Buys core Twin Cities market, which Highland had boldly entered in early 1987.

For a while, both companies benefited from market share increases, if not profit gains, by the battle. Then, finally, a saturation point was reached, with too many stores in the same area competing for the same dollars. According to Biemesderfer, Rumor had it that, as Best Buy limped into the fall of 1988 Schulze tried to sell his company to Sears and failed because of his demands for certain perks. Biemesderfer went on to write that Schulze denies the allegation, but to this day, even his backers question his version of the story. Schulzes own explanation was that At no point in time were there ever any concerns or fears about the future of the company.... Our discussion with Sears Roebuck was simply an attempt to understand the interest they would have in supplying capital necessary to grow the company independently.

Despite the earnings downturn in fiscal 1989 (net profits for the year ending March 31 slumped 26 percent, to just $2 million), and the looming presence of Highland, revenues were still climbing, albeit more slowly. In Schulzes mind, the key to regaining the momentum of the mid-1980s was to stand out from the competition, for the average customer recognized little difference among superstores, with their discount prices, multiple-step purchase processes, commissioned salespeople, and ubiquitous service plan and extended warranty packages. Schulzes answer? Concept II stores.

The unveiling of Best Buys first Concept II stores in 1989 was the culmination of a daring new advance by Schulze. The idea behind Concept II was that the traditional superstore format was largely out of sync with the needs or preferences of most shoppers. Shoppers were entering electronics discount stores with only a limited need for sales help and a desire for hassle-free buying (no service plan contracts, no waiting for merchandise from the back room, no switching from counter to counter). Thus the revamped Best Buy stores would feature well-stocked showrooms averaging around 36,000 square feet; fewer salespeople; more self-help product information; Answer Centers, for those requiring personal assistance; and one-stop purchasing. As a veteran Best Buy analyst, quoted by Biemesderfer, has proclaimed: Concept II is the most innovative thing to happen in this industryever. The revenue Best Buy sacrificed in de-emphasizing service plans was compensated for by lowered employee costs. Stores without commissioned sales help were now able to operate at two-thirds of the work force required in the past.

In April 1991, even before Best Buy had gotten around to converting its 10 Twin Cities stores, loss-ravaged Highland exited the metropolitan area, conceding defeat and closing all six of its stores there. Best Buy itself reported a loss of $9.4 million for fiscal 1991, but this was due to a $14 million change in its method of accounting for extended service plans. From fiscal 1992 to fiscal 1993, Best Buy reported the best financial performance in the companys 27-year history. In addition to its stunning increases in revenues and earnings, the fast-growing retailer opened 38 new stores and saw comparable store sales (sales from stores open at least 14 months) increase by 19.4 percent.

During the calendar year 1993, Best Buy opened 9 more stores in Chicago, for a total of 23, to solidify its leadership position in the Midwest and also entered the key Circuit City markets of Atlanta and Phoenix with an additional 13 stores. Numerous other openings, including a small number of megastores (40,000- to 50,000-square-foot self-service warehouses emphasizing the emerging growth lines of prerecorded music and computers), brought Best Buys tally to 151 stores by year-end 1993. At that point, the only internal factor seriously saddling the company was a hefty 43 percent debt-to-capital ratio. However, Best Buys push distribution system, in which products are automatically shipped to outlets based on computer analysis of past sales trends; its rapid turnover time; and its expectation of rising sales per store indicated that the company could hold its costs while continuing to expand.

Its greatest concern for the future was the bottom line impact of Circuit Citys latest moves. Just as Best Buy had looked to the outer corridors of the country, Circuit City had looked inward. It, too, had embraced Chicago, where price wars began anew. The Virginia company also had plans to enter Kansas City, Missouri, and the Twin Cities in 1994. Whether the two would be able to operate side-by-side for long was unknown. Whatever the case, the stakes were high, not only for the companies but for related retailers and manufacturers. Such high-image manufacturers as Mitsubishi had already retreated from both store chains, complaining of poor price and sales support. And, wrote Berss, the last thing retailers need this Christmasthe biggest selling period of the yearis a price war. But thats what theyre getting. The obvious winner in all of this? The consumer, by sheer happenstance. Then again, maybe its by design.

Further Reading

Apgar, Sally, Best Buy Planning to Spend $5 Million to Upgrade Stores in Twin Cities Area, Star Tribune, March 31, 1993, p. ID; Best Buy Files for New Stock Offering, Star Tribune, April 21, 1993, p. ID.

Berss, Marcia, High Noon, Forbes, December 20, 1993, pp. 4445.

Best Buy Co., Wall Street Journal, January 9, 1992, p. B8.

Best Buy Inc., Chain Store Age Executive with Shopping Center Age, December 1992, pp. 64, 66.

Biemesderfer, S. C, Laughing Last (Executive of the Year: Richard M. Schulze), Corporate Report Minnesota, January 1992, pp. 3342.

Kennedy, Tony, Best Buy Predicting Flat Earnings for First Half, Star Tribune, June 17, 1993, p. 3D; Sales at Best Buy Coincide with Rally of Its Stock, Star Tribune, July 9, 1993, pp. ID, 7D.

Marcotty, Josephine, Best Buy Co. Stock Takes a Beating as Possible Price War with Circuit City Looms, Star Tribune, November 12, 1993, pp. 12D; Best Buy Earnings Soar 114 Percent for Quarter, Star Tribune, December 17, 1993, p. 4D.

Pitzer, Mary J., Electronics Superstores May Have Blown a Fuse, Business Week, June 8, 1987, pp. 90, 94.

Sullivan, R. Lee, Appealing to the Technophiles, Forbes, April 27, 1992, pp. 52, 54.

Jay P. Pederson

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Best Buy Co., Inc.

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.


For an annual report:

on the internet at: http://www.bestbuy.comor write: best buy co., inc., investor relations dept., po box 9312, minneapolis, mn 55440-9312


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. best buy's primary sics are:

5044 office equipment

5045 computers, peripherals & software

5064 electrical appliances, tv & radio

5734 computer and computer software stores

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