Best buy-analysis

Strategic Analysis
Taposh Dutta-Roy
(Word count : 4255)

Best Buy Strategic Analysis
Submitted by: Taposh D.

Introduction

Best Buy Co., Inc. (NYSE: BBY)

is the global leader in consumer

electronics and appliances retail. It has

more than 1,400 large and small-format

locations, more than 160,000 employees,

$50B in annual revenue and is the 11th

largest retail website in the United

States. Best Buy maintains it has the largest share of the electronic and appliances segment at

16%1.

Best Buy is a big box store in the electronics retailing industry. Other firms competing

with Best Buy in this industry include Fry’s Electronics and HH Gregg. The industry previously

included CompUSA and Curcuit City. These companies went out of business in 2008 and 2009

respectively. Figure 1 (next page) maps the industry. The big box electronic retail industry is

differentiated from other industries that sell electronics based on the physical size of the store(s),

plotted on the x-axis, and variety of electronic inventory, plotted on the y-axis. Firms with small

or zero store square footage but sell a moderate-to-high variety of electronic inventory are within

the electronics e-commerce retail industry. And, firms with very large store square footage and

sell a moderate variety of electronic inventory are big box general merchandise retailers.

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Figure 1

Despite holding the leading share in the big box electronic retail industry, Best Buy is

currently a company in decline. The company is facing increasingly strong forces in its industry

that have had a negative impact on its business since 2008.

This paper explores industry forces affecting Best Buy, that have resulted in its business

decline. The following industry dynamics seem to be strengthening buyer power, supplier power

and substitution forces in Best Buy’s industry:

• Showrooming - shopping brick and mortar retail locations to determine purchase

preference, then buying online for a lower price

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• More perfect consumer information - e.g. online and mobile price comparison tools

• Price matching programs - driving down margins

• Shifts in consumer electronic spend - away from computers to mobile products

• Substitution - CDs and DVDs replaced by digital music and streaming services

Background

Best Buy started in 1966 as an audio component systems retailer named Sound of Music.

In 1983, the company changed its name to Best Buy. As part of the change the company began

using mass market merchandising techniques and operating consumer electronic stores in the big

box superstore format. The company has followed a differentiation strategy to create value for

their customers.

Best Buy operates retail stores throughout the United States, China, Canada, Europe, and

Mexico. The company sells products in a variety of categories including: consumer electronics,

appliances, video games, music, movies, and musical instruments. Elements of their

differentiation strategy include: broad selection of products, home delivery, repair and

warranty services, in-home technical services, and financing. The company has also made

acquisitions and joint ventures to further differentiate and diversify its products and services.

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Store Development and Format Strategy

Best Buy’s store development program includes testing stores in new markets; adding

stores within existing markets; and relocating, remodeling and expanding existing stores in order

to offer new products and services to customers. The company rolls out new stores following a

deliberate process that starts with a detailed market analysis of a target metro area. Once

established in a metro area, the company expands into suburban areas and small-markets.

Table 1 shows the total number of US Best Buy stores, number of stores opened and

closed, for last five years2.

Table 1

2012 2011 2010 2009 2008

U.S. Best Buy stores 1103 1099 1069 1023 923

Stores opened 7 31 46 100 101

Stores closed 3 1 0 0 0

Product Mix

Best Buy carries a large inventory of products ranging from consumer electronics, computers and

mobile phones, entertainment products (DVDs, Video Games, CDs), and appliances. Table 2

shows share of revenue for each product category.

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Table 2

Physical electronic and entertainment goods make up the bulk of Best Buy’s revenues.

Best Buy’s Troubles

To understand how much of Best Buy’s performance troubles are due to the industry it

inhabits we have used Porter’s Five Forces model. Each of the five forces is analyzed below.

Threat of New Entrants

Opening a big box electronic store is capital intensive. According to Best Buy's FY2012

financial statements, the firm spent $766 million in capital expenditures on 300 new stores,

remodeling projects to existing stores, and upgrading its information technology infrastrucure.

The average big box store is over 20,000 square feet and employs over 75 people. Firms in this

industry spend millions of dollars on property, plant and equipment to penetrate national and

global markets to capture market share. HH Gregg and Best Buy also spent $2.2 million and $2.4

million, respectively in SG&A per store, and $7.8 million and $8.8 million, respectively, in cost

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of goods sold per store in FY2012. The amount of initial investment to open a big box electronic

retailer is well over $15 million - significant enough to deter new entrants.

Additionally, incumbents have advantages because of multiple establishments, brand

value and relationship with channels. This creates a considerable barrier for new entry. Multiple

establishments in a local region makes it easy for customers to purchase a product. If one chain

location happens to be out of stock of a particular item, the retailer can easily redirect from

another chain location’s inventory. Leaders in this industry have an international presence and

have reached economies of scale. The threat of new entrants in the big box electronics retailing

industry is low.

Bargaining Power of Suppliers

The industry's revenue relies heavily on the major suppliers. For example, the largest 20

suppliers account for 60% of merchandise purchased from Best Buy, the dominant firm in the

industry. The industry's suppliers, Dell, Apple, Samsung, Vizio, LG, Sony, and Yamaha among

others, provide electronics and appliances to the firms' stores and warehouses.

Suppliers in this industry are subject to influence by large volume buyers. For instance,

Best Buy leverages its position as a share leader for electronics with its suppliers. Best Buy’s

product teams can influence product development and design3. Best Buy and other leaders in the

industry also carry exclusive items in special arrangements with suppliers. Bargaining power of

suppliers is moderate for this industry.

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Bargaining Power of Buyers

The industry’s customers are individuals and small businesses who use electronics for

entertainment, leisure, or business. In the past, customers had been extremely fragmented which

limited their ability to organize and influence the price of goods and services that firms offer. In

recent years, the industry's customers' power has been increasing.

The majority of items sold by big box electronics retailers are undifferentiated and are

available in other retail stores or online. As a result, buyers are inclined to go for price shopping

and play one vendor against another. Online tools provide customers with near perfect

information about price availability from competing retail outlets. When shopping for

electronics, 81% of consumers go to a company’s website for information versus 61% of

consumers going to the brick and mortar store4. The availability of online information and

pricing perpetuates the behavior known in the industry as showrooming. To fend off

showrooming the industry has been implementing price-matching policies for online or retail

stores4. The bargaining power of buyers in the industry is high.

Availability of Substitutes

Substitutes to big box electronic retailers include electronic e-commerce retailers (e.g.

Amazon, eBay, Overstock.com), big box general merchandise retailers (e.g. Wal-Mart, Target,

and Costco) and digital content distributors. (e.g. Netflix, iTunes, X-box Live). E-commerce

electronic retailers are considered substitutes because the companies in this industry are able to

provide similar products while offering the convenience of shopping at home or at work.

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Electronic commerce firms provide an alternative experience to the big box electronic

retailers’ showroom experience. A key differentiating benefit of e-commerce retail is the ease of

presentation of relavant information for consumer decisionmaking, such as like-product

recommendations and customer reviews. It is possible for e-commerce retailers to conduct

business under a very different cost structure than Best Buy. Without physical store locations and

staff to support each sale, these firms are often able to offer goods at lower price points than the

big box electronic retailers.

Big box general merchandise retailers can serve as a substitute to big box electronics

retailers because these firms offer customers with economies of scope. General merchandise

retailers allow customers to purchase a variety of household goods, including electronics, in one

store. A key differentiator between big box electronic retailers and big box general merchandise

retailers is that the diversity of inventory.

Another substitute threat to the big box electronics retail industry is the emergence of

digital content. More customers are consuming content via online services. These services, such

as Netflix, iTunes and X-box Live, are replacing the DVDs, CDs and video games that have

made up the 4th largest segment of Best Buy’s revenues (Table 2, page 6).

According to a 2011 e-Commerce and Consumer Electronics report from the NPG

Group, televisions and home theater systems are some of the least likely products that consumers

would purchase via online electronic retailers. However, the report indicates that computers,

tablets, and movies are products that consumers would more likely purchase online4.

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Additionally, Accenture’s 2012 Consumer Electronics report indicates, that TV and DVD

ownership decreased by 7% year over year6.

Economics teaches us that we can determine whether a product is a substitute based on its

price elasticity of demand against another product; as the price of a substitute Product B

decreases, the demand of Product A good will also decrease. As e-commerce electronic and big

box general merchandise retail industries are able to supply electronics to the market at lower

prices, they have captured a larger share of the overall electronic industry pie. Figure 2 illustrates

how Best Buy, the leading big box electronics retailer, faired against the leading firms in the e-

commerce electronic and big box general merchandise industries in Q4 2011.

Figure 2

The threat of substitutes in the big box electronics retailing industry is high.

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Intensity of Rivalry

Rival forces have spawned significant action in recent quarters that have reduced profit

margins in the industry. The pure electronics store segment has become more concentrated in

recent years as Circuit City and CompUSA went out of business. However, for overall

electronics and appliance sales (including online sales) there are several large players. These

larger competitors, selling identical products, have forced aggressive competitive activity. Price

matching programs are now commonplace in the industry and new programs and services, such

as trade-in programs, have been introduced.

Establishing a big box store is both capital and resource intensive. A large amount of

investment is required to rent a large space in a prime location and maintain inventories. The exit

barriers for big box stores causes strong rivalry in industry, increasing price competition and

training customers to pay more attention to price than services provided by the stores.

Rivals in the industry are competing on many fronts. Players in the industry offer both

convenient physical locations as well as an online presence. Nearly all industry players have

loyalty programs and engage customers with promotions.

Intensity of rivalry is high in the big box electronics retailing industry.

Recommendation

Our analysis of the industry using the Five Forces Framework indicates that the industry's

performance should decline. Evidence of decline can be found in the consolidation of the

industry and Best Buy's recent performance. Two of the dominant players in the industry,

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CompUSA and Circuit City, were forced to close their doors in recent years as a result of the

strength of the Five Forces. Both were large competitors in the industry. In 2008 Circuit City’s

annual revenues were $11.7 billion, and in 2006, CompUSA’s revenues topped $4 billion.

According to a 2010 report by Gap Intelligence, approximately 55% of Circuit City shoppers

were planning to transition to Best Buy7. This statistic correlates to the 1.7% same store sales

growth for Best Buy in 2010, the only year in which same store sales growth was positive from

2008 through 2012. However, Amazon’s revenues from consumer electronics grew by 74% from

2009 to 2010.

Best Buy’s financial statements provide insights on the industry. Best Buy is by far the

largest firm in the big box electronic retail industry in terms of sales and market cap. As of

March 2013, Best Buy’s market cap of $6.8 billion was greater than the combined value of the

next four largest public competitors at $4.8 billion according to March 2013 Yahoo! Finance

data. From 2005 to 2007, Best Buy’s annual revenue growth was between 11.8% and 16.5%.

Same store sales in 2006 and 2007 were 4.9 and 4.1% respectively. From 2008 to 2012, Best

Buy’s revenue growth declined from 11% to 1.9%. During the same period, same store sales

plummeted to as low as -3%. Top line growth was driven primarily from new stores until 2011

and 2012 when revenue growth declined to 1% and 1.9%, respectively. From 2008 to 2012,

Amazon, a key substitute for the big box electronic retail industry, experienced revenue growth

between 27.1% and 40.6%. During this period, Amazon’s revenues from electronics (excludes

media) saw year over year increases between 34.4% and 74.2%.

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e-Commerce, digital goods, consumer information are increasing the power of buyers and

increasing the threat of substitutes. Big box general merchandisers are also executing on low cost

strategies that are outperforming the differentiating strategies of the big box electronics retailers.

To compete with emerging threats in its industry Best Buy must change course. They

must leverage their assets in a more focused way to fend off competition. Best Buy must change

their strategy from differentiation to one of focused differentiation.

Focused Differentiation Strategy

Best Buy must reduce the variety of products that it carries by eliminating items for

which there are superior substitutes. This includes all media and electronic games. Instead the

company must focus solely on leading edge consumer electronics and supporting components

and peripherals. By focusing solely on leading edge technology Best Buy will be able to better

utilize their strategic assets and differentiate their offering from their competitors and substitutes.

With this new strategy Best Buy will no longer carry items that have saturated the market and are

commonly understood. Instead they will only carry a supplier’s most current product from each

of their product categories. This will help the company take advantage of public interest in a

product or product category. It will also position the company to be a leading source of expertise

on a product.

Best Buy’s new strategy will require that they leverage their internal systems, physical

locations, internet properties, and expertise in personal electronics integration to create value and

provide industry leading customer service. These strategic resources are a key component to

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their future success. Synergy between them will be valuable to the company, rare amongst its

competitors, and difficult to imitate or substitute.

Internal Systems

Best Buy’s internal systems for training must be augmented to guarantee that their store

and online support employees have strong and timely knowledge of leading technologies,

devices, and configurations. This is a critical piece in executing the recommended strategy and

must be implemented using the company’s internal IT and technology resources. Because of its

position in the industry Best Buy has broad access to a multitude of products and suppliers. This

perspective must be used as inputs into their internal training system. This is something that

Best Buy must keep in-house because timely knowledge of products and services is a critical

component to their value proposition.

R&D

Best Buy must establish an R&D competence. The industry in which Best Buy competes

is being transformed by substitutes that are firmly rooted in technology innovation. Best Buy

will only achieve industry leading customer service if they are able to utilize technology to better

understand their customers in the context of the their unique value proposition. The R&D

organization must focus on developing methods to better understand and reach Best Buy

customers across a growing landscape of interaction points. The R&D organization must mine

customer data and patterns to create new ways to understand and service their target segments.

They must focus on ways to unify and improve customer experience across both virtual and

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physical platforms (e.g. phone and physical store). One area where R&D can drive innovation is

in real-time price matching for physical stores.

Physical Locations

Best Buy’s physical locations are an important differentiator. Unlike their internet based

competitors and substitutes Best Buy has hundreds of physical locations, many in prime

locations, across the United States, Canada, Mexico, and Europe. These locations provide

customers with an opportunity to interact with a product before purchasing it. The key here is to

keep the customer by enticing him or her to buy while they are in the store. Best Buy’s customer

behavior group has identified its customers as “Angels” and “Devils”8. Angel customers are

those who boost profits and Devils are those who use Best Buy’s showroom and staff to gain

product information and buy it elsewhere. To combat the Devils, the company is price matching

competitors, but they can do more.

Best Buy must become a leader in real-time price competition in both their online and

physical locations. The company can price match on large or expensive items that bring people

in the door and sell the accompanying services and accessories at a higher margin.

The company’s stores are also important because of their proximity to the customer. Products

can be purchased and returned more conveniently in the same day. This is something that cannot

be easily matched by an online competitor.

Best Buy’s store development strategy should be focused on increasing their retail points

of presence, while decreasing their overall store square footage (average: 37,000 square feet), for

increased flexibility in a multi-channel environment.

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Best Buy has come up with new concept of “Connected Store”, which they plan to roll

out sometime this year2. A Connected Store will be a remodeled store that focuses on

connections, services and an enhanced multi-channel experience through a total transformation

of both the physical store and the operating model.

We agree with this direction. Further, we recommend converting the physical store in to a

showroom for their products. This means an open, hands-on environment where shoppers can

touch and use an actual device before making a purchase decision. We believe that a solution

offering, a showroom structured store and a multi-channel connectivity will enable them to

enhance the connection between shoppers and product experiences.

Fulfillment

Best Buy’s physical stores provide important opportunity for the company to

differentiate. Today, stores serve as a fulfillment center for online and phone orders. We believe

the stores should be used as fulfillment centers for same-day delivery to customers in the

immediate geographic area. The company must again leverage their internal R&D and IT

departments to improve or develop the systems necessary to coordinate product distribution and

fulfillment. Such a system will build on the company’s strategic resources to create a process

which is valuable, rare among competitors, difficult to imitate or substitute.

Best Buy’s virtual properties must provide an experience which is seamlessly consistent

with the physical stores. The company must capture shoppers who visit a physical store to try a

device but complete their purchase online with a different retailer. With improved, home grown,

technology Best Buy must guide user experience from their online channels to their physical

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locations while learning more about the customer’s wants and needs along the way. To achieve a

seamless integration the company’s internal logistics system must be integrated to serve stores,

physical customers, and online customers.

Employees

In January 2012, Best Buy was ranked 6th among most hated companies9 by its customers

when it could not deliver thousands of orders placed for Christmas in 2011. Instances of

mismanagement like these cost Best Buy with bad reputation, negative customer sentiments and

further alienated it from ever depleting customer base.

The company’s line staff must be knowledgeable not only on technology and device

configuration but also on the various products and services that are available to enable or

augment a product. The company must focus on store employees who should exude passion for

technology and the brands that the company sells. Best Buy’s store employees are the front line

to the customers who visit their retail locations. The customer likely has information on the

product that they want to purchase. The store employees can add value by demonstrating in

depth knowledge about the product and how it integrates with other products or services that are

available in the store.

With hands-on demo units, store employees can delight customers by demonstrating how

a device integrates and works with supporting products and services. Functioning demo units

across product categories will help the company realize the industry leading customer service

that is strategic to their success.

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Turnover rates in retail sales are predictably high compared to other sectors. According to

an analysis of BLS data by the National Retail Federation, nearly a quarter (24.6 percent) of

retail workers voluntarily left a job in 2010, substantially above the national average of 16.4

percent10.

At the end of fiscal 2012, Best Buy employed approximately 167,000 full-time, part-time

and seasonal employees worldwide. Best Buy’s turnover rate is 37%11. Best Buy needs to reduce

the employee turnover rate. We recommend Best Buy to turn their employees into brand

messengers. Our strategy of narrow focused differentiation, will lead to selling cutting edge

products. This will attract early adopters of technology, who have a passion for sharing their

knowledge as potential employees. These new employees will have a strong affinity to the Best

Buy brand.

Organization Structure

To execute this strategy and ensure the required focus on synergy the company must restructure

their three sales channels to fall under a single multi-channel senior vice-president. Also

reporting to this role will be the Regional Fulfillment vice-president. This role will work closely

with the store managers to streamline online and phone order fulfillment and store deliveries.

The company must create corporate level R&D and Training departments. R&D will be

responsible for creating tools and solutions that can be deployed across sales channels. The

training department will primarily serve the customer facing employees with relevant and timely

training on products and services being offered by the store.

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Sustained Competitive Advantage

The big box electronics retail industry that Best Buy is a part of is under under attack.

The industry is battling nimble substitutes and internal enemies. Best Buy is the largest and most

19


well known of the group. Substitutes like Amazon.com and EBay are making significant gains

operating as eCommerce only stores. Walmart and Target are winning with a broad

differentiation strategy. Best Buy must change its strategy from differentiation to focused

differentiation to compete.

Best Buy company has several strategic resources that can be leveraged in the fight for its

survival. Because of its size it maintains favorable access to suppliers and their upcoming

products. The company has stores in prime locations across the country and internationally. The

company has well trained employees across its locations. Finally Best Buy has, because of its

history and configuration, internal systems and processes that help to move products to stores

and into customers’ hands.

To win as a focused differentiator Best Buy must reduce both the size of their stores and

the type of products offerred. They must drop products for which there are superior substitutes

like audio and video media, and videogames. The stores and online channels should only carry a

selection of leading edge electronics and appliances, and supporting products and periferals.

Products which have not yet saturated the market will benefit more from the value that Best Buy

offers, Face-to-face customer service by knowledgeable employees in convenient locations. The

company will continue to compete in the online channel and should increase the integration

between their physical and online stores. The company must invest in research and development

to find ways to increase the synergy between their resources and customers. The physical stores

must be leveraged to provide online shoppers with fast and efficient same-day delivery.

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If the company can cultivate synergy between their strategic resources they will establish

a sustainable competitive advantage.

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Appendix

Exhibit 1: Best Buy Five Elements of Strategy

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Exhibit 2: Best Buy – Porter’s Five Forces

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Exhibit 3: Value Chain Analysis

Exhibit 4: Best Buy Stores going out of Business

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Works Cited
1
Chang, A. (November 2012). Best Buy’s new CEO outlines turnaround plan. Retrieved Feb. 14,
2013, from MarketWatch: http://articles.marketwatch.com/2012-11-
13/industries/35086726_1_comparable-sales-online-appliances-market

2
Best Buy FY Annual Reports on Form 10-K, as retrieved from:
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-reportsannual
3
Edwards, C. (December 2009). Why Tech Bows to Best Buy. Retrieved Mar. 7, 2013, from
http://businessweek.com/magazine/content/09_51/b4160050951315.htm
4
The NPD Group, (September 2011). e-Commerce and Consumer Electronics: Online Shopping
and Purchasing. https://www.npd.com/lps/pdf/CE_e-Commerce_Final_Report.pdf
5
Wolf, A. (January 2013). Target Extends Online Price-Match; Best Buy May Follow.
http://www.twice.com/magazine/retailingetailing/target-extends-online-price-match-best-buy-
may-follow/104790
6
Accenture (2012). Consumer Electronics Report.
http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_EHT_Research_2012_Con
sumer_Technology_Report.pdf
7
Fishman, J (March 2010). The Demand Creation Vacuum – Who is Going to Step Up.
Retrieved March 7, 2013, from http://gapintelligence.com/blog/tag/compusa/

8
McWillimas, G. (Nov. 2004) Analyzing Customers, Best Buy Decides Not All Are Welcome
Retrieved March 15, 2013 from
http://online.wsj.com/article/0,,SB109986994931767086,00.html

9
Hudson, B. (January 2012). Best Buy Among ‘Most Hated’ For Customer Satisfaction. As
retrieved from:
http://minnesota.cbslocal.com/2012/01/18/best-buy-among-most-hated-for-customer-
satisfaction

10
Labor Turnover in the Reatil Industry. Careerbuilder.com. Retrieved March 7, 2013 from
http://www.careerbuilder.com/Article/CB-2677-Retai

25


11
Listen Carefully to Best Buy CEO's Take on Employee Turnover Rate. SeekingAlpha.com.
Retrieved March 8, 2013 from:
http://seekingalpha.com/article/210512-listen-carefully-to-best-buy-ceo-s-take-on-employee-
turnover-rate

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