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Best Buy Case Study

Background information
Best Buy was once the rock star of Big Box electronic retailing. The other electronic boxes are gone.

Problem statement
What can Best Buy do to strengthen financials and become profitable again?

Analysis of case data
First we need to break down Best Buy revenue by category. From their December 2011 report (Best Buy, 2012):
Consumer Electronics 40%
Computing and Mobile Phones 35%
Entertainment 16%
Appliances 4%
Services 4%
Other 1%
Total 100%
A fairly simple look at Best Buy market competition:
  • Consumer electronics - Best Buy faces stiff competition from office retailers (Staples, Office Depot) and online competitors (Amazon, TigerDirect).
  • Mobile phone competition breaks down to manufacturers selling directly, the major cellular network providers selling directly, and every kiosk in every mall and big box that does phone sales (e.g Sam's Club).
  • Entertainment - The old retail music and video days are gone. Best Buy did try a service to burn CD’s of customer chosen music in the stores.
  • Appliances – Best Buy faces very stiff competition from retail discounters (Wal-Mart, Target), wholesale clubs (Costco, Sam’s Club), Big Box retailers (The Home Depot, Lowes, Sears), and local appliance retailers (Warners' Stellian).
  • Services – Best Buy has scattered local competition for their Geek Squad brand. The level of competition could be hit & miss varying on location.

Brick & Mortar locations, both a positive and negative for Best Buy. People love to touch and look at items they want to buy, however too many people are touching at Best Buy and ordering online. Best Buy needs to covert these touches into sales in the store, or through their online web presence.

Customer Service Issues
The following is anecdotal from my personal perspective shopping Best Buy and reading The Consumerist Website on a fairly regular basis. Best Buy’s reputation is SHOT. The public has lost TRUST in the employees and the stores.

There have been regular stories reported of employees holding the hot new electronics for themselves, not having enough in stock, and repackaging returns and selling as new. There have been many allegations of involuntary enrolling people (without consent) into Best Buy’s Rewards Zone program, and charging customers without consent for a Best Buy Performance Service Plan (PSP). Employees may have hours cut if enough PSP’s are not sold, so some unethical employees have simply added PSP’s onto simple items like a DVD where the customer may not notice an extra dollar. How many news stories were out there for customers bringing in a computer to the Geek Squad only to have personal files held hostage for extra money, or to have personal documents placed publicly on the web?

Best Buy holds sales, including on Black Friday, without enough staff resulting in long lines. It’s just too easy to buy at Amazon for people to want to deal with improperly staffed stores with surly employees.

I have read on The Consumerist many times how a customer would try to match a Best Buy store with Best Buy’s online website. Stores don’t want to lose sales to the web, even Best Buy’s web, so they created their own internal Best Buy website with prices the same as the store. You would have to bring your own device in with cellular web coverage to prove a price match was needed. They have corrected this, I’m told, but the memory lingers. The competition between stores and the Best Buy website still exists when people buy online to pick up at the store, some managers won’t hand the item over to an online customer.

The Best Buy website itself is not very consumer friendly and is prone to crashing during big sales, and product launches. This is unacceptable.

SWOT Analysis
Strengths:

  • Name recognition
  • No direct Big Box competitors because Circuit City, Ultimate Electronics, and CompUSA are gone
  • International business
  • Variety of products
  • Physical stores
Weaknesses:
  • Initially established image as a lower quality retailer
  • Previously neglected niche market for higher end products
  • Physical stores with real costs etailors don't have
  • Showrooming
Opportunities:
  • Purchase of CarPhone Warehouse Group interest (U.S. / Canada)
  • Growth in sales of mobile phones and tablets
  • Improving inventory management through long-term contracts
  • Greater use of the Internet by consumers
  • Growing demand for consumer electronics
Threats:
  • Fiscal Cliff – higher taxes on earnings
  • Recession, less consumer spending
  • Affordable Care Act, higher costs for full-time employees
  • Online competitors - Amazon, TigerDirect, etc.

Discussion of alternative solutions
The old retail music and video days are gone – could Best Buy become an online music and video distribution channel through their web portal, or is it time to exit the sector?

Recommendations
Leading

Admit mistakes, promise to fix them. Put the CEO on camera to articulate boldly new directions Best Buy will take to earn consumer trust back. The reputation for less than honest or ethical employees must be met head on. Perhaps a code of ethics and conduct all employees must adhere to? If you indeed change, you have to tell people or they will never know. The customers want to believe in change.

Fix relationship with employees; get them to buy-in with overall company direction. People hate the hard sell on Best Buy’s Rewards Zone program and Best Buy Performance Service Plan and employees hate to sell them. Holding employees hours hostage over sales quotas has to end. Fix the hours for employees, look into benefits.

Occasional weeding of the garden via personnel changes may be necessary to get a good mix of sales of high margin Rewards Zone and Performance Service Plans sold. Correct the ratio of part-time employees with the Affordable Care Act coming soon, and the added costs for the Act. Make sure you have staff for big sales and product launches.

Controlling
Fix the financials, continue to close unprofitable stores, determine what categories are profitable and what is not, Activity-Based Costing. Discontinue dividends and reinvest that money into profitable ventures.

  1. Leverage brands
  2. CinemaNow
  3. Geek Squad
  4. Magnolia
  5. Pacific Sales
  6. CarPhone Warehouse Group
The Best Buy website must become rock solid, multi-honed, and easy to use.
  • 5-Nines Up-time (99.999%, this means your website can be down for about 20 minutes a year)!
  • Keep It Simple Stupid (KISS)

Continue branding of Rocketfish and Insignia. Store brands can be developed into desired products. Insignia is a entry-level product line, while RocketFish occupies the middle-level product line. Market them appropriately, and create or purchase a top-level product line. Having a high end brand allows customer to grow with Best Buy coming back to purchase their way up with in-house brands.

A Social Media Department!
In today’s environment, one bad customer experience can be spread worldwide in minutes. One poorly acting employee can be caught on video and added to YouTube in minutes. The consumerist continually has bad Best Buy stories, it’s time to go find those disenfranchised customers and make them whole again. When people know you’re trying to fix issues, they will be more patient. It would have to become a department to fix issues found anywhere on the Internet. I've mostly brought up The Consumerist, but social media is Facebook, Twitter, Linkedin, and every forum out there.

Planning
Think large, enter corporate arena. Geek Squad market is individual people and families. I ran my own consulting firm, RK Secure Networks. I watched all the other IT people I knew try to help individual technophobes setup wireless units at home. Every single problem in the house now becomes the fault of the IT worker. There is very little money driving from house to house doing little setups. Go big or go home, and with online retailers eating your retailing lunch it’s time to discover new revenue opportunities.

Create partnerships with home builders, one firm to take place of many subcontractors. Wire whole houses both high  & low voltage, TV and Internet connections, whole house sound systems, PA systems, and alarms. If you’re in the house, you might as well stock it with Best Buy appliances. Start small and learn how to build the business, or buy an existing firm that will get this plan running.

After Best Buy learns how to work with home building contractors it will be time for commercial construction partnerships. Corporate tower building downtown need high voltage, low voltage TV and internet connections, sound systems, PA systems, and alarms only higher grade typically. That tower is going to need a bunch of refrigerators, microwaves. Once in the building, they will need printers and computers. If you can do the network wiring, Best Buy might as well install all the networking equipment.

Become KINGS of video conferencing. Everybody wants it; nobody knows how to get started. Video conferencing saves money.

More revenue opportunities, once you can do the bigger project it may be time to get contracts to do whole chains of movie theaters. After you learn to install everything everywhere, it’s time for service contracts. Service contracts are regular streams of income.

Work out a deal to put an Apple Store inside every Best Buy. Best Buy already sells 13% of all iPhones compared to Apple at 15%. (Paczkowski, 2012)

Organization
Homogenize and control stores, there’s too much difference between stores in Minnesota and Arizona. Managers act like they have fiefdoms in some stores. The world is connected in an instant, and the customer in Florida will tell the customer in Montana store policy, but what happens when the manager runs his store different? Homogenization is why McDonald's thrives, you know exactly what to expect in each and every store!

I was personally told each store may only have 3 phone carriers per store. I bought a Nexus S Android phone at the Mall of America, but when I went in for service on the PSP in Shakopee the employee wasn't familiar with that carrier. I was told each store may only carry 3 carriers. I did get a replacement phone ordered after the employee did some research, but it was a massive inconvenience.

Maybe the difference is corporate stores vs. stores owned by franchisees. I had one Best Buy employee tell me at the Mall of America that she was held to a higher standard because it was a corporate store. Homogenize the experience.

Finally determine margins and reallocate floor space in stores.