GROUP CASE
SYNOPSIS
BEST BUY CO., INC
BUS 478 // GROUP 3
JENNY LAM
SHIYU LIU
ALVIN MUI
RICHARD YUAN
CONGCONG ZHAO
BUS478 // GROUP CASE SYNOPSIS
HISTORY/BACKGROUND
Best Buy Co., Inc. is a US based specialty retailer of consumer electronics. Headquartered
in Richfield, Minnesota, it also operates in Canada, China, Puerto Rico, and Mexico. In 1966,
Richard Schulze, along with his business partner Gary Smoliak, opened Sound of Music in
St. Paul, Minnesota. The name "Best Buy" was first introduced in 1981 when a tornado hit
Minnesota on June 14. In response to the tornado, Sound of Music introduced the "Tornado
Sale" also known as a "Best Buy" which later became an annual event. By 1983, Sound of
Music was rebranded as Best Buy Co., Inc., with the establishment of a flagship store in
Burnsville, Minnesota. In 1993, Best Buy became the second-largest consumer electronics
retailer in the US. Later in 1999, a partnership was established between Best Buy and
Microsoft. The following year, Bestbuy.com was launched which marked Best Buy's
entrance into the online-retailing business.
In 2001, Best Buy took its first step into the international market by acquiring Future Shop,
Canada's own consumer electronics chain. After acquiring Geek Squad, the 24/7
computer-support force was introduced in every Best Buy in 2004. Continuing on its
international presence, in 2006, Best Buy spent $180 million towards the acquisition of
Jiangsu Five Star Appliance in China. This gave Best Buy the majority share of 136 stores
across eight provinces within China. Later on in 2007, Best Buy opened its first retail store
in China. Four years later, announcements were made regarding the closure of all nine Best
Buy stores in China. Executives at Best Buy decided to focus their resources towards
expanding the Jiangsu Five Star Appliances business. In May of 2008, a 50% share of The
Carphone Warehouse in the UK was taken over by Best Buy for approximately 1.1 billion
Euros. This purchase officially launched the Best Buy Europe joint venture. This joint
venture led to the opening of many Best Buy superstores in the UK. Unfortunately, the
eleven stores opened in the UK had to close down two years later due to poor sales and
income.
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BUS478 // GROUP CASE SYNOPSIS
ENVIRONMENT
General Environment
Currently, North America, Asia Pacific, and Europe are the major retail markets of consumer
electronics. The global economic recession in 2009 had a great impact on the industry in
terms of both retail value sales and volume. However, with the GDP growth of 2% in the
third quarter of 2012 and unemployment rate declining to 7.9% in October 2012, the US
economy is slowly recovering. The ongoing Eurozone crisis has pushed the unemployment
rate higher and caused a GDP decline of 0.7% in Q2 of 2012. Although Europe's weakness
is no longer a regional crisis, it has already spread to other entrants of the global economy.
Chinese exports to the Eurozone has decreased sharply in 2012, contributing to the
country's GDP growth slowdown. Moreover, Japan's GDP has shrunk an annualized 3.5%
in Q3 of 2012, which is the largest decrease since the March 2011 earthquake and tsunami.
The US federal government started the 2013 budget year with a $120 billion deficit, which is
the nation’s fifth straight $1 trillion-plus annual deficit. In order to re-balance the books
during times of budget deficits, the government has announced an increase in levels of
taxation and decrease in the level of public spending. The foreseeable downtrend in
consumers' disposable incomes will likely lead to a sales decline for consumer electronics
retailers.
On the other hand, the People's Bank of China has been cutting interest rates this year to
soften the economic slowdown. In 2011, China has replaced the US in retail value sales of
consumer electronic products to become the world’s largest and most promising market.
As we can see from the chart below, the increasing purchasing capability of Chinese
customers bring large potential revenue for the retailers.
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BUS478 // GROUP CASE SYNOPSIS
CHART 1. CONSUMER ELECTRONICS RETAIL SALES 2007-2015
As a technology based industry, the consumer electronics retailers have to adopt the latest
products in order to maintain their market share. The ability to keep their display fresh and
up-to-date is critical to the retailers since the lifecycle of some of the new technologies are
getting shorter and shorter. The rapid growth of the Internet, smartphone, and tablet
technology is encouraging Internet retail sales in every possible way. In order to attract the
young and tech-savvy consumers, retailers have been working to develop Internet retailing
as a part of their multi-channel distribution strategy. Internet based retailing has increased
significantly in all of the major markets from 2006 to 2012 and the trend is expected to
continue in the future.
With more and more females entering the job market and gaining financial independence,
consumer behavior is expected to shift. Designs and sizes of products need to be
improved in order to meet female consumers’ needs. A global trend of aging population
can be foreseen as a result of decreasing birth rates and progressing medical technologies
which rises the importance of silver dollar (elderly), especially in the developed countries.
Elder people have distinct needs from other age groups, requiring the manufacturers to
develop more easy-to-use products. Retailers need to adjust their product collection in
order to attract the elders.
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BUS478 // GROUP CASE SYNOPSIS
Industrial Environment
THREAT OF NEW ENTRANTS
The threat of new entrants is relatively low in the consumer electronics retail industry. The
capital requirement to enter the market is affordable compared to other industries. However,
it is hard for new entrants to expand their business scales considering the brand
reputations established by the existing retailers. Consumers prefer to shop at large chainretailers believing that they can provide the latest products at comparably low prices with
excellent customer service. Moreover, it is even harder for the startup retailers to attract
customers by offering lower prices, since they have not yet established their relationships
with the suppliers.
BARGAINING POWER OF SUPPLIERS
The bargaining power of suppliers in the consumer electronics retail industry is high. In
order to attract customers, electronics retailers have to keep their inventory fresh with up-todate products. Currently, there are only limited number of suppliers. Examples of large
suppliers include Apple, HP, Sony, Samsung, LG, and Panasonic. Suppliers can choose to
distribute their products in several different stores which gives these suppliers a substantial
control over the prices of their products. BARGAINING POWER OF BUYERS
The bargaining power of buyers is relatively low within the industry. Since the purchasing
volume of an individual or a family consumer is very low, the buyers do not have much
influence on the prices. However, due to the low switching cost, retailers have to maintain
their competitive advantages by offering lower prices and better services.
THREAT OF SUBSTITUTE PRODUCTS
The threat of substitutes is low in consumer electronics retail industry. Today, people are
relying heavily on modern technologies and electronics. As a result, there are only few
substitutes towards electronics, such as books and magazines. However, retailers are more
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BUS478 // GROUP CASE SYNOPSIS
worried about other substitute products, counterfeits. Counterfeit products have similar
looks and functions as the original one but can be purchased at a much lower price. This
situation is more critical in some developing countries with lower disposable income levels
such as China.
INTENSITY OF RIVALRY AMONG COMPETITORS
The consumer electronics retail industry is highly competitive. According to Yahoo Finance
(2012), major retailers within the industry includes Best Buy, Wal-Mart, Dell, RadioShack,
Target, and Costco. Competition is fierce among rivals primarily because switching costs
are very low. Consumers can choose to shop at any electronic store since the products are
not differentiated: similar products are offered at almost all of the different electronic stores.
As a result, companies are striving to maintain their market share by competing on prices
and non-tangibles, such as customer service and goodwill.
COMPETITOR ANALYSIS
For many years, Best Buy’s most direct competition comes from Circuit City, the second
largest consumer electronics retailer. After Circuit City filed for bankruptcy protection in
November 2008, Best Buy was able to capture 40% of its market share, making itself the
largest specialty consumer electronics retailer in the world. However, Best Buy still has a
significant number of competitors:
1. Unspecialized discount retailers such as Walmart and Costco.
2. Online retailers such as Amazon, eBay, and Dell.
3. Consumer electronics producer such as Apple and HP
Below is the table containing key financial information of Best Buy’s top three direct
competitors: Amazon, Apple, and Walmart.
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BUS478 // GROUP CASE SYNOPSIS
TABLE 1. DIRECT COMPETITORS COMPARISON
Market Cap
Employees
Qtrly Rev Growth (yoy)
Revenue (ttm)
Gross Margin (ttm)
EBITDA(ttm)
Operation Margin (ttm)
Net Income(ttm)
EPS(ttm)
P/E(ttm)
PEG(ttm)
P/S(ttm)
Best Buy
4.63B
167000
-0.03
50.70B
0.25
3.30B
0.05
-1.06B
-3.36
N/A
-1.87
0.10
Amazon
102.02B
56200
0.27
57.26B
0.24
2.09B
0.01
40.00M
0.08
2681.31
-619.83
1.75
Apple
496.38B
72800
0.27
156.51B
0.44
58.52B
0.35
41.73B
44.15
11.95
0.48
3.16
Walmart
228.85B
2,200,000
0.03
464.41B
0.25
35.99B
0.06
16.59B
4.86
14
1.51
0.50
Industry
850.57M
17.00K
0.11
4.35B
0.29
95.82M
0.01
N/A
-0.64
46.94
0.82
0.11
Walmart is a US based corporation that runs discount departments and warehouse stores
in fifteen countries. Unlike Best Buy, a pure consumer electronics retailer, Walmart offers
various products in different categories including apparel, appliances, automotive parts,
electronics, furniture, and groceries. As a result, Walmart has a much larger market capital
of $228.85 billion compared to Best Buy’s $4.63 billion.
Amazon.com, Inc. is an American multinational electronic commerce company and also the
largest online retailer in the world. Amazon not only sells consumer electronics online but
also produces and sells its own consumer electronics—Amazon Kindle e-book reader and
the Kindle Fire tablet computer. As online shopping is becoming a popular lifestyle these
days, Best Buy is facing a worrisome situation of losing market share to its online
competitors.
Apple Inc. is a US multinational corporation that sells its own designed products including
consumer electronics, computer software, personal computers, MP3 players, and tablets.
Apple is acting as both the supplier and competitor to Best Buy today. The company wants
to reach a wider customer base by cooperating with different retailers and
telecommunication companies.
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BUS478 // GROUP CASE SYNOPSIS
CURRENT SITUATION
Financial Performance
With new management in place, Best Buy aims to achieve an operating margin of 5-6
percent and invested capital of 13-15 percent over time. However, Best Buy is going
through some rough times as the third quarter financial performance released in August
shows negative results for the company. As of November 16, Best Buy’s share price
dropped by 9.84% to $13.75, which is the lowest price since 2002. Many factors could
have led to this poor performance. Best Buy has difficulties competing with online retailers
such as eBay and Amazon. Online sales for Best Buy only rose by 18% as compared to
Amazon’s growth of 48%. This decline in sale growth had resulted in a $1.2 billion loss in
the previous year, which is a significant change from the $1.4 billion profit four years ago.
Retailers like Best Buy have long been affected by competition from online retailers
because of the “showroom” trend, where customers would visit retailers to see the physical
object, but buy the actual product from an online retailer that usually offers cheaper prices.
With benefits like lower online prices and subscription services such as Netflix, the need for
physical retailers such as Best Buy is diminishing. With the poor results in financial
performance and the new management in place, many employees have begun making
necessary preparations to protect their future by searching for employment elsewhere.
Therefore, expenses have been on the rise as Best Buy has to train new employees. The
increase in employee training costs is also part of the new CEO Joly’s plan, “Renew Blue”,
which aims to provide expertise that customers cannot find online.
Retail Shrinkage
Best Buy has been experiencing pressures from their online and offline operations. As a
result, the company has suffered major decline in profits, market value and major retreat
from their initial global expansion efforts. After pulling all eleven stores from the European
market, the US division has announced the closing of fifty “big box” superstores across the
nation. This was not simply a cost-reduction solution, but part of the proposed strategy to
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BUS478 // GROUP CASE SYNOPSIS
transform the business model and improve operating performance. By eliminating the
large-scale retail outlets, Best Buy plans to concentrate on smaller, more targeted stores
with a strong emphasis on mobile electronics. In addition, retail operations will heavily shift
into their online store.
Major Operations and Management Restructure
Best Buy recently suffered from a scandal that caused a significant shift in the company’s
top management. Under the new leadership of Hubert Joly, major upper-level
organizational changes were in place to accommodate the new CEO’s strategy. A
significant layer of senior management was dismissed causing a huge shift in top
management. The organizational structure will become more centralized with more support
in departments such as Human Resources, Finance, Legal and Marketing. Moreover, more
resources are planned to be invested in Information Technology departments to plan and
execute online and new communication approaches. Based on the Joly’s planned tactics,
the top priority is enhancing the customer experience and ultimately converting both online
and offline shoppers from browsers to buyers. Some immediate actions implemented
include improve employee training procedures and customer-orientated incentives such as
flexible price matching (using flyers, websites or in-store from local competitors).
Potential Buyout
A potential buyout offer from founder and former CEO Richard Schulze is currently
underway. New proposal will soon be released to the board of directors, and Schulze is
hoping to finalize the offer sometime next month. However, due to the recent third quarter
data, the chance of a buyout is diminishing as the company’s prospects do not look very
attractive to investors. Many investors have not been too hopeful of Schulze’s buyout plan
because the share price has not closed above $18 for a long time and Schulze’s proposal
offered to buy from $24 to $26 per share. Schulze's proposal offers to buy at an estimated
amount of 8 billion dollars.
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BUS478 // GROUP CASE SYNOPSIS
STRATEGIC CHALLENGES
Best Buy is currently faced with several strategic challenges. Some of these challenges
Best Buy is currently faced with several strategic challenges. Some of these challenges
affect Best Buy in the short run while others have a lasting effect on the company in terms
of sales and growth. In both the short and long term, here are the challenges Best Buy is
facing:
1. With the increasing popularity of digital copies and pirating, media sales at Best Buy has
drastically fallen over the recent years and the trend is still continuing. A large portion of the
market has transitioned to web-based programs such as Netflix and I-Tunes for their movie
and music needs. These web-based programs allow customers to purchase the media they
wish within minutes, at a lower cost, and all within the comfort of their own home.
2. Constant technological improvement has lowered the sales in areas where Best Buy was
once famous for. For example, as recent as a decade ago, digital imaging was very
popular as Best Buy. Everyone would come to the "Big-Box" store as their one-stop shop for
all their camera and camcorder needs. With the technology of today's smartphones, a 5.0
mega-pixel camera with full HD recording has become the industry standard. The average
person no longer needs a digital camera or camcorder as it's more hassle than anything to
carry an extra electronic around.
3. The sales of popular brand items are being redirected elsewhere. For example, the opening
of the Apple store has taken a large portion of Apple brand sales from Best Buy. Customers
would rather visit a specialized store to purchase, inquire or repair an item, especially if the
store is owned by the manufacturer itself. These manufacturer owned stores are not only
taking away sales but setting price standards as well. Using the same example, Best Buy
cannot increase their profit margins by raising the prices of their Apple products since the
nearby Apple store stocks the same item at a specific price.
4.
An enormous challenge Best Buy currently faces is the growth and popularity of online
retailers such as Amazon. A large majority of consumers have a tendency to go to Amazon
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BUS478 // GROUP CASE SYNOPSIS
or similar retailers to purchase their electronics. Best Buy has just become a mere
showroom for these retailers. Customers are coming into Best Buy to inquire and test out
the products they're in the market for. After they had the opportunity to try out the product
and their questions answered, they can simply log on to Amazon and have the same
product shipped to their doorstep within days. Not only do these products arrive at their
house, they are also significantly lower in cost compared to their local Best Buy. This leaves
Best Buy at a permanent cost disadvantage because it is almost impossible for them to
compete with said online retailers in terms of price. Not only is Best Buy's cost of goods
sold significantly higher, they also lack the variety and selection competing online retailers
offer.
REFERENCES
Bustillo, M. (2011, April 15). Best Buy to Shrink 'Big-Box' Store Strategy. Wall Street Journal - Eastern
Edition. p. B7
Felix Lowe. (2008). Best buy: Company history and facts. Retrieved from
http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/2789570/Best-Buy-Companyhistory-and-facts.html
Katsenelson, V. (2012). Thinking outside the best buy box. Institutional Investor-International Edition,
37(5), 31.
Passport. (2011, Dec 05). Consumer Electronics Global Overview: Growth Trends and Analysis.
Retrieved from Passport GMID:
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/Portal/Pages/Search/SearchResultsList.aspx
Passport. (2012, April). Best Buy Co Inc In Retailing (World). Retrieved from Passport GMID:
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/Portal/Pages/Search/SearchResultsList.aspx
Passport. (2012, July 18). Economic Impact: Examining the Effect of Fiscal and Monetary Policy in
Retailing. Retrieved from Passport GMID:
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/Portal/Pages/Analysis/AnalysisPage.aspx
Yahoo! Canada Finance. (2012). BBY Competitors. Retrieved from Yahoo! Canada Finance:
http://ca.finance.yahoo.com/q/co?s=BBY
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