Best Buy Marketing Case Study Robert Paul Ellentuck

Best Buy Marketing Case Study Robert Paul Ellentuck EMBA 2011 Marketing Management Professor Hassan 16 October 2009

n n COPYRIGHT © 2009 ROBERT PAUL ELLENTUCK

Industry Overview n Industry n n n Major Players for Consumer Electronics n n n Big box concept Specialty Store in Consumer Electronics Segment Top 5 2002: Best Buy, Wal-Mart, Circuit City, Dell, Amazon. com Top 5 2008: Dell, Best Buy, Wal-Mart, Circuit City, CDW Market Development n n n Emerging “discount” retailers emerging -consumer choosing price over service/support Competition online “etailers” growing - free delivery on large purchases Consumer base evolving from technological novices to technologically competent Sources: Lal, R. , Knoop, CC-I. , and Tarsis, I. (October 2006; , Spinali, L. and O’Hier, J. (2009); Pressler, M. W. (2004)

Industry Overview – cont’ n “Big Box” push to increase sales of high margin products n Emphasis evolved to offering service and support to customers n Consumers now focusing more on price over service and support n Popularity of online purchasing increased; free shipping and delivery n “Big box” concept declining; scaled-down version of stores emerging

Top 5 Consumer Electronics Merchandiser Comparisons 2003 10 K Category Best Buy Wal-Mart e. Bay Dell Amazon Revenue ($B) 21 256 2 35 5 Gross Margin (%) 25 22 81 18 17 Cash ($B) 2 5 1 4 1 Debt (%) 11 16 2 3 90 Source: United States Securities and Exchange Commission via their web (2009) and Lal, R. , Knopp, CC-I. , and Tarsis, I, (October 2006)

Top 5 Consumer Electronics Merchandiser Comparisons 2008 10 K Category Dell Best Buy Wal-Mart Circuit City Revenue ($B) 61 40 374 12 Not Available Gross Margin (%) 19 24 15 21 Not Available Cash ($B) 10 2 47 1 Not Available Debt (%) 2 6 21 6 Not Available CDW Corp Source: United States Securities and Exchange Commission via their web (2009) and Spinali, L. and O’Hier, J. (2009)

Company Overview Sound of Music 1967 - St. Paul, MN “Grab and Go”– New Logo 1989 Best Buy Becomes company name - 1983 Global Expansion - Asia, Europe, Mexico, Turkey 2003 -present Fortune 500 Top Co Customer #56 - $45 Billion Centricity 2009 Implemented - 2003 Best Buy Mobile stores & 2 nd Largest Consumer “Best Buy” Sale @ SOM Electronics Retailer - 1993 Geek Squad to Europe 2003 tornado hit 9 Stores -1981 CEO Dunn replaces Public Offering - $33. 6 M retiring Anderson 12 Stores - 1986 2009 Fortune names Best Buy Top 10 performing stock, 2000 Source: Bestbuy. com, Fortune (5/4/09)

Company Overview (Consumer Driven) n n “We believe that focusing on customers' needs generates growth opportunities” “At Best Buy, we aspire to be a responsible, values-driven global corporation – we believe that's what you expect” “And we believe in customer centricity - the idea is that a customer isn't just looking for a product, but a solution or experience that improves her life” Ranked highest in customer satisfaction among national and multi-regional from 2009 report by J. D. Power and Associates Sources: Bestbuy. com, Wolfe (2009)

Company Overview (Evolving Customer Centricity) n Customer-centricity (CC) retailing n n n Embraced by broad range of organizations Uses insights from analytics to identify/understand core group of valued customers Predicts what motivates shopping behavior Essential for retailers facing demands of competitive marketplace Forward-looking strategy; must permeate every area of enterprise Reinvents retailer's value proposition Source: Biggs, John (2009)

Company Overview (Products) n n Branded products designed out of customer research and priced to fill gaps n Dynex, Init, Insignia, and Rocket Fish Napster n Working with Dell to have a streaming audio/video computer Geek Squad n Affordable technological assistance services Best Buy Mobile and Car phone Warehouse n Smaller footprints focusing on mobile products and solutions in US and Europe Source: Bestbuy. com, Sidibe, G (10/7/09 )

Company Overview ( Revenue by Product Group) FY 2008 Source: Bestbuy. com 10 K(FY 2008), (FY 2005) FY 2005

Product (Big Box Retailing) Best Buy – Then (2005) n Big Box large retail footprints – Everything under one roof n Standard Operating Procedures (SOPs) n Products Sold by category n Organizational Structure n Top Down; One P&L Source: Shevory, Christina (2009) Best Buy Now (2009) n n Introducing Smaller Foot - Print stores Competitors are following suit in Specialty Markets n Overall lower costs n Customer Centricity

Product “Solution Based” (Customer Centricity) n n n Model California Based Test – Skewed Results Roll-out: no financial modeling beyond Pilot test Stores Aggressive Rollout Plan - 12 labs to 32 pilots to 110 stores nationwide n Leveraged prior acquisitions (e. g. Geek Squad) n Organizational structure - organized to unorganized n Product mix by solution based on Personas

Competitive Analysis • Out of Business • CEO blamed demise on “poor macroeconomic conditions” • Unknowledgeable sales staff • “Late to the game with Firedog customer service business, didn’t resonate with customers as well as Best Buy’s Geek Squad” • Unfortunate position Mid-level player • Top retailer in the country • Lost leaders in drive traffic • Convenience & wide range of products in one store • 17% margins in CE (Mid player) • Quality and service • General merchandise • Lack of flexibility Dell • Customized products • Reliability, Service and Support • Customers can’t go to retailers for custom-built products • Huge global brand • Customer Relationship Management and IT support business strategy • Addition of new categories to business may hurt brand • May need to reconsider free shipping to customers Sources: Spolsky, Joel (2009), Kavilanz, Parifa (2009), Cuizon, Gwendolyn (2009) and www. marketingteacher. com

SWOT Analysis Strengths Weaknesses §Heavily driven customer • Customer Centricity model fragmented by Opportunities Threats • Centricity; max profit in high-end products • Low priced “big box” stores playing into satisfaction/customer service based §Standard Operating Procedures; guaranteed standard experience across network §Valued, trained, rewarded workforce §Central corporate structure/territory and solutions • Solution based to increase sales of products and services • Expansion of CC model into all U. S. stores individual store locations • Creation of unified sales force more costly in other markets • Valued, trained, rewarded workforce expensive to replicate across other markets • ”Turf battles” /Lack of synchronization between business units highly competitive arena • Market expansion into other markets/regions • Online sales

Weaknesses to Strengths FROM (2005): n CC model fragmented by individual store locations n Creation of unified sales force based on CC more costly in other markets n Valued, trained, rewarded workforce expensive to replicate across other markets n ”Turf battles” /Lack of synchronization between business units TO (2009): n n Still have major customer segments; grouped by location more (eg. DMAscluster stores in market) CC model working if solutions are sold; revenues justify expense CC model working if work force is trained to sale; “upsell” a customer & sale solution Corporate needed to see segment leaders mutually benefitted from CC model

Threats to Opportunities FROM (2005): Low priced “big box” stores playing into highly competitive arena TO (2009): n n Market expansion into other markets/regions n n n Online sales n Sell products with services and solutions; Best Buy also has their own brands Best Buy started expansion into China in 2003 Best Buy now also multiple online channels

Linking Internal and External n n Organization changing at same time as industry is changing; extreme dynamic occurring Pace and synchronization of rollout affected internal organization and sales revenues Customer Centricity model increases sales per foot and expands externally because they hit saturation in US Overall “big box” concept pushing for lower priced items

Change from Input to Output n n n Price of technology, appliances, home office equipment costs dramatically reduced during time-period Home offices continues to be sustainable with 34% of product mix revenues year over year Services increased 7% of revenues from FY 08 vs. FY 05 Down economy resulted in two competitors out of the market – more competition from “Big Box” retailers (e. g. Wal-Mart and Target) Increase in online purchasing for music, games, etc. impacting entertainment software Source: Bestbuy. com 10 K(FY 2008), (FY 2005); Sidibe, G (10/7/09 )

Problem Definition Implementation of Customer-Centricity caused internal organizational conflicts and it increased operating expenses, which led to a loss of the overall brand image and fragmentation. The organization had lost focus during the implementation process resulting in the overall goal of providing an outstanding customer experience.

Alternatives Evaluation A. B. Continue to convert all stores to Customer Centricity; allow time for concept to mature Create a hybrid; continue with Customer Centricity; group personas/segments to market level instead of individual store (e. g. DMAs/cluster stores into local market)

Alternatives Evaluation – cont’d C. D. Abandonment of Customer Centricity to SOP “common” Best Buy (“Big Box”) customer experience Shift channels of distribution from primarily offline retail “brick & mortar” to more online channels for cost efficiencies

Best Alternative Rationale n Allow time for the concept to mature; continue to convert all stores n n n Heritage of valuing customer relationship Prepares for future of industry and competition – Big Box “price” driven vs. Big Box “solution” Connects to company values & retains talent/staff Localization and segment relate to closer community, customer, and retail experience Creates opportunity for new products and services for high profit margin sales

Customer-Centric Best Practice n n n n “Last mile” retail Localization Assortment Outperform peers Supply Chain inclusive Six weeks or less of inventory Above average annual sales increases, year-to-year “Promo to Supply” Pricing (Optimization) Overcome Organizational Behavior Best Buy n n n n Adoption rate among stores high Found Growth in localization: Assortment, store size, globalization Out performed peers in specialty (CE) Big Box Struggled in implementation phase Increases in year over year annual sales, but diminishing No, higher than optimal to cover expenses Organization struggled and now is empowered Source: Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report 2008. Copyright RSR Research, LLC. All rights reserved.

Customer Centricity Personas n Marketers increasingly using personas n n n Identify mindset and goals of customers/Better predictor human behavior – Some companies report 400% conversion rate Forrester survey - one in four companies with revenues above $200 M planned to increase spending on persona research Persona research made a dramatic difference in Best Buy performance and overall revenues during turbulent times as their closest competitors filed bankruptcy. Sources: Howlett, Greg (2007) and Gardener, Elizabeth (2007), Sidibe, G (10/1/09 )

Implementation Plan n n Communicate internally and externally that customer centricity model is new mode of operation Create task force that reviews strengths/weaknesses of model; make changes based on recommendations n Slow down pace of store conversions n Devise actions for implementation plan n Calculate how new model is affecting sales per sq foot n Make adjusts to model as needed

Implementation Plan - Time Schedule n n n One year for implementation based on when store was converted Modify the conversion process (slower pace) than the ones in initial conversion process Benchmark in 3 -6 month increments based on how stores were initially converted

References Industry Overview (Slide 2) Lal, R. , Knoop, CC-I. , and Tarsis, I. (October 2006). Best Buy Co. , Inc. : Customer-Centricity. Harvard Business School, exhibit 4 a Spinali, L. and O’Hier, J. (March 2009). Dealerscope. com annual top 101 rankings report on consumer electronics retailers/etailers Pressler, M. W. (Sunday 11 July 2004). “Big-Box Stores Rule Top 10 List: Wal-Mart's No. 1 Rank Shows U. S. Goes for Price”, Washington Post online edition, page F 01 Top 5 CE Merchandiser ‘s and their 10 K Select Category Comparisons (Slides 4 and 5) Lal, R. , Knoop, CC-I. , and Tarsis, I. (October 2006). Best Buy Co. , Inc. : Customer-Centricity. Harvard Business School, exhibit 4 b Spinali, L. and O’Hier, J. (March 2009). Dealerscope. com annual top 101 rankings report on consumer electronics retailers/etailers United States Securities and Exchange Commission via their web (2009) Company Overview (Slide 6) Bestbuy. com, Fortune (4 May 2009) Company Overview (Consumer Driven) (Slide 7) Bestbuy. com, Wolfe (28 September 2009). Majap Survey: Best Buy Tops In Customer Satisfaction. Twice.

References Company Overview (Evolving Customer Centricity) (Slide 8) Biggs, John. “Wal-Mart stepping into the big box breach. ” Crunch Gear. 18 May 2009. Crunch. Gear, Web. 4 Oct 2009. http: //www. crunchgear. com/2009/05/18/wal-mart-stepping-into-the-big-box -electornics-breeech. Company Overview (Products) (Slide 9) bestbuy. com, Sidibe, G (10/7/09 ) Interview Company Overview (Revenue by Product Group) (Slide 10) Bestbuy. com 10 K(FY 2008), (FY 2005) Product (Big Box Retailing) (Slide 11) Shevory, Christina. “A Recession Play – Mini Versions of Big-Box Stores. ” New York Times 19 May 2009, Print.

References Competitive Analysis (Slide 13) Spolsky, Joel. “Why Circuit City Failed, and Why B&H Thrives. ” Inc. 1 May 2009. http: //www. inc. com/magazine/20090501/why-circuit-city-failed-and-why-bh-thrives. html# Kavilanz, Parija. “Circuit City to shut down. ” CNNMoney. com. 16 January 2009. http: //money. cnn. com/2009/01/16/news/companies/circuit_city/ Cuizon, Gwendolyn. “SWOT Analysis of Dell Computers. ” Suite 101. com 5 March 2009 http: //strategic-business-planning. suite 101. com/article. cfm/swot_analysis_of_dell_computers http: //www. marketingteacher. com/SWOT/amazon_swot. htm Change from Input to Output (Slide 18) Bestbuy. com 10 K(FY 2008), (FY 2005); Sidibe, G (10/7/09 ) Interview Customer-Centric Best Practice (Slide 23) Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report 2008. Copyright RSR Research, LLC. All rights reserved.

References Personas (Slide 24) Howlett, Greg. “Developing Personas to Boost Your Retailing Success. ” Marketing Pilgrim. 13 November 2007. Marketing Pilgrim, Web. 4 Oct 2009. http: //www. marketingpilgrim. com/2007/11/developing-personas-to-boost-your-retailsuccess. html Gardner, Elizabeth. “Personalizing. ” Retailer. November 2007. Internet Retailer, Web. 4 Oct 2009. http: //www. intemetretailer. com/article. asp? id=24243 Sidibe, G (10/7/09 ) Interview

References (Interview) Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western Territory for Best Buy via telephone on 10/7/09 Gail Sidibe has worked for Best Buy for close to four years in her present position. She also spent 6 -months as a General Manager of Store in the East Bay, CA. Prior to Best Buy, Ms. Sidibe worked for HEAR Music as the Director of Music Acquisition. Customer Centricity is very active program in all stores. Localization is at” the heart” of the Best Buy as a business. Ms. Sidibe is very proud of the companies commitment to communities that they serve through their corporate responsibility program. It is reflected in the stores, employees from corporate, territories and store levels and it includes volunteering. In addition, Ms. Sidibe believes that most retailers use some sort of Customer Centricity. Merchandise mix reflects the retailers point of view, skewed to demographics and shopping patterns at the store level. (Her example was Nordstrom and Gap) It is no longer something we talk about as we have already put it into practice. She wasn’t part of the “growing pains” – most of the implementation came into being after I arrived. Ms. Dunn inquired about the economic down-turn in the economy, if that had an impact on the merchandising mix and competition. Gail Sidibe made it a point that two of Best Buy’s competitors left the market; however, the Targets and Wal-Marts have been more active in consumer electronics. As for her Department, In-store Entertainment, Best buy gas gain in market-share of CDs and DVDs over the new competitive retailers. It was noted that Gail did make mentioned that i. Tunes and Amazon as well as down-loadable software had made more of an impact on the business. Her Department is moving into more gadgets (e. Books readers (e. g. Sony), Leap frog and Sharper Image label products As a side note, Gail indicated that Dell is working with Best Buy in creating a bundle computer with Napster streaming audio and video. .

References (Interview) – cont’ Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western Territory for Best Buy via telephone on 10/7/09 Finally, Ms. Dunn asked if Ms. Sidibe could comment on the transition between Mr. Dunn and Mr. Anderson as the CEO. This was very smooth transition, corporate create virtual town halls for all employees. . We knew that Mr. Anderson was retiring, so it wasn’t a surprise. The company is till focused on excellent customer service even as it expands into other countries (Kalampour is a new location), new mobile focused stores with the Carphone Warehouse have been very successful, She mentioned that the American Consumer Org and JD Power had named Best Buy number one in customer service. Gail has a lot of pride being a part of the Best Buy family.