best buy
Content
BEST BUY CO INC IN RETAILING (WORLD)
April 2012
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SCOPE OF THE REPORT
Scope
All values expressed in this report are in US dollar terms, using a fixed exchange rate (2011). 2010 figures are based on part-year estimates. All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account.
Disclaimer Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors. Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies' opinions, reader discretion is advised. With recent withdrawals of its eponymous brand in both the UK and China, plus a full withdrawal from Turkey, electronics and appliance specialist retailer Best Buy is left almost totally reliant on its domestic US market. With slow growth forecast for the US and store closures announced, Best Buy has decided to change its strategy. In this report, Euromonitor International assesses the outlook for the company as it tries to reduce its reliance on "big box" stores and grow its presence in China.
Retailing
Store-based Retailing
Non-store Retailing
Electronics and Appliance Specialist Retailers
Internet Retailing
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
STRATEGIC EVALUATION
Key company facts
Best Buy Inc, The Headquarters: Minnesota, US North America, Western Regional Europe, Latin America, Asia involvement: Pacific Electronics and appliance Major channel specialist retailers, internet involvement: retailing 6.2% (electronics and World retailing value appliance specialist retailing), share: 0.6 (internet retailing) World retailing sales 1.3% (2010-2011) value growth: 6.1% CAGR (2006-2011) Best Buy: Dominance in US lends it global leadership Best Buy is the leading global electronics and appliance specialist retailer, primarily through its chain of eponymous "big box" stores in the US. The company is also keen on its "store within a store" concept whereby its smaller brands such as Geek Squad (computing support services) and MindSHIFT (managed service provision) are afforded small retail outlets within its "big box" stores. A change in growth strategy for financial year 2013 The company has previously tried to expand overseas by opening Best Buy branded "big box" stores. However, this strategy did not work in the UK, China and Turkey and it closed stores in 2011, leading to the exit of the brand from these countries. The company plans to open 50 new stores in China under its acquired Chinese brand Five Star, including 14 mobile "store within a store" outlets.
Note: Financial year 2011 - financial year end 26 February 2011
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STRATEGIC EVALUATION
Best Buy fourth quarter 2012 results sees move to smaller stores
2012 Financial Year Fourth Quarter Net sales Year-on-year growth (%) Net profit/(loss) Year-on-year growth (%) US$16.6 bn 3 (US$1.7 bn) -361 Losses associated with UK closures Best Buy's financial year fourth quarter 2012 results included a US$2.6 billion charge pertaining to the closures of its "big box" stores in the UK, a venture it operated with Carphone Warehouse, in which Best Buy has a 50% stake. Best Buy said that, had it not incurred these charges, its net profit would have shown a year-on-year increase. Restructuring to cut costs planned for financial year 2013 Best Buy announced that in order to drive costs down and maximise its profitability, it will close 50 of its "big box" stores in the US. Instead the company said that it would concentrate on smaller store concepts and would look to open 100 smaller Best Buy Mobile stores that specialise in mobile phones and smaller consumer electronics. The company plans to save US$250 million in financial year 2013 and US$800 million by financial year 2015 from improvements in its store format mix, lower corporate costs, lower product costs, fewer returns and improved supply chain efficiency.
Note: Q4 2012 financial period: three months ending 3 March 2012
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STRATEGIC EVALUATION
SWOT: Best Buy Inc, The
STRENGTHS WEAKNESSES
Size is power in the buying stakes As the world's largest electronics and appliance specialist retailer, Best Buy has considerable buying power among its vendors. In the US, this has translated to lower prices and exclusives.
OPPORTUNITIES
Multi-channel presence Although Best Buy is losing out to pure ecommerce retailers, its mix of store formats and online presence leaves it in a strong position moving forward.
Inability to push its Best Reputation and online Buy brand overseas marketing is poor Lack of expansion into Best Buy's online social markets outside North media sites appear to America has limited imply that many Best Buy's ability to customers have a offset slower growth in negative view of Best the US with faster sales Buy's customer service. growth elsewhere. An improved social media strategy is required to counter this.
THREATS
China provides Small format Best Buy opportunity for growth Mobile Five Star is profitable Best Buy Mobile's entry for Best Buy and into the specialised expansion of the brand mobile phone market could see Best Buy could earn it consumer making progress in loyalty due to retail China. Best Buy's plan independence from to open more stores is a network providers. positive step.
Continuing economic Competition in electronics uncertainty ramps up globally The economic Competition within the slowdown, especially in consumer electronics the US led to a fall in products area is rising, demand for electronics and will continue to do and appliances. Further so, with grocery and slowdowns would cause internet retailers severe problems for Best squeezing margins. Buy's expansion plans.
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STRATEGIC EVALUATION
Key challenges: Stores numbers to grow, but shrink in size
Best Buy will have to reduce its reliance on "big box" stores in favour of smaller stores The Best Buy Mobile concept continued to expand rapidly through stand-alone stores in 2011 in the US and the company has announced that it intends to close 50 "big box" stores and open a further 100 Best Buy Mobile stores in the US in the short term. The company also intends to extend its "store within a store" concept in its Chinese Five Star chain and this could be a way to build brand recognition for a smaller store chain in China. Chinese growth has to be a priority for Best Buy Best Buy announced in March 2012 that it intends to open a further 50 Five Star stores in China. Given that the operations in China are already profitable, continued expansion could help underpin a change in strategy in the US. The electronics and appliance specialist retailing channel in China is forecast to benefit from one of the highest value CAGRs among the countries in which Best Buy operates.
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Maintaining its "store within a store" brands amid "big box" closures Best Buy has a number of other brands that it intends to primarily promote via its "store within a store" concept, such as Geek Squad, Magnolia and MindSHIFT. As its "big box" stores close, the company will lose the opportunity to house more of these brands and will need to contemplate whether these stores can operate (again) as stand-alone chains.
Push for greater "exclusivity" to ward off the threat from grocers and internet-based rivals While grocery and internet retailers can sometimes match the level of variety that Best Buy offers, few of them have the buying power required to gain exclusivity on products. Consequently, Best Buy should continue to use its supplier relationships to build a larger portfolio of exclusive products, which would limit consumers' opportunities to use its stores as showrooms, but buy their goods elsewhere.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
COMPETITIVE POSITIONING
Best Buy struggles to expand international retail presence
The electronics and appliance specialist channel has seen growth globally every year apart from 2009 when it fell by 1%, largely due to economic conditions in the US and parts of Western Europe, including the UK. Competitor Yamada Denki saw mixed growth, with its fortunes based solely on the Japanese market, while Metro AG saw a gradual fall in its sales growth rate, reflecting increased competition in Germany and Western Europe as well as a recovery of the US dollar against the euro.
A
B
C
A (2007): Benefiting from the 2006 acquisition of a 75% stake in China-based retailer Jiangsu Five Star, the pace of Best Buy's sales growth rises. Following the purchase, it becomes the fifth largest electronics and appliance specialist retailer in China.
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B (2009): Despite declining global, US and European markets, Best Buy manages to grow, benefiting from further expansion into Mexico and Europe where it purchases a 50% stake in UK-based Carphone Warehouse.
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C (2011): With poor sales and eventual closure of its Best Buy branded stores in Turkey, the UK and China, plus lower than average regional growth in Western Europe and North America, Best Buy sees its growth lag global rivals.
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COMPETITIVE POSITIONING
Competitive context: Best Buy remains global leader
Electronics and Appliance Specialists: Ranking of Top 10 Companies by Value 2008-2011 4-year 2011 % Company share share trend 2008 2009 2010 Best Buy Metro AG Yamada Denki GOME Electrical Suning Appliance Co Apple Inc Euronics International Edion Corp K's Holdings Dixons Retail 1 2 6 5 12 11 4 10 18 3 1 2 3 5 9 13 4 8 14 6 1 2 3 4 6 8 5 7 10 9 2011 1 2 3 4 5 6 7 8 9 10 6.2 3.9 2.1 1.9 1.7 1.7 1.7 1.6 1.5 1.4 Best Buy maintains global leadership In terms of value sales, Best Buy's global market share grew from 5.9% in 2006, to reach 6.2% in 2011. With the North America market expected to grow faster than the Western Europe market, Best Buy will be difficult to catch over the 2011-2016 time frame. Regional growth key to company growth GOME Electrical has been the most dynamic player over 20082011, in value sales terms, while its China-based rival, Suning, was the second most dynamic as the Chinese market flourished. Europe-based retailers Euronics and Dixons have seen market share falls, reflecting the difficult economic conditions in the region.
Note: 2011 data are provisional
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
DOMESTIC STRATEGY
US integral to Best Buy's success, despite China's market size
The US market is Best Buy's main source of revenue and, despite an increasing focus on international markets, it contributed around 76% of the company's revenue in 2011, largely through its eponymous retail store chain. At the end of the year, the US market accounted for 14% of the world's electronics and appliance specialist retailing channel sales and will, therefore, remain vital to Best Buy in the short term. However, the company cannot ignore the fact that the US is no longer the biggest market overall in this channel with China overtaking the US in value sales in 2007 and accounting for 16% of the channel's sales globally in 2011. Sales value growth in the US electronics and appliance specialists channel has lagged behind global value growth at times, especially during the economic downturn in 2009, which hit the US market hard. However, the US has seen a change in fortunes and sales growth is on the rise again, driven, in part, by the popularity of tablet-style computers and smartphones.
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DOMESTIC STRATEGY
US internet retailing promising but still no challenge to store sales
While internet sales make up just 6% of US sales (value terms) for Best Buy, the channel has been a source of growth for the company throughout the economic downturn. Further to this, internet sales in consumer appliances are expected to see a value CAGR of 7.5% over 2011-2016, while consumer electronics and video games hardware internet retailing is expected to see a CAGR in sales value terms of 3.8%. At the same time storebased retailing of electronics and appliances is expected to see a value CAGR of just 0.4% in the US. US consumers commonly use the internet to research product availability, and look for comparisons in specifications and pricing. However, Best Buy will need to differentiate itself through online exclusives, private label sales, instore pick-up for products purchased online and no or low shipping rates in order to attract consumers away from the large number of online competitors.
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DOMESTIC STRATEGY
Best Buy to use smaller stores to sell smaller products
In 2011, Best Buy accounted for 34% of value sales generated in the electronics and appliance specialists channel. The size of Best Buy as a retailer of consumer electronics and appliances means that almost all suppliers are keen to maintain good retailer-vendor relationships. This has resulted in Best Buy being granted a large number of exclusive products that are only available at Best Buy stores. This provides a major selling point for Best Buy as a retailer. The liquidation of Circuit City in 2009 meant that Best Buy's largest competitor disappeared and to some degree, Best Buy became the default choice for consumers in many areas in the US. The development of Best Buy Mobile in 2007 has been a major strategic change of direction for Best Buy, switching its product focus to mobile devices such as smartphones and tablet computers. This is a shrewd move by the company which has opened a number of smaller stand-alone Best Buy Mobile stores, often in shopping malls, bringing its store-based retail presence closer to consumers, who have traditionally been forced to drive to its "big box" outlets.
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DOMESTIC STRATEGY
Computer-managed service provision boosts US strategy
Napster sold, MindSHIFT acquired, while Geek Squad goes in-house In financial year 2010, Best Buy acquired Napster Inc, but only a year later, in October 2011, it announced that it was going to sell it to digital music rival Rhapsody. In November 2011, Best Buy announced that it had agreed to acquire computer-managed services provider MindSHIFT. The purchase indicated a switch in strategy for Best Buy, seeing it move away from music, where Apple is dominant and rivals such as Spotify are emerging, towards other services, such as the provision of computer services. The purchase of MindSHIFT bolsters Best Buy's presence in supporting consumers' IT needs. The company operates the Geek Squad service, which provides repair, support and installation services. While the company aimed to build a stand-alone presence for Geek Squad, it closed its six stores in financial year 2011. Moving forward, Best Buy plans to build a presence for both Geek Squad and MindSHIFT brands within its "big box" stores. If the services are popular they may help drive footfall at its stores and enable Best Buy to remain relevant in a product area that is moving online.
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Magnolia Audio Video purchased to move up market In financial year 2001, Best Buy acquired Magnolia Audio Video, a high-end retailer of audio and video products and services, to access an upscale customer segment. In financial year 2005, the company began operating Magnolia Home Theater within Best Buy stores. However, the brand has struggled to maintain market share, and sales value experiencing a negative CAGR of 24% over 2006-2011 as consumers sought cheaper alternatives. Best Buy diversifies with Pacific Sales Kitchen and Bath Centers In financial year 2007, Best Buy acquired Pacific Sales Kitchen and Bath Centers. Pacific Sales specialises in the sale and installation of high-end and mass-market premium brand kitchen appliances, plumbing fixtures and home entertainment products, with a focus on builders. The brand achieved a value CAGR of 24% over 2006-2011, bringing Best Buy total sales revenue of US$426 million in 2011.
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DOMESTIC STRATEGY
"Showrooming" hits Best Buy's hard, limiting sales growth
In the US, economic uncertainty affecting consumer expenditure and high levels of broadband penetration have made internet bargain hunting a growing challenge for electrical retailers. Troubling to "big box" retailers such as Best Buy is the practice of "showrooming" where consumers browse in store to ascertain the look and feel of the product while also discussing their needs and specifications with sales advisers, before looking to purchase at discounted prices from online suppliers. Since 2010, the rise of smartphones has cemented this mentality as a permanent feature of the market and while stores are attracting consumers, sales per visitor have plummeted leading to the closure and downsizing of many stores. This is particularly affecting consumer electronics and computer game hardware retailing, which of the 12 product categories within internet retailing researched by Euromonitor International, has one of the biggest 2011 internet sales values, at US$27 billion in the US, second only to the "other internet retailing" category.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
INTERNATIONAL STRATEGY
Best Buy's global growth hits a number of hurdles along the way
The US remains the biggest market in sales value terms for Best Buy in 2011, but China has a bigger market overall and is forecast to benefit from higher growth than the other markets. Over the last decade the electronics and appliance specialists channel in China has grown at a rapid pace, which encouraged Best Buy to enter the market through the acquisition of Jiangsu Five Star in 2006. As a large developing market, Best Buy sought to capitalise on rising incomes in China and established Best Buy branded stores in Shanghai and its surrounding provinces in an attempt to import its eponymous brand into the country. The internationalisation of Best Buy's operations continued with the opening of stores in Mexico and the acquisition of a 50% stake in UK-based mobile phone retailer, Carphone Warehouse, with whom the company opened a number of Best Buy stores in the UK. By the end of 2010, Best Buy had retail operations in 14 markets, a considerable increase from the two markets in 2005. However, the company has since closed its Best Buy branded stores in the UK and China, and withdrawn from Turkey, which it had entered in 2009.
Note: Bubble size shows company sales (2011). Range displayed: US$0.1-34.9 billion
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INTERNATIONAL STRATEGY
China: Best Buy makes tactical retreat for self branded stores
The electronics and appliance specialists channel in China has grown rapidly over the past decade. The channel is forecast to benefit from a value CAGR of 10.2% over 2011-2016, underlining the continued positive outlook for it. In an attempt to grow its share of sales in the country, Best Buy plans to open 50 Five Star stores in financial year 2013 alone. However, if electronics and appliance specialists want to take advantage of the growth, they will need to position themselves accordingly. The appliances market is very competitive in China and specialist retailers face additional, and growing, competition from grocery and mixed retailers. Best Buy closed stores under its own brand name, which underperformed due to its comparatively high pricing and product mix that skewed towards international rather than Chinese brands. This leaves the company operating only its Five Star brand in the country. Maintaining profitability will be difficult moving forward as the market is likely to remain very competitive with large-scale rivals such as GOME and Suning set to remain keenly focused on price, which will keep margins thin.
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INTERNATIONAL STRATEGY
UK: Best Buy's slow progress enabled competitors to improve
Best Buy launched a joint venture with UK-based mobile phone retailer Carphone Warehouse in 2008, giving the company a platform to enter Western Europe. Progress since the joint venture's announcement was slow, enabling UK-based Dixons Retail, the leading retailer in the electronics and appliance specialists channel in the country, to improve stores close to where Best Buy was set to open outlets. Ultimately, slow progress in the UK led Best Buy to close its stores in the country. However, through its holding in Carphone Warehouse, Best Buy has managed to grow its market value share since its acquisition, up from 10.3% in 2009 to 11% in 2011 and this comes despite the channel suffering from a contraction of 3.5% in value terms in 2010. Carphone Warehouse is the only mobile phone specialist within the top three with Dixons Retail and KESA Electricals, operating a similar business model to that operated by Best Buy in the US. However, the chasing pack of companies ranked from fourth to seventh are all mobile phone based and include the likes of Orange and Vodafone, underlining how competitive a market the UK is for retailers of mobile phones. Aside from the incumbent competition in the electronics and appliance specialists channel, Best Buy also faces the might of international grocers, Tesco and Wal-Mart (Asda), both of whom have moved further into the electronics and appliances product categories since 2005. Furthermore, the establishment of specialist non-grocery sites, TescoDirect and AsdaDirect, adds to the competitive environment, which is accentuated by the strength of Amazon in the country, minimising the opportunity for Best Buy to grow online.
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INTERNATIONAL STRATEGY
Why did Best Buy fail to establish its brand in China and the UK?
Brand identity requires big investment One of the biggest contributing factors has been establishing brand identity among Chinese and British consumers. While Best Buy is a global retail brand and a particularly formidable force in its domestic US market, it was relatively unheard of in both China and UK prior to its acquisitions. In contrast, its competitors, such as GOME, Suning, Dixons and Comet, are household names in their respective markets. This meant that Best Buy had to invest a considerable amount of capital simply to achieve local brand recognition. Chinese sales culture clash Another important factor has been Best Buy's noncommission sales environment, which has failed to achieve the same recognition of impartiality in China that it has in the US. By comparison, GOME and Suning's sales staff are largely, if not wholly, commission-based, and as a result sales personnel are keener to sell and meet their quotas in order to increase their personal incomes. This has resulted in higher sales per employee for domestic retailers, while Best Buy suffered by comparison. Does Canada provide the model moving forward? In Canada, Best Buy has enjoyed success through maintaining the brand name of the company it acquired: Future Shop. Key to this success is the fact that Future Shop's sales culture was retained, i.e. Best Buy's culture was not imported into the brand. Future Shop has a culture whereby its sales staff are highly interactive with the customers on the shop floor. To succeed in future, Best Buy should consider retaining the national identity and especially the sales culture associated with the acquired brand rather than trying to impose its US-developed culture on it.
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INTERNATIONAL STRATEGY
Mexico remains fragmented and slow to grow
Best Buy entered the Mexican market in 2008 and by the end of its third year of operation was the largest retailer in the hugely fragmented electronics and appliance specialist retailers channel in the country. Leadership has been maintained in 2011, despite only having six outlets. However, Best Buy held a value sales share of just 2.2% at the end of 2011, underlining how fragmented the channel remains in Mexico. The difficulty for Best Buy is that home appliances and electronics are available through a wide number of other retail channels. Other retailers, such as Sanborns, Salinas y Rocha, Famsa, Elektra and Coppel, offer a wide range of products, and all of them, with the exception of Sanborns, offer credit facilities to encourage low-income consumers to buy. Also, small-scale, independent stores dominate the channel. There are 26,000 electronics and appliance specialist retailer outlets in Mexico, which on average have a mere 50 sq m of sales area, and register annual sales of only Mx$2.6 million (US$211,000) per outlet. Many of these small stores engage in repairs to maintain loyalty with local consumers. As such, Best Buy operates an almost unique business model in the Mexican market, managing vast outlets of nearly 5,000 sq m each, which allows the company to offer deep specialisation and a wide product range. However, unless Best Buy can encourage consumers to visit its stores it is likely to struggle to make an impression in Mexico. Without expansion, Best Buy will continue to struggle in Mexico and this may become the next market that it exits.
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MULTI-CHANNEL STRATEGY
Internet sales a small but growing channel
Over 2006-2011, Best Buy has seen a 17% value CAGR in its internet retailing operations, while storebased retailing has seen a value CAGR of just 6%. However, despite this pace of growth internet sales account for only 5% of the company's total sales value as of 2011. While internet retailing as a whole is forecast to enjoy faster growth in sales terms than the electronics and appliance specialists channel, internet retailing will only account for a relatively small share of sales for some time yet. The best growth prospect for Best Buy is in the US where the consumer appliances internet sales channel is forecast to post a 7.5% CAGR from 2011 to 2016.
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MULTI-CHANNEL STRATEGY
"big box" store format sees diminishing returns
In March 2012, Best Buy announced that it wanted to focus on smaller stores in order to cut costs. This was part of the company's announcement that it would close 50 of its US-based big-box stores and open 100 of its small mobile stores during financial year 2013. The company believes this will reduce costs by US$250 million in 2013 and US$800 million by 2015. The company has seen its sales growth rate fall, alongside its selling space growth rate and has also seen its country sales presence fall from Turkey and Belgium. Best Buy's large format stores exceeded 1,200 in number in the US at the end of 2011 and the company has a presence in every state in the country. As stores' local consumer bases begin to overlap, additional store openings face diminishing returns. Internet retailing is also adding to the pressure on Best Buy, especially as consumers increasingly opt to try instore and purchase cheaper online. Over 2006-2011, online sales of consumer electronics and video games hardware has seen overall value growth of almost US$9 billion with much of this coming at the expense of storebased electronics retailers such as Best Buy.
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MULTI-CHANNEL STRATEGY
Best Buy's internet strategy allows customers to vent frustrations
Internet retailing with US at its core Best Buy has online shopping available in some of its chains outside the US but its biggest market remains its home territory. In the US, customers can choose to purchase and pick up at a store or opt for home delivery, which is often free for certain items as part of various bundled offers. The "Collect at Store" option enables consumers to check stock levels of products at their local stores and reserve these products. This offer is likely to become increasingly essential for operators of "out of town" stores, which force customers to travel some distance for items. Products can be shipped to all Best Buy's locations within the US. Social media presence a vehicle for negative feedback Best Buy has a presence on Facebook, Twitter and YouTube. The Facebook page has nearly six million likes (March 2012), but suffers from a very low engagement rate of under 1%. The page features products and deals from Best Buy, but is often hijacked by disgruntled customers with complaints about poor customer service. For example, one entry by Best Buy itself, about the website being down for maintenance, was "liked" by over 100 people. On some occasions, off duty Best Buy employees actually add to the negativity with their own dissenting comments. The company's YouTube channel offers little that would draw new customers into the site unless they were already looking for a Best Buy product demonstrated on YouTube. Best Buy's Twitter page features a large amount of responses to customer queries with limited pro-active content. Best Buy would do well to copy the example set by UK colleagues in Carphone Warehouse who primarily use their Facebook page to highlight new products, while also featuring competitions to win prizes as well as articles about celebrities and their gadgets.
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BRAND AND PRIVATE LABEL STRATEGIES
"big box" stores unlikely to see strong growth in future
Best Buy tends to retain brands after acquisition, largely because they are locally prominent or operate within a more specialised sub-market. In 2008, Best Buy strategically acquired a number of retail brands to boost its portfolio, including Carphone Warehouse. When the US retailer entered the Canadian market, it acquired Future Shop, then established its big blue box stores. The same is true in the Chinese market, with Five Star. "big box" formats have been key to Best Buy as the company operates many "store within a store" retail chains such as Magnolia Home Theater and Geek Squad and these rely on footfall within "big box" stores. Consequently it has been disappointing for Best Buy to struggle to establish its eponymously branded outlets in new markets, with the most prominent failures being China and the UK. The US has seen a recent change of strategy with the company deciding to cut back on the number of its "big box" stores in favour of smaller outlets. This, with the failures of the larger format in China and the UK, could herald the beginning of a new phase for the company, especially as consumer behaviour appears to be turning away from "out of town" stores and choosing more convenient local options or purchasing online.
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BRAND AND PRIVATE LABEL STRATEGIES
Best Buy Mobile: Expanding the Best Buy brand
After successfully dominating the "big box" electronics and appliance specialists channel in the US and Canada, Best Buy has sought to expand into smaller format retailing through the Best Buy Mobile brand, which specialises in the sale of pre- and post-paid mobile devices. While these stores are set up to sell hundreds of SKUs, they are largely focused on selling services. In addition to generating income from hardware sales, the stores earn a considerable share of total income from fees paid by network providers such as Verizon and AT&T. Various other additional services, such as insurance, are also sold. At the end of financial year 2011, there were 177 Best Buy Mobile stores in operation, with retail sales of US$90 million. The store concept has so far proved successful and the company has indicated that it will continue to grow its presence in Canada and the US.
Note: 2011 year falls in end of financial year 2012 annual report data
With Best Buy's move into specialised mobile device retailing, the company will be directly competing against new rivals, primarily AT&T, Verizon and Sprint. These companies have thousands of stores and accounted for 65% of mobile phone distribution in 2011. However, Best Buy should be able to position itself as an independent retailer and grow its distribution share. If it does, it should be able to gain access to exclusive products from handset manufacturers, which will help drive footfall.
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BRAND AND PRIVATE LABEL STRATEGIES
Customer service orientated Future Shop leads in Canada
The second biggest market for Best Buy is Canada and the company operates two retailing brands, Best Buy and Future Shop. Best Buy Canada Ltd acquired the Future Shop brand in 2001, then in 2002 the company introduced its Best Buy brand. While Best Buy was expected to come into direct competition with Future Shop, according to trade sources the gradual introduction of Best Buy outlets did not hamper the performance of Future Shop as much as was expected. In consumers' minds, Future Shop remained a separate brand with its own unique image. In 2011, the company operated 222 outlets under its Future Shop and Best Buy brands. One of the main differences between Best Buy and Future Shop outlets is the interaction between staff and consumers. In Future Shop outlets there are various salespeople who engage in considerable interaction with consumers, while in Best Buy outlets there are interactive displays and a focus on self service.
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BRAND AND PRIVATE LABEL STRATEGIES
Well-developed private label range, but unlikely to expand
Best Buy branches out into private label manufacture for selected products Best Buy manufactures several ranges of private label goods to cater largely for the more value-conscious consumers. These products are sourced from manufacturers operating in Southeast Asia, and Best Buy has established a sourcing office in China to design, develop and test all of its private label products. Best Buy's private label ranges include: Insignia This brand competes directly against some of the biggest brand names in consumer electronics. Insignia products can be found in televisions, video players, home theatre systems and several other mainstream consumer electronics categories. Dynex Best Buy has a wide range of products under the Dynex brand including computer monitors, portable media devices, office supplies, peripherals and cables among other things. Geek Squad Primarily known among consumers as a repair service brand, Best Buy has produced several SKUs with the Geek Squad branding. In general, the products manufactured under this brand are cables and flash drives. Rocketfish The vast majority of these products can be attributed to one of three product categories: accessories; peripherals; and components.
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OPERATIONS
Supply and distribution
In financial year 2011, Best Buy's 20 largest suppliers accounted for just under 65% of the merchandise it purchased, with five suppliers - Apple, Samsung, Sony, Hewlett-Packard and Toshiba - representing 39% of total merchandise purchased. For its private label offerings, the company operates a global sourcing office in China in order to design, develop, test and contract manufacture its own line of products in association with factories in Asia. Since 2005, the top five brands sold at Best Buy have always included Toshiba and Hewlett-Packard, reflecting the skew towards electronics and US consumers' brand preferences. Best Buy supply chain set up for "big box" stores, changes required for smaller format operations Best Buy's existing supply chain requires vendors to ship products directly to distribution centres which are then transported to local stores. This system works well for larger format stores as they can hold a larger number of products. However, with Best Buy's push towards smaller formats and more time-sensitive exclusive products, this model may prove inefficient at keeping smaller urban stores well stocked. Major Appliances and Large-screen Televisions Domestic Vendors International Vendors Contract Carriers Ship to Ship to Ship to Ship to Distribution Centres Collected from Online orders Ship to US Best Buy Stores
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OPPORTUNITIES AND RECOMMENDATIONS
Key recommendations
Grow small stores and add further in-store brands The smaller store format has been seen to be successful in the US and Best Buy has already announced plans (March 2012) to continue to build this format, while reducing its reliance on "big box" stores. Best Buy should consider applying this strategy to both China and its second most valuable territory, Canada. The growth in popularity of smartphones and tablet-style computers coincides perfectly to give a rise in popularity of the ideal types of products for sale in these stores and Best Buy should consider ways to incorporate its other brands, particularly Geek Squad into its smaller stores.
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Push for growth in China via the Five Star brand The company needs to look to grow its market in China in order to reduce its reliance on the US economy. With electronics and appliance specialist retailing forecast a value CAGR over 2011-2016 of just 0.4% in the US, growth can only come via competing more aggressively, possibly on price. Meanwhile, China is forecast a 10.2% value CAGR as the population's incomes grow and the Chinese consumer spending remains strong. Best Buy has already seen a failure of its own brand within China and it is essential that the company can make a success of its acquired Five Star brand.
Rectify customer service reputation Best Buy needs to address negative comments online and its perceived issues with levels of customer service. Best Buy's own Facebook page is beset by stories from disgruntled customers complaining about inadequate returns policies and other tales of poor customer aftercare. Best Buy needs to re-vamp its online marketing strategy, possibly learning from joint venture partner Carphone Warehouse and providing more online content that is helpful to customers, and not just a catalogue of products.
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This research from Euromonitor International is part of a global strategic intelligence system which offers a complete picture of the commercial environment. Also available from Euromonitor International: Global Briefings Timely, relevant insight published every month on the state of the market, emerging trends and pressing industry issues. Interactive Statistical Database Complete market analysis at a levels of detail beyond any other source. Market sizes, market shares, distribution channels and forecasts. Strategy Briefings Executive debate on the global trends changing the consumer markets of the future. Global Company Profiles The competitive positioning and strategic direction of leading companies including uniquely sector-specific sales and share data. Country Market Insight Reports The key drivers influencing the industry in each country; comprehensive coverage of supply-side and demand trends and how they shape the future outlook.
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SCOPE OF THE REPORT
Scope
All values expressed in this report are in US dollar terms, using a fixed exchange rate (2011). 2010 figures are based on part-year estimates. All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data are expressed in current terms; inflationary effects are taken into account.
Disclaimer Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors. Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies' opinions, reader discretion is advised. With recent withdrawals of its eponymous brand in both the UK and China, plus a full withdrawal from Turkey, electronics and appliance specialist retailer Best Buy is left almost totally reliant on its domestic US market. With slow growth forecast for the US and store closures announced, Best Buy has decided to change its strategy. In this report, Euromonitor International assesses the outlook for the company as it tries to reduce its reliance on "big box" stores and grow its presence in China.
Retailing
Store-based Retailing
Non-store Retailing
Electronics and Appliance Specialist Retailers
Internet Retailing
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STRATEGIC EVALUATION
Key company facts
Best Buy Inc, The Headquarters: Minnesota, US North America, Western Regional Europe, Latin America, Asia involvement: Pacific Electronics and appliance Major channel specialist retailers, internet involvement: retailing 6.2% (electronics and World retailing value appliance specialist retailing), share: 0.6 (internet retailing) World retailing sales 1.3% (2010-2011) value growth: 6.1% CAGR (2006-2011) Best Buy: Dominance in US lends it global leadership Best Buy is the leading global electronics and appliance specialist retailer, primarily through its chain of eponymous "big box" stores in the US. The company is also keen on its "store within a store" concept whereby its smaller brands such as Geek Squad (computing support services) and MindSHIFT (managed service provision) are afforded small retail outlets within its "big box" stores. A change in growth strategy for financial year 2013 The company has previously tried to expand overseas by opening Best Buy branded "big box" stores. However, this strategy did not work in the UK, China and Turkey and it closed stores in 2011, leading to the exit of the brand from these countries. The company plans to open 50 new stores in China under its acquired Chinese brand Five Star, including 14 mobile "store within a store" outlets.
Note: Financial year 2011 - financial year end 26 February 2011
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STRATEGIC EVALUATION
Best Buy fourth quarter 2012 results sees move to smaller stores
2012 Financial Year Fourth Quarter Net sales Year-on-year growth (%) Net profit/(loss) Year-on-year growth (%) US$16.6 bn 3 (US$1.7 bn) -361 Losses associated with UK closures Best Buy's financial year fourth quarter 2012 results included a US$2.6 billion charge pertaining to the closures of its "big box" stores in the UK, a venture it operated with Carphone Warehouse, in which Best Buy has a 50% stake. Best Buy said that, had it not incurred these charges, its net profit would have shown a year-on-year increase. Restructuring to cut costs planned for financial year 2013 Best Buy announced that in order to drive costs down and maximise its profitability, it will close 50 of its "big box" stores in the US. Instead the company said that it would concentrate on smaller store concepts and would look to open 100 smaller Best Buy Mobile stores that specialise in mobile phones and smaller consumer electronics. The company plans to save US$250 million in financial year 2013 and US$800 million by financial year 2015 from improvements in its store format mix, lower corporate costs, lower product costs, fewer returns and improved supply chain efficiency.
Note: Q4 2012 financial period: three months ending 3 March 2012
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STRATEGIC EVALUATION
SWOT: Best Buy Inc, The
STRENGTHS WEAKNESSES
Size is power in the buying stakes As the world's largest electronics and appliance specialist retailer, Best Buy has considerable buying power among its vendors. In the US, this has translated to lower prices and exclusives.
OPPORTUNITIES
Multi-channel presence Although Best Buy is losing out to pure ecommerce retailers, its mix of store formats and online presence leaves it in a strong position moving forward.
Inability to push its Best Reputation and online Buy brand overseas marketing is poor Lack of expansion into Best Buy's online social markets outside North media sites appear to America has limited imply that many Best Buy's ability to customers have a offset slower growth in negative view of Best the US with faster sales Buy's customer service. growth elsewhere. An improved social media strategy is required to counter this.
THREATS
China provides Small format Best Buy opportunity for growth Mobile Five Star is profitable Best Buy Mobile's entry for Best Buy and into the specialised expansion of the brand mobile phone market could see Best Buy could earn it consumer making progress in loyalty due to retail China. Best Buy's plan independence from to open more stores is a network providers. positive step.
Continuing economic Competition in electronics uncertainty ramps up globally The economic Competition within the slowdown, especially in consumer electronics the US led to a fall in products area is rising, demand for electronics and will continue to do and appliances. Further so, with grocery and slowdowns would cause internet retailers severe problems for Best squeezing margins. Buy's expansion plans.
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STRATEGIC EVALUATION
Key challenges: Stores numbers to grow, but shrink in size
Best Buy will have to reduce its reliance on "big box" stores in favour of smaller stores The Best Buy Mobile concept continued to expand rapidly through stand-alone stores in 2011 in the US and the company has announced that it intends to close 50 "big box" stores and open a further 100 Best Buy Mobile stores in the US in the short term. The company also intends to extend its "store within a store" concept in its Chinese Five Star chain and this could be a way to build brand recognition for a smaller store chain in China. Chinese growth has to be a priority for Best Buy Best Buy announced in March 2012 that it intends to open a further 50 Five Star stores in China. Given that the operations in China are already profitable, continued expansion could help underpin a change in strategy in the US. The electronics and appliance specialist retailing channel in China is forecast to benefit from one of the highest value CAGRs among the countries in which Best Buy operates.
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Maintaining its "store within a store" brands amid "big box" closures Best Buy has a number of other brands that it intends to primarily promote via its "store within a store" concept, such as Geek Squad, Magnolia and MindSHIFT. As its "big box" stores close, the company will lose the opportunity to house more of these brands and will need to contemplate whether these stores can operate (again) as stand-alone chains.
Push for greater "exclusivity" to ward off the threat from grocers and internet-based rivals While grocery and internet retailers can sometimes match the level of variety that Best Buy offers, few of them have the buying power required to gain exclusivity on products. Consequently, Best Buy should continue to use its supplier relationships to build a larger portfolio of exclusive products, which would limit consumers' opportunities to use its stores as showrooms, but buy their goods elsewhere.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
COMPETITIVE POSITIONING
Best Buy struggles to expand international retail presence
The electronics and appliance specialist channel has seen growth globally every year apart from 2009 when it fell by 1%, largely due to economic conditions in the US and parts of Western Europe, including the UK. Competitor Yamada Denki saw mixed growth, with its fortunes based solely on the Japanese market, while Metro AG saw a gradual fall in its sales growth rate, reflecting increased competition in Germany and Western Europe as well as a recovery of the US dollar against the euro.
A
B
C
A (2007): Benefiting from the 2006 acquisition of a 75% stake in China-based retailer Jiangsu Five Star, the pace of Best Buy's sales growth rises. Following the purchase, it becomes the fifth largest electronics and appliance specialist retailer in China.
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B (2009): Despite declining global, US and European markets, Best Buy manages to grow, benefiting from further expansion into Mexico and Europe where it purchases a 50% stake in UK-based Carphone Warehouse.
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C (2011): With poor sales and eventual closure of its Best Buy branded stores in Turkey, the UK and China, plus lower than average regional growth in Western Europe and North America, Best Buy sees its growth lag global rivals.
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COMPETITIVE POSITIONING
Competitive context: Best Buy remains global leader
Electronics and Appliance Specialists: Ranking of Top 10 Companies by Value 2008-2011 4-year 2011 % Company share share trend 2008 2009 2010 Best Buy Metro AG Yamada Denki GOME Electrical Suning Appliance Co Apple Inc Euronics International Edion Corp K's Holdings Dixons Retail 1 2 6 5 12 11 4 10 18 3 1 2 3 5 9 13 4 8 14 6 1 2 3 4 6 8 5 7 10 9 2011 1 2 3 4 5 6 7 8 9 10 6.2 3.9 2.1 1.9 1.7 1.7 1.7 1.6 1.5 1.4 Best Buy maintains global leadership In terms of value sales, Best Buy's global market share grew from 5.9% in 2006, to reach 6.2% in 2011. With the North America market expected to grow faster than the Western Europe market, Best Buy will be difficult to catch over the 2011-2016 time frame. Regional growth key to company growth GOME Electrical has been the most dynamic player over 20082011, in value sales terms, while its China-based rival, Suning, was the second most dynamic as the Chinese market flourished. Europe-based retailers Euronics and Dixons have seen market share falls, reflecting the difficult economic conditions in the region.
Note: 2011 data are provisional
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
DOMESTIC STRATEGY
US integral to Best Buy's success, despite China's market size
The US market is Best Buy's main source of revenue and, despite an increasing focus on international markets, it contributed around 76% of the company's revenue in 2011, largely through its eponymous retail store chain. At the end of the year, the US market accounted for 14% of the world's electronics and appliance specialist retailing channel sales and will, therefore, remain vital to Best Buy in the short term. However, the company cannot ignore the fact that the US is no longer the biggest market overall in this channel with China overtaking the US in value sales in 2007 and accounting for 16% of the channel's sales globally in 2011. Sales value growth in the US electronics and appliance specialists channel has lagged behind global value growth at times, especially during the economic downturn in 2009, which hit the US market hard. However, the US has seen a change in fortunes and sales growth is on the rise again, driven, in part, by the popularity of tablet-style computers and smartphones.
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DOMESTIC STRATEGY
US internet retailing promising but still no challenge to store sales
While internet sales make up just 6% of US sales (value terms) for Best Buy, the channel has been a source of growth for the company throughout the economic downturn. Further to this, internet sales in consumer appliances are expected to see a value CAGR of 7.5% over 2011-2016, while consumer electronics and video games hardware internet retailing is expected to see a CAGR in sales value terms of 3.8%. At the same time storebased retailing of electronics and appliances is expected to see a value CAGR of just 0.4% in the US. US consumers commonly use the internet to research product availability, and look for comparisons in specifications and pricing. However, Best Buy will need to differentiate itself through online exclusives, private label sales, instore pick-up for products purchased online and no or low shipping rates in order to attract consumers away from the large number of online competitors.
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DOMESTIC STRATEGY
Best Buy to use smaller stores to sell smaller products
In 2011, Best Buy accounted for 34% of value sales generated in the electronics and appliance specialists channel. The size of Best Buy as a retailer of consumer electronics and appliances means that almost all suppliers are keen to maintain good retailer-vendor relationships. This has resulted in Best Buy being granted a large number of exclusive products that are only available at Best Buy stores. This provides a major selling point for Best Buy as a retailer. The liquidation of Circuit City in 2009 meant that Best Buy's largest competitor disappeared and to some degree, Best Buy became the default choice for consumers in many areas in the US. The development of Best Buy Mobile in 2007 has been a major strategic change of direction for Best Buy, switching its product focus to mobile devices such as smartphones and tablet computers. This is a shrewd move by the company which has opened a number of smaller stand-alone Best Buy Mobile stores, often in shopping malls, bringing its store-based retail presence closer to consumers, who have traditionally been forced to drive to its "big box" outlets.
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DOMESTIC STRATEGY
Computer-managed service provision boosts US strategy
Napster sold, MindSHIFT acquired, while Geek Squad goes in-house In financial year 2010, Best Buy acquired Napster Inc, but only a year later, in October 2011, it announced that it was going to sell it to digital music rival Rhapsody. In November 2011, Best Buy announced that it had agreed to acquire computer-managed services provider MindSHIFT. The purchase indicated a switch in strategy for Best Buy, seeing it move away from music, where Apple is dominant and rivals such as Spotify are emerging, towards other services, such as the provision of computer services. The purchase of MindSHIFT bolsters Best Buy's presence in supporting consumers' IT needs. The company operates the Geek Squad service, which provides repair, support and installation services. While the company aimed to build a stand-alone presence for Geek Squad, it closed its six stores in financial year 2011. Moving forward, Best Buy plans to build a presence for both Geek Squad and MindSHIFT brands within its "big box" stores. If the services are popular they may help drive footfall at its stores and enable Best Buy to remain relevant in a product area that is moving online.
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Magnolia Audio Video purchased to move up market In financial year 2001, Best Buy acquired Magnolia Audio Video, a high-end retailer of audio and video products and services, to access an upscale customer segment. In financial year 2005, the company began operating Magnolia Home Theater within Best Buy stores. However, the brand has struggled to maintain market share, and sales value experiencing a negative CAGR of 24% over 2006-2011 as consumers sought cheaper alternatives. Best Buy diversifies with Pacific Sales Kitchen and Bath Centers In financial year 2007, Best Buy acquired Pacific Sales Kitchen and Bath Centers. Pacific Sales specialises in the sale and installation of high-end and mass-market premium brand kitchen appliances, plumbing fixtures and home entertainment products, with a focus on builders. The brand achieved a value CAGR of 24% over 2006-2011, bringing Best Buy total sales revenue of US$426 million in 2011.
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DOMESTIC STRATEGY
"Showrooming" hits Best Buy's hard, limiting sales growth
In the US, economic uncertainty affecting consumer expenditure and high levels of broadband penetration have made internet bargain hunting a growing challenge for electrical retailers. Troubling to "big box" retailers such as Best Buy is the practice of "showrooming" where consumers browse in store to ascertain the look and feel of the product while also discussing their needs and specifications with sales advisers, before looking to purchase at discounted prices from online suppliers. Since 2010, the rise of smartphones has cemented this mentality as a permanent feature of the market and while stores are attracting consumers, sales per visitor have plummeted leading to the closure and downsizing of many stores. This is particularly affecting consumer electronics and computer game hardware retailing, which of the 12 product categories within internet retailing researched by Euromonitor International, has one of the biggest 2011 internet sales values, at US$27 billion in the US, second only to the "other internet retailing" category.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
INTERNATIONAL STRATEGY
Best Buy's global growth hits a number of hurdles along the way
The US remains the biggest market in sales value terms for Best Buy in 2011, but China has a bigger market overall and is forecast to benefit from higher growth than the other markets. Over the last decade the electronics and appliance specialists channel in China has grown at a rapid pace, which encouraged Best Buy to enter the market through the acquisition of Jiangsu Five Star in 2006. As a large developing market, Best Buy sought to capitalise on rising incomes in China and established Best Buy branded stores in Shanghai and its surrounding provinces in an attempt to import its eponymous brand into the country. The internationalisation of Best Buy's operations continued with the opening of stores in Mexico and the acquisition of a 50% stake in UK-based mobile phone retailer, Carphone Warehouse, with whom the company opened a number of Best Buy stores in the UK. By the end of 2010, Best Buy had retail operations in 14 markets, a considerable increase from the two markets in 2005. However, the company has since closed its Best Buy branded stores in the UK and China, and withdrawn from Turkey, which it had entered in 2009.
Note: Bubble size shows company sales (2011). Range displayed: US$0.1-34.9 billion
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INTERNATIONAL STRATEGY
China: Best Buy makes tactical retreat for self branded stores
The electronics and appliance specialists channel in China has grown rapidly over the past decade. The channel is forecast to benefit from a value CAGR of 10.2% over 2011-2016, underlining the continued positive outlook for it. In an attempt to grow its share of sales in the country, Best Buy plans to open 50 Five Star stores in financial year 2013 alone. However, if electronics and appliance specialists want to take advantage of the growth, they will need to position themselves accordingly. The appliances market is very competitive in China and specialist retailers face additional, and growing, competition from grocery and mixed retailers. Best Buy closed stores under its own brand name, which underperformed due to its comparatively high pricing and product mix that skewed towards international rather than Chinese brands. This leaves the company operating only its Five Star brand in the country. Maintaining profitability will be difficult moving forward as the market is likely to remain very competitive with large-scale rivals such as GOME and Suning set to remain keenly focused on price, which will keep margins thin.
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INTERNATIONAL STRATEGY
UK: Best Buy's slow progress enabled competitors to improve
Best Buy launched a joint venture with UK-based mobile phone retailer Carphone Warehouse in 2008, giving the company a platform to enter Western Europe. Progress since the joint venture's announcement was slow, enabling UK-based Dixons Retail, the leading retailer in the electronics and appliance specialists channel in the country, to improve stores close to where Best Buy was set to open outlets. Ultimately, slow progress in the UK led Best Buy to close its stores in the country. However, through its holding in Carphone Warehouse, Best Buy has managed to grow its market value share since its acquisition, up from 10.3% in 2009 to 11% in 2011 and this comes despite the channel suffering from a contraction of 3.5% in value terms in 2010. Carphone Warehouse is the only mobile phone specialist within the top three with Dixons Retail and KESA Electricals, operating a similar business model to that operated by Best Buy in the US. However, the chasing pack of companies ranked from fourth to seventh are all mobile phone based and include the likes of Orange and Vodafone, underlining how competitive a market the UK is for retailers of mobile phones. Aside from the incumbent competition in the electronics and appliance specialists channel, Best Buy also faces the might of international grocers, Tesco and Wal-Mart (Asda), both of whom have moved further into the electronics and appliances product categories since 2005. Furthermore, the establishment of specialist non-grocery sites, TescoDirect and AsdaDirect, adds to the competitive environment, which is accentuated by the strength of Amazon in the country, minimising the opportunity for Best Buy to grow online.
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INTERNATIONAL STRATEGY
Why did Best Buy fail to establish its brand in China and the UK?
Brand identity requires big investment One of the biggest contributing factors has been establishing brand identity among Chinese and British consumers. While Best Buy is a global retail brand and a particularly formidable force in its domestic US market, it was relatively unheard of in both China and UK prior to its acquisitions. In contrast, its competitors, such as GOME, Suning, Dixons and Comet, are household names in their respective markets. This meant that Best Buy had to invest a considerable amount of capital simply to achieve local brand recognition. Chinese sales culture clash Another important factor has been Best Buy's noncommission sales environment, which has failed to achieve the same recognition of impartiality in China that it has in the US. By comparison, GOME and Suning's sales staff are largely, if not wholly, commission-based, and as a result sales personnel are keener to sell and meet their quotas in order to increase their personal incomes. This has resulted in higher sales per employee for domestic retailers, while Best Buy suffered by comparison. Does Canada provide the model moving forward? In Canada, Best Buy has enjoyed success through maintaining the brand name of the company it acquired: Future Shop. Key to this success is the fact that Future Shop's sales culture was retained, i.e. Best Buy's culture was not imported into the brand. Future Shop has a culture whereby its sales staff are highly interactive with the customers on the shop floor. To succeed in future, Best Buy should consider retaining the national identity and especially the sales culture associated with the acquired brand rather than trying to impose its US-developed culture on it.
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INTERNATIONAL STRATEGY
Mexico remains fragmented and slow to grow
Best Buy entered the Mexican market in 2008 and by the end of its third year of operation was the largest retailer in the hugely fragmented electronics and appliance specialist retailers channel in the country. Leadership has been maintained in 2011, despite only having six outlets. However, Best Buy held a value sales share of just 2.2% at the end of 2011, underlining how fragmented the channel remains in Mexico. The difficulty for Best Buy is that home appliances and electronics are available through a wide number of other retail channels. Other retailers, such as Sanborns, Salinas y Rocha, Famsa, Elektra and Coppel, offer a wide range of products, and all of them, with the exception of Sanborns, offer credit facilities to encourage low-income consumers to buy. Also, small-scale, independent stores dominate the channel. There are 26,000 electronics and appliance specialist retailer outlets in Mexico, which on average have a mere 50 sq m of sales area, and register annual sales of only Mx$2.6 million (US$211,000) per outlet. Many of these small stores engage in repairs to maintain loyalty with local consumers. As such, Best Buy operates an almost unique business model in the Mexican market, managing vast outlets of nearly 5,000 sq m each, which allows the company to offer deep specialisation and a wide product range. However, unless Best Buy can encourage consumers to visit its stores it is likely to struggle to make an impression in Mexico. Without expansion, Best Buy will continue to struggle in Mexico and this may become the next market that it exits.
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MULTI-CHANNEL STRATEGY
Internet sales a small but growing channel
Over 2006-2011, Best Buy has seen a 17% value CAGR in its internet retailing operations, while storebased retailing has seen a value CAGR of just 6%. However, despite this pace of growth internet sales account for only 5% of the company's total sales value as of 2011. While internet retailing as a whole is forecast to enjoy faster growth in sales terms than the electronics and appliance specialists channel, internet retailing will only account for a relatively small share of sales for some time yet. The best growth prospect for Best Buy is in the US where the consumer appliances internet sales channel is forecast to post a 7.5% CAGR from 2011 to 2016.
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MULTI-CHANNEL STRATEGY
"big box" store format sees diminishing returns
In March 2012, Best Buy announced that it wanted to focus on smaller stores in order to cut costs. This was part of the company's announcement that it would close 50 of its US-based big-box stores and open 100 of its small mobile stores during financial year 2013. The company believes this will reduce costs by US$250 million in 2013 and US$800 million by 2015. The company has seen its sales growth rate fall, alongside its selling space growth rate and has also seen its country sales presence fall from Turkey and Belgium. Best Buy's large format stores exceeded 1,200 in number in the US at the end of 2011 and the company has a presence in every state in the country. As stores' local consumer bases begin to overlap, additional store openings face diminishing returns. Internet retailing is also adding to the pressure on Best Buy, especially as consumers increasingly opt to try instore and purchase cheaper online. Over 2006-2011, online sales of consumer electronics and video games hardware has seen overall value growth of almost US$9 billion with much of this coming at the expense of storebased electronics retailers such as Best Buy.
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MULTI-CHANNEL STRATEGY
Best Buy's internet strategy allows customers to vent frustrations
Internet retailing with US at its core Best Buy has online shopping available in some of its chains outside the US but its biggest market remains its home territory. In the US, customers can choose to purchase and pick up at a store or opt for home delivery, which is often free for certain items as part of various bundled offers. The "Collect at Store" option enables consumers to check stock levels of products at their local stores and reserve these products. This offer is likely to become increasingly essential for operators of "out of town" stores, which force customers to travel some distance for items. Products can be shipped to all Best Buy's locations within the US. Social media presence a vehicle for negative feedback Best Buy has a presence on Facebook, Twitter and YouTube. The Facebook page has nearly six million likes (March 2012), but suffers from a very low engagement rate of under 1%. The page features products and deals from Best Buy, but is often hijacked by disgruntled customers with complaints about poor customer service. For example, one entry by Best Buy itself, about the website being down for maintenance, was "liked" by over 100 people. On some occasions, off duty Best Buy employees actually add to the negativity with their own dissenting comments. The company's YouTube channel offers little that would draw new customers into the site unless they were already looking for a Best Buy product demonstrated on YouTube. Best Buy's Twitter page features a large amount of responses to customer queries with limited pro-active content. Best Buy would do well to copy the example set by UK colleagues in Carphone Warehouse who primarily use their Facebook page to highlight new products, while also featuring competitions to win prizes as well as articles about celebrities and their gadgets.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
BRAND AND PRIVATE LABEL STRATEGIES
"big box" stores unlikely to see strong growth in future
Best Buy tends to retain brands after acquisition, largely because they are locally prominent or operate within a more specialised sub-market. In 2008, Best Buy strategically acquired a number of retail brands to boost its portfolio, including Carphone Warehouse. When the US retailer entered the Canadian market, it acquired Future Shop, then established its big blue box stores. The same is true in the Chinese market, with Five Star. "big box" formats have been key to Best Buy as the company operates many "store within a store" retail chains such as Magnolia Home Theater and Geek Squad and these rely on footfall within "big box" stores. Consequently it has been disappointing for Best Buy to struggle to establish its eponymously branded outlets in new markets, with the most prominent failures being China and the UK. The US has seen a recent change of strategy with the company deciding to cut back on the number of its "big box" stores in favour of smaller outlets. This, with the failures of the larger format in China and the UK, could herald the beginning of a new phase for the company, especially as consumer behaviour appears to be turning away from "out of town" stores and choosing more convenient local options or purchasing online.
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BRAND AND PRIVATE LABEL STRATEGIES
Best Buy Mobile: Expanding the Best Buy brand
After successfully dominating the "big box" electronics and appliance specialists channel in the US and Canada, Best Buy has sought to expand into smaller format retailing through the Best Buy Mobile brand, which specialises in the sale of pre- and post-paid mobile devices. While these stores are set up to sell hundreds of SKUs, they are largely focused on selling services. In addition to generating income from hardware sales, the stores earn a considerable share of total income from fees paid by network providers such as Verizon and AT&T. Various other additional services, such as insurance, are also sold. At the end of financial year 2011, there were 177 Best Buy Mobile stores in operation, with retail sales of US$90 million. The store concept has so far proved successful and the company has indicated that it will continue to grow its presence in Canada and the US.
Note: 2011 year falls in end of financial year 2012 annual report data
With Best Buy's move into specialised mobile device retailing, the company will be directly competing against new rivals, primarily AT&T, Verizon and Sprint. These companies have thousands of stores and accounted for 65% of mobile phone distribution in 2011. However, Best Buy should be able to position itself as an independent retailer and grow its distribution share. If it does, it should be able to gain access to exclusive products from handset manufacturers, which will help drive footfall.
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BRAND AND PRIVATE LABEL STRATEGIES
Customer service orientated Future Shop leads in Canada
The second biggest market for Best Buy is Canada and the company operates two retailing brands, Best Buy and Future Shop. Best Buy Canada Ltd acquired the Future Shop brand in 2001, then in 2002 the company introduced its Best Buy brand. While Best Buy was expected to come into direct competition with Future Shop, according to trade sources the gradual introduction of Best Buy outlets did not hamper the performance of Future Shop as much as was expected. In consumers' minds, Future Shop remained a separate brand with its own unique image. In 2011, the company operated 222 outlets under its Future Shop and Best Buy brands. One of the main differences between Best Buy and Future Shop outlets is the interaction between staff and consumers. In Future Shop outlets there are various salespeople who engage in considerable interaction with consumers, while in Best Buy outlets there are interactive displays and a focus on self service.
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BRAND AND PRIVATE LABEL STRATEGIES
Well-developed private label range, but unlikely to expand
Best Buy branches out into private label manufacture for selected products Best Buy manufactures several ranges of private label goods to cater largely for the more value-conscious consumers. These products are sourced from manufacturers operating in Southeast Asia, and Best Buy has established a sourcing office in China to design, develop and test all of its private label products. Best Buy's private label ranges include: Insignia This brand competes directly against some of the biggest brand names in consumer electronics. Insignia products can be found in televisions, video players, home theatre systems and several other mainstream consumer electronics categories. Dynex Best Buy has a wide range of products under the Dynex brand including computer monitors, portable media devices, office supplies, peripherals and cables among other things. Geek Squad Primarily known among consumers as a repair service brand, Best Buy has produced several SKUs with the Geek Squad branding. In general, the products manufactured under this brand are cables and flash drives. Rocketfish The vast majority of these products can be attributed to one of three product categories: accessories; peripherals; and components.
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
OPERATIONS
Supply and distribution
In financial year 2011, Best Buy's 20 largest suppliers accounted for just under 65% of the merchandise it purchased, with five suppliers - Apple, Samsung, Sony, Hewlett-Packard and Toshiba - representing 39% of total merchandise purchased. For its private label offerings, the company operates a global sourcing office in China in order to design, develop, test and contract manufacture its own line of products in association with factories in Asia. Since 2005, the top five brands sold at Best Buy have always included Toshiba and Hewlett-Packard, reflecting the skew towards electronics and US consumers' brand preferences. Best Buy supply chain set up for "big box" stores, changes required for smaller format operations Best Buy's existing supply chain requires vendors to ship products directly to distribution centres which are then transported to local stores. This system works well for larger format stores as they can hold a larger number of products. However, with Best Buy's push towards smaller formats and more time-sensitive exclusive products, this model may prove inefficient at keeping smaller urban stores well stocked. Major Appliances and Large-screen Televisions Domestic Vendors International Vendors Contract Carriers Ship to Ship to Ship to Ship to Distribution Centres Collected from Online orders Ship to US Best Buy Stores
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STRATEGIC EVALUATION COMPETITIVE POSITIONING DOMESTIC STRATEGY INTERNATIONAL STRATEGY MULTI-CHANNEL STRATEGY BRAND AND PRIVATE LABEL STRATEGIES OPERATIONS OPPORTUNITIES AND RECOMMENDATIONS
OPPORTUNITIES AND RECOMMENDATIONS
Key recommendations
Grow small stores and add further in-store brands The smaller store format has been seen to be successful in the US and Best Buy has already announced plans (March 2012) to continue to build this format, while reducing its reliance on "big box" stores. Best Buy should consider applying this strategy to both China and its second most valuable territory, Canada. The growth in popularity of smartphones and tablet-style computers coincides perfectly to give a rise in popularity of the ideal types of products for sale in these stores and Best Buy should consider ways to incorporate its other brands, particularly Geek Squad into its smaller stores.
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Push for growth in China via the Five Star brand The company needs to look to grow its market in China in order to reduce its reliance on the US economy. With electronics and appliance specialist retailing forecast a value CAGR over 2011-2016 of just 0.4% in the US, growth can only come via competing more aggressively, possibly on price. Meanwhile, China is forecast a 10.2% value CAGR as the population's incomes grow and the Chinese consumer spending remains strong. Best Buy has already seen a failure of its own brand within China and it is essential that the company can make a success of its acquired Five Star brand.
Rectify customer service reputation Best Buy needs to address negative comments online and its perceived issues with levels of customer service. Best Buy's own Facebook page is beset by stories from disgruntled customers complaining about inadequate returns policies and other tales of poor customer aftercare. Best Buy needs to re-vamp its online marketing strategy, possibly learning from joint venture partner Carphone Warehouse and providing more online content that is helpful to customers, and not just a catalogue of products.
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