Will Best Buy Survive Amazon?

Will Best Buy Survive Amazon?

September 12, 2019 100 By Kailee Schamberger


Once an online bookstore, Amazon now
sells just about anything you would find in a home or business,
and has developed a formidable formula. Meanwhile storied and
once dominant U.S. retail chains everywhere
are struggling. Faced with monumental shifts in
the way consumers shop. Once remarkably durable brands have shuttered
their stores, which sometimes number in the hundreds. The more than century-old retailer,
Sears, once the country’s largest chain, filed for Chapter
11 bankruptcy in 2018. Just one of the many victims
of the so-called retail apocalypse. There is no question, the world
is dramatically different than it was even a decade ago. So how do
traditional retailers survive? Some answers may lie with Best Buy. It might seem to be a
relic of a bygone era. Much of its business model is
based on large format physical stores. Pretty much the very definition of
what is failing across the industry. But Best Buy is killing it. Shares are hovering near an all
time high fueled by a transformation centered on in-store service and stocking
its shelves with new key products in health care
and smart homes. It is a rebirth many
in the industry consider miraculous. In 2012, Best Buy was in dire shape. Sales were plummeting, morale had
tanked, and executives were scrambling to save the company. Within the space of just a few
years, a retail giant that employed nearly 170,000 people and dominated
its industry, nearly died. Then, somehow, it didn’t. While retailers such as Toys R Us
bit the dust, Best Buy bucked the trend. Now the CEO who pulled off
this miraculous turnaround is stepping down, and the company’s CFO will now steer
the revived retailer and fend off still growing threats. So how did Best Buy
engineered such a renaissance? Is its massive recovery sustainable? And can it be replicated? Best Buy’s origins can be
traced back to St. Paul Minnesota in the late 1960s. Electronics salesman, Richard Schultz, founded
a store in the area called Sound of Music. It sold stereos, speakers, vinyl
records and other audio equipment. It grew into a chain but
the business found greater success after Schultz adopted the big box format. The Best Buy concept was born, and
Schultz renamed the store in 1983. Two years later it went public. Growth was slow at first in its
first decade as a public company. Its stock only peaked at a high of
five dollars and three cents in late 1994. But over the next 20 years,
Best Buy became the largest U.S. seller of electronics in the Golden
Age of America’s big box retailers. These big stores, modeled on warehouses,
really rose to dominance in the 1980s and 1990s and
they spread across segments. Home Depot and Lowe’s became
major home improvement stores. Petco and Petsmart ruled
the pets category. Stores such as Bed Bath and Beyond
and Linens and Things dominated home goods. Best Buy was considered a best in
class retailer and the growth was spectacular. Best Buy had 679 stores
at the end of 2003. By the end of 2009, it had 3,889. Sales climbed from roughly 21 billion
to 45 billion over the same period. Its stock jumped to above
50 dollars a share. But Amazon was starting to rise in the
late 1990s and it seemed to offer deals too good to refuse. It could sell a customer the same
exact products they could find in a store, but often at lower prices and
with free shipping due to the nature of e-commerce. Amazon often did not have to charge
sales tax which could make a huge difference in price on high
ticket items like televisions and appliances. Amazon’s first wave of success began
to shake out smaller competitors such as Comp USA and Twitter. But it took a bit longer and a
few other blows to dent bigger players like Circuit City, which during Best
Buy’s heyday, was its biggest competitor in 2008. Circuit City was fending off an active
investor who wanted to shake up its management. Then the financial crisis hit and
sparked a slowdown in consumer spending that culminated in the
Great Recession in November 2008. It filed for bankruptcy, and with the
lack of credit, was forced to liquidate. Circuit City closed its last
567 stores in 2009. At that point, the retailer had been
around for more than 60 years, and it had more than 700
stores in its heyday. Circuit City’s demise gave Best Buy
a bit of a tailwind. Industry sales were down about
10 percent that year. But as Circuit City began closing
up stores, shoppers shifted to Best Buy. The result: Best Buy’s
sales fell only five percent. It had gone from being the
biggest of several national electronics chains to the only one left. But, competing with fellow brick and
mortar stores like this was what Best Buy was used to, and the
rapidly ascending Amazon was a another beast entirely. Analysts who follow Best Buy say
the company might have underestimated the threat from the
Seattle based e-commerce giant. The Amazon threat, for years, had been
masked by the arrival of the flat screen television. Massive technological leaps to sleek
televisions with crystal clear pictures motivated people all over the country
to go out and buy new sets. Perhaps the best years for the
product cycle were 2005 and 2006. B ut retailers benefited for the better
part of the decade as e-commerce continued to quietly strengthen its
grip on the market. But by the time the Great Recession
began to hit, Best Buy started to suffer. A slowing housing market in
2007 hit sales of appliances and large home electronics. The following financial crisis dried up
credit and tightened consumer spending around the country. Finding the lowest prices possible on
what items a buyer could afford became even more of a priority. Best Buy same store sales fell 1.3 percent in 2008. Things turned around briefly in 2009,
but same store sales fell again every year from 2010 through 2013. Best Buy went from pulling in 1.2 billion dollars in net income in 2011,
to a one billion dollar loss in 2012, and another forty three
million dollar loss in 2013. Other things happening at the
company did not exactly inspire confidence among investors. Then CEO Brian Dunn a lifelong best
buy employee who had started as a blue shirt worker on the
store floor resigned in 2012. This came after news surfaced that he
may have had a relationship with a younger female employee. The fallout from the episode led Schultz
to resign as chairman in 2012 Best Buy’s board brought in Zubair
Joly a relative outsider who had previously worked at McKinsey and Vivendi
where approved the launch of successful video games such
as World of Warcraft. It is Jolie’s tenure that is
credited with turning the company around when he joined. It was a very tumultuous time at
Best Buy as a retail analyst with almost 20 years of experience. There are very few retailers that
have experienced going through such a period of hatred and
concern as Best Buy. I was going through in 2012 if
you looked at valuation metrics the stock was priced as if this was a
company that was going to go bankrupt within five years. And the initial reaction from the
Wall Street community and investors was who is who bear Jolie and how
is this man going to save Best Buy. The new CEO and his staff began
cutting costs and investing in parts of Best Buy’s business that gave it
advantages over its online competitors that started with service and
stores up to that point. Best Buy was one of many
retailers faced with a problem sometimes referred to as showroom where customers
would walk into a store to inspect and learn about products they wanted
only to go home and buy them online often via Amazon
and usually at cheaper prices. So Best Buy had to take the fight
to them and it did so by leveraging its large network of stores matching
Amazon’s prices and focusing on providing the customer service
and online retailer can’t. In 2012 Best Buy began matching any
price on an item anyone could find elsewhere. That meant a customer checking
out a stereo system computer or phone could walk out of one
of Best Buy stores with that product. On that day and pay the same price. The company also started shipping
online orders directly from stores turning every store into a small
warehouse which increased Best Buy’s available inventory and
shorten delivery times. They also put in place an easy
process for returning online products in stores saving customers the trouble of
packing something back up in a box. If you think about it all or
all of retail right now is working aggressively to become omni channel
and that’s their advantage versus the web. They have physical stores. Why not leverage that use those stores
as pickup points drop off points shipping points. The Web can’t really do that. The web that last mile is really where
the stores can come in and try to be more effective. And you’ve seen that you know
Wal-Mart Target Costco they’re going big time after the
omni channel consumer. Best Buy also begin working closely
with the store’s vendors which many say has been a crucial
step in the company’s turnaround. The company started giving electronics
makers their own dedicated sections at Best Buy stores. This store within-a-store concept was
mutually beneficial to both Best Buy and these tech firms. The first deal during Jolie’s tenure
was with Korean electronics maker Samsung in April of 2013. Then Microsoft followed. Best Buy also made a deal with
Apple to revamp its displays even worked with Amazon to be the exclusive
seller of smart TV’s embedded with Amazon’s fired TV technology. The retailer keeps the exact details of
these deals close to its chest, but essentially it shares the cost
of investments and the revenues with each manufacturer in turn. Device makers can exercise greater control
over how their products are presented to customers. They can set up their displays
and tailor the shopping experience much the way they want. They often bring their own staff
into the stores who obviously know their products best. Customers can learn about something
directly from its manufacturer and Best Buy employees can receive
training from the vendors. This arrangement gives sometimes fierce
competitors such as Google Apple and Amazon a kind of neutral ground
where each can sell their competing products side by side. The store within a store
concept deepened the symbiotic relationship between the retailer and suppliers and
kept them invested in Best Buy survival and success. Best Buy’s troubles had spelled danger
from any of these device makers who do not really have their
own physical retail networks and suppliers. That was a scary time for them. All of a sudden they
started to think about. What if we’re in a world
where there is no Best Buy. Suppliers realized that was
not a pleasant world. And I think that the
message was to suppliers from Best Buy was, “You need us as
much as we need you. So, you know, help to support us and we
will showcase and sell your products.” The company also bet on service both
inside and outside its stores Best Buy invested in training for its
floor employees commonly known as blue shirts for the polo
shirts they wear. The retailer figured that a store
can offer customers something online typically does not flesh and blood
authorities on products who can answer questions and
make recommendations. One of the pillars of Best Buy’s
approach to service is its Geek Squad division which it acquired
back in 2002. Geek Squad sends technicians to homes
to set up troubleshoot and repair electronics bought at Best
Buy or elsewhere. The group has a membership program
and aims to be a comprehensive in-home service that will set up
fix or troubleshoot anything that plugs into a wall from home
theaters to networking devices to appliances. Geek Squad has 23 years
of experience making house calls and currently employs 20000 people
who make 33 million total interactions with consumers a year
including one point eight million home visits according to Jefferies, Geek
Squad and other services make up a small but growing
portion of Best Buy’s revenues. The chain pulled in about five percent
of its sales from services in 2018 up from about four
percent the previous year. Best Buy is betting that as
our homes fill up with complex interconnected devices customers will
increasingly want one company that can tackle everything. It is also pushing a new product
areas it thinks offer potentially high margins such as smart home
technology and health care. In 2018 it acquired Great
Call for $800 million dollars. Great call makes smartphones and wearables
aimed at older adults and sells the service customers can use
to quickly access caregivers and first responders. The work has paid off. Best Buy shares have risen
from a high of $44.66 a share in 2013 to $75.95 cents a share in 2019. Same store sales have grown
every year since 2015. In the process the company is becoming
something of a model for other retailers showing how businesses can
steer through a competitive and rapidly changing technology
fueled retail market. Now that Best Buy has turned itself
around though the question is: Where does it go from here? Joly is stepping down, and Best
Buy has appointed its chief financial officer Corie Barry to the top job. Barry oversees the company’s service
division and its Health Division and was a key player in the
Great Call acquisition and she’s a veteran. She’s worked at the
company since 1999. Analysts say Barry is certainly qualified
to take the job and she’s well liked by Wall Street. But Joly’s shoes will not
be easy to fill. Corie Barry is a very strong
leader within their Best Buy organization and I think she’s going to
be great as the next CEO. She has big shoes to fill. Hubert Joly did a phenomenal job turning
Best Buy around and making it relevant again. But I think Corey Barry has
a very strong operating background and strategic thinking background that’s going to
help her to achieve great things in the future for Best Buy. For now the company
is focused on execution. It has put together some plans that give
it a solid chance at a future. But what about competitors. Amazon after all surprised the world
by buying Whole Foods and entering the grocery business. Best Buy is still the
largest seller of electronics. It sold 32.4 billion dollars in electronics in 2017,
a five percent increase over the previous year according
to industry publication twice. But Amazon was not
far behind, selling 30.1 billion dollars worth a four
percent increase over 2016. Could the online giant move
on to Best Buy’s turf? Once again this time
with its own stores. For now, Best Buy has found a way
to dig deep into what it knows: electronics. It is also leveraged its
strengths in stores and service while beefing up
its online presence. Analysts are optimistic but this is
an era of unprecedented disruption and there is a long list of
retailers that have gone out of business, in electronics alone. If Best Buy expects to stick around it
needs to keep a pretty wide moat between it and
rivals especially Amazon.