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.