BA 4101 Best Buy Case Analysis Presentation please read the best buy case first, and finish the recommendation and implementation plan on the powerpoint. A

BA 4101 Best Buy Case Analysis Presentation please read the best buy case first, and finish the recommendation and implementation plan on the powerpoint. Also write a presentation draft for me. For the exclusive use of L. Byrd-Williams, 2020.
MH0052
1 2 59927628
R EV: S eptember 7, 2017
FRANK T. ROT H A E RME L
DAVID R. KING
MARNE L. A RT H AU D -DAY
Best Buy Co., Inc.
By 2017, the value of Best Buy’s stock climbed over 200 percent1 since Hubert Joly was appointed
CEO in 2012. Although lagging the returns of Amazon (300 percent), it exceeds the 75 percent return
on the S&P 500 over the same time period2 (Exhibit 1 depicts a stock price comparison from August
20, 2012, the day that Hubert Joly was appointed as Best Buy CEO, to September 6, 2017).3 Best Buy’s
performance reflects a stark difference for many retailers that have declared or are facing bankruptcy,
such as RadioShack and Sears. Best Buy has used its physical presence to engage customers in “high
touch” products that allow customers to interact with products combined with competitive prices,
and then offering after-sales support such as in-home installation. Joly implemented a mix of “Expert
Service. Unbeatable Prices” to provide a clear value proposition.4,5 The strategy’s success is reflected
in Best Buy’s performance, and Hubert Joly being touted as the “retailer of the year” by Forbes for
2016.6 Still, Hubert Joly increasingly confronts questions about how to maintain the firm’s improved
performance. Currently, Best Buy is focusing on in-home advisors with a brand-agnostic approach to
unlock latent demand and drive sales. However, it is unclear whether it will work. It is either possible
that Best Buy may provide a glimpse of what the future may look like, or these moves may simply
prelude the firm’s demise.
Amazon remains a formidable competitor for Best Buy. For example, Amazon has begun offering inhome consultation with Alexa,7 and Best Buy does not have an offering in the growing area of digital
assistants that may substitute for its trained sales staff. Amazon is also creating increased physical
presence through the expansion of warehouses8 and through its purchase of Whole Foods. While the
purchase of Whole Foods by Amazon has mainly driven grocery chain companies stock lower, 9 it also
gives Amazon a physical presence where customers will be able to pick up purchases. Additionally,
through a partnership with Sears, Amazon is rolling out the sale of Kenmore appliances nationwide.1
Appliances played a large part in Best Buy’s recent growth and recovery,11 and Best Buy cannot simply
rest on its laurels as competition continues to evolve.
Competition in the consumer-electronics industry remains cut-throat. While Best Buy is no longer
considered doomed to follow other national consumer electronics retail superstores into extinction, it
will be harder for Best Buy to meet increased expectations for continued performance. For example,
analysts are skeptical that Best Buy’s recent performance is sustainable, and rate Best Buy’s stock as
a hold.12 This likely reflects concerns Best Buy may simply have received a temporary boost from
struggles at other traditional retailers.13 If insider stock sales are any indication, Best Buy’s managers may agree, as over the last two years of its high-performance, Best Buy managers have been net
Professors Frank T. Rothaermel, David R. King, and Marne L. Arthaud-Day prepared this case from public sources. This case is not intended to be
used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and
omissions, are entirely the authors’. © by Rothaermel, King, and Arthaud-Day 2017.
This document is authorized for use only by LaShanda Byrd-Williams in Global Business Policies – Summer 2020 taught by JOAN ALLATTA, Temple University from May 2020 to Nov 2020.
For the exclusive use of L. Byrd-Williams, 2020.
Best Buy Co., Inc.
sellers of the company’s stock.14 Further, reflecting potential concerns with growing revenue, Best Buy
has announced plans to cut costs by $600 million by 2021, after reaching a previous goal of reducing
costs by $400 million.15 Meanwhile, Best Buy is looking for growth outside the U.S. by expanding in
Canada and Mexico.16
A Brief History of Best Buy
Together with his business partner, James Wheeler, Richard Schulze founded Sound of Music, an
audio specialty store, in Minnesota in 1966. The fledgling company ended its first fiscal year with
gross sales of $173,000, and continued to grow rapidly over the next few years. By the time of its initial
public offering in 1969, the home-town enterprise had acquired two of its local competitors 17 and it
opened two new outlets near the University of Minnesota in downtown Minneapolis.
Schulze bought out Wheeler in 1971,18 shortly after Sound of Music hit the $1 million mark in
annual revenues.19 Subsequent years saw continued expansion through additional locations, new product lines, and novel promotional techniques. For example, in 1979 Sound of Music became the first
supplier of video and laserdisc equipment from companies such as Panasonic, Magnavox, Sony, and
Sharp. After a tornado hit the Roseville, Minnesota, store in June 1981, the company responded with
a “Tornado Sale,” which became an annual event, storm or no storm. This strategy boosted Sound of
Music’s average sales per square foot to $350, compared with an industry average of $150 to $200.20
ARRIVAL OF THE SUPERSTORE
With ambitions to capture even larger market share, Sound of Music changed its name, in 1983,
to Best Buy Co., Inc. Shortly thereafter, it adopted its now-familiar superstore format, with an increasingly diversified product range. Boosted by an infusion of cash from a series of public offerings, Best
Buy proceeded to grow from eight to 24 stores and saw its revenues increase from $29 million in 1984
to $290 million in 1987. 21 On July 20, 1987, Best Buy made its debut on the New York Stock Exchange
(NYSE: BBY) with an initial offering of 8.3 million shares of common stock.
Best Buy changed its logo to the yellow tag in 1987, and in 1989 its stores adopted a new “grab-andgo” store format, called Concept II. Schulze’s revolutionary new approach to big-box retailing combined
Walmart’s prices with Circuit City’s assortment, in a shopping warehouse with a 35,000-square-foot
footprint.22 The new stores consisted of well-stocked showrooms with self-help information so that
people could make their product selections independently and check out in a single stop. Answer
Centers were still available for people who desired assistance, but salespeople no longer needed to
attend to each individual customer or fetch merchandise from storage. This change reduced Best Buy’s
employment costs by one-third, which compensated for the corresponding de-emphasis on service
contracts. One analyst called Concept II “the most innovative thing to happen in this industry—ever.”23
However, Best Buy’s store format has continued to evolve and it currently operates Concept IV stores
that provide an open floor format and cash registers throughout the store, and dedicated space to
vendors.24
2
This document is authorized for use only by LaShanda Byrd-Williams in Global Business Policies – Summer 2020 taught by JOAN ALLATTA, Temple University from May 2020 to Nov 2020.
For the exclusive use of L. Byrd-Williams, 2020.
Best Buy Co., Inc.
GROWTH THROUGH ACQUISITIONS
The year 2000 marked the launch of a new phase of inorganic growth through acquisitions. Best
Buy grew its revenues from $12.5 billion in 2000 to nearly $51 billion in 2012.25 The company
first purchased Magnolia, a high-end consumer-electronics chain with 13 locations throughout
Washington, California, and Oregon, for $88 million in 2000.26 The next year, Best Buy purchased
Musicland for $425.1 million. The acquisition of the mall-based music and entertainment retailer gave
Best Buy access to an additional 1,300 stores across the United States and Puerto Rico, including 650
Sam Goody and 400 Suncoast Motion Picture outlets. In 2002, the company acquired Geek Squad, a
24-hour computer-support task force. By 2004, Best Buy had opened Geek Squad precincts within all
of its stores.27
In contrast to the rapid expansion of Geek Squad, Best Buy divested Musicland, in 2003, due to
declining sales, and increased competition from Walmart and Target in the CD segment, as well as
iTunes in digital music. Sun Capital Partners Inc., a private equity firm, purchased the failing firm for
only the assumption of Musicland’s debt and lease obligations. Brad Anderson, who succeeded Schulze
as CEO in 2002, described the Musicland venture as “a very expensive but powerful learning experience for Best Buy.”28
Best Buy then took a two-year hiatus from acquisitions before purchasing AudioVisions, a custom
integrator of electronic products such as flat-screen TVs and security solutions, in 2005.29 In December
of that same year, Best Buy acquired Pacific Sales, a Los Angeles–headquartered company that specialized in selling premium kitchen appliances, for $410 million. 30 In 2007, Best Buy announced plans to
purchase Seattle-based Speakeasy Inc., a broadband and VoIP services provider, for $97 million.31 This
transaction was followed by the 2008 announcement of Best Buy’s acquisition of Napster for $121 million in cash, in an effort to compete with Apple’s 70 percent share of the digital-music marketplace.32
In 2008, Best Buy also acquired Dealtree and it became the backbone of Best Buy’s customer return,
trade-in, and liquidation programs.33 In 2011, Best Buy acquired Mineshaft in an attempt to move into
managed IT services that it abandoned by 2014 through a divestment of Mindshift as a wholly owned
subsidiary of Ricoh.34 Under CEO Joly’s tenure, Best Buy has not made an acquisition, but it did divest
its operations outside North America.
INTERNATIONAL EXPANSION AND RETRENCHMENT
Best Buy expanded internationally before refocusing on the North American market, and in 2016
only 8.4 percent of its sales were international.35 Its first cross-border expansion was the 2001 acquisition of Futureshop Ltd., a Canadian electronics chain, which added annual sales of $1.32 billion.36
Maintaining Futureshop as a wholly owned subsidiary, Best Buy later strengthened its Canadian presence by opening 77 branded stores of its own.37 Best Buy established an active presence in the growing Asian markets with its 2006 acquisition of a majority interest in the retail chain Jiangsu Five Star
Appliance Co., Ltd., China’s fourth-largest appliance and consumer-electronics retailer, for $180 million.38 A year later on January 26, 2007, the first Best Buy store in China—touted as the largest Best Buy
in existence—opened in Shanghai.39 Other regions quickly followed. By 2008, Best Buy had announced
the opening of its first pilot stores in Mexico and Turkey, as well as multiple branded superstores in
the United Kingdom and other European countries.40
3
This document is authorized for use only by LaShanda Byrd-Williams in Global Business Policies – Summer 2020 taught by JOAN ALLATTA, Temple University from May 2020 to Nov 2020.
For the exclusive use of L. Byrd-Williams, 2020.
Best Buy Co., Inc.
In response to the 2008–2009 recession and increasing competitive pressures, Best Buy started to
shift its expansion efforts away from traditional “big box” stores to focus on its new “Connected Store”
format and “Best Buy Mobile” concept stores both at home and abroad. Then, in a stunning reversal,
Best Buy closed all of its branded stores in China, Turkey, and the United Kingdom by the end of 2012.
Instead, the company invested heavily in its Five Star subsidiary in China and its Carphone Warehouse
and Phone House stores in Europe, opening 38 and 36 new locations in fiscal 2012, respectively.41
As the company’s financial struggles continued, Best Buy decided to refocus its efforts around
its higher performing units in North America (including Canada and Mexico) and to exit the Asian
and European markets altogether. Best Buy completed the sale of its interest in Best Buy Europe to
Carphone Warehouse Group in June 2013, and Best Buy divested its ownership of Five Star (China) in
February 2015. In March 2015, the company also consolidated all of its Canadian Future Shop stores
under the Best Buy brand.42
LEADERSHIP CHANGES
After having just two CEOs in its first 43 years of operations (Richard Schulze and his successor
Brad Anderson), Best Buy went through three top leaders in a six-month period in 2012.43 Brian Dunn
assumed the helm, in June 2009, and he had been trying to “right” Best Buy’s “ship” for three years.
Dunn believed that the company’s physical stores were an asset: “There are still things in the physical
world that are going to be important: expert advice and the ability to see and touch the latest tablets.”44 But to cut costs, he announced in 2011 that Best Buy would reduce its “big box” real estate by
10 percent over five years by closing some stores, renegotiating leases, and letting some leases expire.45
Thousands of workers, including some 600 highly trained Geek Squad staffers, were laid off.46 Moving
forward, Dunn planned to open 600 to 800 new Best Buy Mobile stores, focusing on smartphones and
other mobile devices.47 The goal was to increase the number of retail points of contact while decreasing square footage, thereby increasing the company’s flexibility as a multichannel retailer.48 He also
increased Best Buy’s online offerings by more than 20,000 items to broaden its “virtual” footprint.49
Unfortunately, Wall Street was not satisfied, and the company’s stock price continued to decline.
Analysts felt Dunn had been slow to recognize the company’s problems, and he was not being aggressive enough in shutting down underperforming units.50 Thus, when Dunn announced his resignation
in April 2012 after 28 years as a Best Buy employee, many assumed it was due to the company’s
financial woes. In reality, he left in the midst of a board investigation into allegations of personal
misconduct (a close relationship with a female employee).51 Ultimately, the independent investigators
determined that there had been no misuse of company resources, but that Dunn’s poor judgment and
lack of professionalism had contributed to a negative work environment.52
The fallout did not stop there. Richard Schulze, who was then serving as Chairman of the Board,
stepped down from his position at the June 2012 board meeting. The board “expanded his role” by
granting him the honorary title of “Founder and Chairman Emeritus” and permitted him to finish out
his term as director through 2013. The investigative report indicated that Schulze had learned about
Dunn’s actions, confronted him, warned him that such behavior was contrary to company policy, but
then dropped the issue when Dunn denied the allegations. To rectify this breach of ethics, the board
named Hatim Tyabji, chair of the audit committee, as the new Chairman53 and hired an external consultant to run the search process for a new CEO. In the interim, George Mikan III, another director,
4
This document is authorized for use only by LaShanda Byrd-Williams in Global Business Policies – Summer 2020 taught by JOAN ALLATTA, Temple University from May 2020 to Nov 2020.
For the exclusive use of L. Byrd-Williams, 2020.
Best Buy Co., Inc.
agreed to take on the day-to-day responsibilities for running the company.54 The board also recommended that shareholders approve the declassification of the board, making each director subject to
annual re-election.55
Hailing from Nancy, France, Hubert Joly was appointed Best Buy CEO on August 20, 2012.56 In prior
jobs, Joly had engineered successful turnaround strategies for Vivendi and Carlson Wagonlit Travel,57
and he saw no reason why Best Buy would be any different. Still, several investors were not happy
with his appointment. Some saw Joly’s lack of retail experience as a significant limitation, while others
wondered if the company had rushed the search just so it could proceed with its restructuring plan.58
It was not until 2015 that Joly began to win some respect for his turnaround efforts (see Exhibit 2
for Best Buy financial data).
The Consumer-Electronics Retail Industry
A BRIEF HISTORY
The consumer-electronics retail industry grew rapidly in the second half of the 20th century due
to several converging trends. At the end of World War II, a significant portion of the U.S. population
migrated from cities to suburbs, creating a need for suburban retail centers. At the same time, the cost
of technology decreased, corresponding to an increase in demand for televisions and other consumer
electronics. Many of these new customers were price-sensitive, first-time homeowners, who were
willing to accept decreased customer service in return for lower prices, leading to a rapid growth in
discount stores.59
As the children of the WWII generation—the baby boomers—reached adulthood in the 1970s,
demand for consumer electronics soared. Retailers shifted from carrying just one or two lines of
equipment toward stocking a diverse set of product lines. Strong industry growth continued through
the late 1980s, until the new VCR market became saturated and a recession slowed consumer sales. By
1991, 98 percent of all homes had at least one color TV and 77 percent of those that owned TVs also
owned a VCR. The United States alone had at least 10,000 radio, television, and consumer-electronics
stores that had sprung up to meet the surge in demand. With market saturation, however, growth in
the 1990s was limited to the replacement and upgrading of existing devices. 60 As a result, competition intensified and many companies, such as Highland Superstores Inc., left the electronics market. 61
Technology advancements and improved economic conditions in the mid- to late-1990s again led
to a period of growth that supported the rise of large superstores such as Best Buy and Circuit City.
In 1998, sales at Best Buy and Circuit City increased by 21 percent and 48 percent, respectively. 62 It
was around this time that the industry faced yet another great shakeup—the birth of online retailing.
In 1998, Amazon.com, a new competitor, entered the consumer-electronics market by offering
music CD sales online.63 Not willing to cede this potentially lucrative market, Circuit City, Tweeter
Home Entertainment Group, and Outpost.com all opened online consumer-electronics sites of their
own within the next year. Best Buy followed suit with Bestbuy.com in 2000, making it a relatively late
mover in e-retailing.64 However, sales of CDs were decimated following the success of Apple’s iTunes
that allowed consumers to buy only the songs they wanted and play them all on an iPod.
5
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For the exclusive use of L. Byrd-Williams, 2020.
Best Buy Co., Inc.
The ability to reach new consumers online, coupled with increased interest in digital cameras and
DVDs, led to yet another period of rapid expansion throughout the early 2000s. This time, however,
growth occurred primarily through acquisitions and industry consolidation. From 1994 to 2007, the
three largest consumer-electronics retailers (Circuit City, Best Buy, and Radio Shack) consolidated
their combined market share from approximately 22 percent to 45 percent. Meanwhile, the total
number of firms in electronics retailing with over 100 employees declined by four percent per annum
from 1998 to 2004.65
From 2005 to 2007, the industry compound annual growth rate (CAGR) was approximately six
percent. With the onset of the global recession, growth fell to 3.4 percent in 2008 and –0.4 percent in
2009.66The industry started to recover in 2010 but growth remained relatively flat for the next several
years…
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