Best Buy Co, Inc.
Company Profile
Reference Code: 228
Publication Date: May 2005
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Best Buy Co, Inc.
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BEST BUY CO, INC.
TABLE OF CONTENTS
TABLE OF CONTENTS
Company Overview ....................................................... 4
Key Facts........................................................................ 4
Business Description .................................................... 5
History ............................................................................ 7
Key Employees .............................................................. 9
Major Products And Services..................................... 18
Products And Services Analysis................................ 19
SWOT Analysis ............................................................ 20
Top Competitors .......................................................... 24
Company View ............................................................. 25
Locations and Subsidiaries ........................................ 30
Best Buy Co, Inc.
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BEST BUY CO, INC.
Company Overview
COMPANY OVERVIEW
Best Buy is a consumer electronics and appliances retailing company, engaged in
retailing consumer electronics, home-office products, entertainment software and
related services. The company operates in the US and Canada. It is headquartered in
Richfield, Minnesota and employs about 100,000 people.
The company recorded revenues of $27.3 billion during the fiscal year ended
February 2005, an increase of 11.4% over 2004. The increase was primarily
attributable to the increase in demand for digital products. The operating profit of the
company during fiscal 2005 was $1.4 billion, an increase of 10.6% over fiscal 2004.
The net profit was $984 million during fiscal year 2005, an increase of 39.6% over
2004.
KEY FACTS
Head Office
Best Buy Co, Inc.
7601 Penn Avenue South
Richfield
Minnesota
MN 55423
United States
Phone
+1 612 291 1000
Fax
+1 612 292 4001
Web Address
www.bestbuy.com
Revenues/turnover
27300
(US$ Mn)
Financial Year End
February
Employees
100000
SIC Codes
SIC 5731 Radio, Television, and Consumer Electronics Stores
NAICS Codes
44131, 443112
New York Ticker
BBY
Best Buy Co, Inc.
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BEST BUY CO, INC.
Business Description
BUSINESS DESCRIPTION
Best Buy is a specialty retailer of name-brand consumer electronics, home office
equipment, entertainment software, and appliances. The company currently offers
approximately 6000 products, exclusive of entertainment software titles and
accessories, in its four principal product categories. In addition, the company offers a
selection of accessories supporting its principal product categories.
Best Buy operates in two geographical segments: domestic and international. The
domestic segment is comprised of the United States Best Buy and Magnolia Audio
Video operations. Through the United States Best Buy stores offer a variety of
consumer electronics, home-office equipment, entertainment software, appliances
and related services. Magnolia Audio Video stores offer high-end audio and video
products. The international segment comprises Best Buy Canada and its operating
division, Future Shop. Future Shop and Best Buy Canada stores offer products similar
to those offered by the United States Best Buy stores.
The company operates 608 Best Buy stores in 48 states of the US and the District of
Columbia that averaged approximately 43,500 retail square feet, and 22 Magnolia
Audio Video stores in California, Washington and Oregon, that averaged
approximately 10,000 retail square feet. Collectively, the United States Best Buy
stores totaled approximately 26.4 million retail square feet at the end of fiscal 2003
(about 90% of the Company’s total retail square footage). The Magnolia Audio Video
stores totaled approximately 218,000 retail square feet at the end of fiscal 2003 (less
than 1% of its total retail square footage).
The international segment of the company involves the operation of 108 Future Shop
stores throughout all Canadian provinces and 19 Canadian Best Buy stores in
Ontario, Alberta and Manitoba. Collectively, international stores totalled approximately
2.8 million retail square feet (about 10% of the Company’s total retail square footage)
in fiscal 2003.
Best Buy’s largest product category, home office, includes personal computers and
related peripheral equipment, telephones, digital and cellular phones, pagers,
answering machines, fax machines, copiers and calculators. Best Buy has also added
vendors such as Emachine and Micron to its list of home office brand name products,
which already included brand names such as Canon, Epson, Fujitsu, HewlettPackard, Nokia, Panasonic and Toshiba amongst others.
Best Buy Co, Inc.
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BEST BUY CO, INC.
Business Description
Best Buy’s second largest product category is consumer electronics, consisting of
video and audio equipment. Video products include television sets, DVD players,
VCRs, camcorders and DBS systems. Audio products include audio components,
audio systems, shelf systems, portable audio equipment, car stereos and security
systems. It sells consumer electronics with brand names such as Aiwa, JVC,
Kenwood, Panasonic, Technics and Yamaha amongst others.
The company’s third category is entertainment software, which includes compact
discs, DVD movies, pre-recorded videocassettes, computer software and video game
hardware and software. The company is one of the few large consumer electronics
retailers that sell a broad selection of entertainment software in all of its stores. .
Its final category is major appliances, which includes microwave ovens, washing
machines, dryers, air conditioners, dishwashers, refrigerators, freezers, ranges and
vacuum cleaners.
In addition to products in its four main categories, the company sells cameras and
other photographic equipment, and ready-to-assemble furniture designed for use with
computer and audio/video equipment. Best Buy also sells performance service plans
(PSPs) on behalf of an unrelated third party. These PSPs cover product repair and/or
replacement for a specified period of time following the purchase of a product,
extending and enhancing the manufacturer’s warranty.
Best Buy Co, Inc.
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BEST BUY CO, INC.
History
HISTORY
The foundations of the company were laid when Richard Schulze in 1969, with a
partner, founded Sound Of Music, a Minnesota home/car stereo store. In 1971, he
bought out his partner and began to expand the chain. In the early 1980s, Schulze
broadened his product line and targeted older, more affluent customers by offering
appliances and VCRs.
Best Buy grew rapidly between 1984 and 1987; it expanded from eight stores to 24
and its sales jumped from $29 million to $240 million. The next year another 16 stores
were opened and the sales jumped by 84%.
To set Best Buy apart from its competitors, in 1989 Schulze introduced the Concept II
warehouse-like store format. Schulze also cut payroll by taking sales staff off
commission and reducing the number of employees per store by about a third. The
concept proved to be a major hit.
In 1994, the company announced the debut Concept III, an even larger store format
with more hands on features such as listening stations. Best Buy opened 47 new
stores in 1995 but found itself in debt. Earnings plummeted in the fiscal year 1997,
partly due to a huge PC inventory made obsolete by Intel’s newer product, which led
to a $15 million write-off.
The company started selling CD’s on its website in 1997. That year it realized it had
overextended itself with its expansion, super-sized stores and financing promotion
and quickly initiated a massive makeover. It scaled back expansion and narrowed
inventory.
In 1999, Best Buy began to enter new markets and introduced its Concept IV stores,
which highlighted digital products and feature stations for computer software and DVD
demonstrations. Also in 1999, Best Buy formed, for its online operations,
BestBuy.com and invested $10 million in consumer electronics information web site
etown.com.
In early 2000, Best Buy began selling personalized computers directly from Micron
Electronics through Kiosks in its stores. In addition, in the same year, it agreed to
purchase Seattle-based Magnolia Hi-Fi, a privately held chain of 13 high-end audio
and video stores, marking its entry into the higher-end consumer electronics retail
segment.
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BEST BUY CO, INC.
History
In 2001, Best Buy announced the completion of its acquisition of Musicland, extending
its product offerings to include MP3 players, cellular telephones, satellite systems,
digital imaging, game hardware and software, and an expanded assortment of
accessories. In the same year, Best Buy completed the acquisition of Future Shop. By
the end of fiscal 2002, Future Shop had expanded to over 90 stores and had attained
the status as Canada’s largest consumer electronics retailer.
Best Buy reported in 2003, that it intended to sell its interest in the Musicland Group in
order to concentrate on its core business and assets as part of its strategic plan. In
June 2003, an affiliate of Sun Capital acquired Musicland Group, from the company.
Best Buy announced in 2004, that it planned to open up to 73 new stores in the US
and Canada during the 2005 fiscal year. It anticipated opening 10 Best Buy stores in
Canada, predominantly in the 30,000-square-foot format. New target markets
included Calgary, Alberta; Regina, Saskatchewan; and Langley, British Columbia.
In May 2004 Best Buy announced plans to improve its services to its customers as
well as attract new groups of customers by launching its customer centricity initiative
in up to 110 additional US Best Buy stores during fiscal 2005.
In July 2004 the company entered into a seven-year strategic relationship with
Accenture for consulting and outsourcing services.
October, 2004 saw the launch of Best Buy’s next generation stores in California.
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BEST BUY CO, INC.
Key Employees
KEY EMPLOYEES
Name
Job Title
Board
Richard M. Schulze
Chairman
Executive Board
Bradbury H. Anderson
Chief Executive Officer and
Executive Board
Compensation
Vice Chairman
Allen U. Lenzmeier
President and Chief Operat-
Executive Board
ing Officer
Robert T. Blanchard
Director
Non Executive Board
Kathy J. Higgins Victor
Director
Non Executive Board
Ronald James
Director
Non Executive Board
Elliot S. Kaplan
Director
Non Executive Board
Matthew H. Paull
Director
Non Executive Board
Mark C. Thompson
Director
Non Executive Board
Frank D. Trestman
Director
Non Executive Board
Mary A. Tolan
Director
Non Executive Board
Hatim A. Tyabji
Director
Non Executive Board
James C. Wetherbe
Director
Non Executive Board
Michael R. Keskey
President, US Retail Stores
Senior Management
Ronald D. Boire
Executive Vice President and
Senior Management
General Merchandise Manager
Brian J. Dunn
Executive Vice President,
Senior Management
Retail Sales
Darren R. Jackson
Executive Vice President,
Senior Management
Finance; and Chief Financial
Officer
Michael A. Linton
Executive Vice President,
Senior Management
Consumer and Brand Marketing; and Chief Marketing
Officer
Philip J. Schoonover
Executive Vice President,
Senior Management
Customer Segments
John C. Walden
Executive Vice President,
Senior Management
Human Capital and Leadership
Robert A. Willett
Executive Vice President,
Senior Management
Operations
Susan S. Hoff
Senior Vice President and
Senior Management
Chief Communications
Officer
Best Buy Co, Inc.
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BEST BUY CO, INC.
Key Employees
Joseph M. Joyce
Senior Vice President, Gen-
Senior Management
eral Counsel; and Assistant
Secretary
Bruce H. Besanko
Vice President, Finance
Senior Management
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BEST BUY CO, INC.
Key Employee Biographies
KEY EMPLOYEE BIOGRAPHIES
Richard M. Schulze
Board: Executive Board
Job Title: Chairman
Since: 1966
Age: 63
Mr. Schulze is a founder of Best Buy. He has been an officer and director since the
company’s inception in 1966 and currently is chairman of the board. He is a trustee of
the University of St. Thomas, chairman of the board of governors of the University of
St. Thomas Business School and a member of the President’s Council of Twin Cities
Public Television.
Bradbury H. Anderson
Board: Executive Board
Job Title: Chief Executive Officer and Vice Chairman
Since: 2002
Age: 54
Mr. Anderson has been a director since 1986 and is currently Best Buy’s vice
chairman and chief executive officer. He has previously served as president and chief
operating officer since 1991. He has been employed in various capacities with Best
Buy since 1973.
Allen U. Lenzmeier
Board: Executive Board
Job Title: President and Chief Operating Officer
Since: 2001
Age: 60
Mr. Lenzmeier is currently Best Buy’s president and chief operating officer. Mr.
Lenzmeier joined the company in 1984. Prior to his promotion to the current position,
he served as president - Best Buy Retail Stores, from 2001 to 2002 and as chief
financial officer and executive vice president, from 1991 to 2001. He is a national
trustee for the Boys and Girls Clubs of the Twin Cities and serves on its board of
directors.
Best Buy Co, Inc.
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BEST BUY CO, INC.
Key Employee Biographies
Robert T. Blanchard
Board: Non Executive Board
Job Title: Director
Since: 1999
Mr Blanchard is currently the president of Strategic and Marketing Services. He was
formerly the president of the North American beauty care sector of Procter & Gamble.
He serves as a director of Bandag, and Signet Group. In addition, he serves as
chairman of the board of executive advisors to Xavier University’s College of
Business.
Kathy J. Higgins Victor
Board: Non Executive Board
Job Title: Director
Since: 1999
Ms Higgins is the founder and president of Centera. She was formerly the senior vice
president of human resources at Northwest Airlines, and has held senior executive
positions at The Pillsbury Company and Burger King.
Matthew H. Paull
Board: Non Executive Board
Job Title: Director
Since: 2003
Mr. Paull has worked closely with the board of directors of McDonald’s throughout his
10-year career with the company. As chief finance officer, he is responsible for
maintaining McDonald’s financial integrity and assisting McDonald’s chief executive
officer. He is also a member of McDonald’s chairman’s council, which sets the
company’s strategic direction. Prior to being promoted to the chief finance officer at
McDonald’s, he held the position of senior vice president of finance and tax, where he
was involved with negotiating and structuring all restaurant acquisitions, including
acquisitions in the United Kingdom and Italy. He also served as vice president of
corporate tax for the organization and was responsible for all corporate tax matters in
more than 100 countries. Prior to that, he worked for 18 years with Ernst & Young. He
is a trustee of the Ravinia Festival Association and an advisory council member for
the Federal Reserve Bank of Chicago. He also has served as a board member of the
Loyola Hospital chapter of the Ronald McDonald House.
Best Buy Co, Inc.
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BEST BUY CO, INC.
Key Employee Biographies
Frank D. Trestman
Board: Non Executive Board
Job Title: Director
Since: 1984
Mr. Trestman is the president of Trestman Enterprises, and chairman of The Avalon
Group. He had been a consultant to McKesson and is the former chairman of the
board and chief executive officer of Mass Merchandisers. He is also a director of
Insignia Systems and Metris Companies.
Hatim A. Tyabji
Board: Non Executive Board
Job Title: Director
Since: 1998
Mr. Tyabji has been executive chairman of Bytemobile. From 1998 to 2000, he served
as chairman and chief executive officer of Saraïde. From 1986 until 1998, he served
as president and chief executive officer (and as chairman from 1992 until 1998) of
VeriFone. He is also a chairman of DataCard, a director of SmartDisk, and eFunds
and a trustee of the Carnegie Institute.
James C. Wetherbe
Board: Non Executive Board
Job Title: Director
Since: 1993
Dr Wetherbe he has been the Stevenson professor of information technology at Texas
Tech University. He was a professor of management information systems at the
University of Minnesota, from 1980 until 2000, and the Federal Express professor and
director of the FedEx Center for Cycle Time Research at the University of Memphis,
from 1993 until 2000. He is a leading consultant and lecturer on information
technology and the author of 20 books and more than 200 articles in the field of
management and information systems.
Michael R. Keskey
Board: Senior Management
Job Title: President, US Retail Stores
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BEST BUY CO, INC.
Key Employee Biographies
Since: 2004
Age: 49
Mr. Keskey has previously served as executive vice president -retail sales from 2001
to 2002 and as senior vice president - retail sales from 1997 to 2001. He joined the
company in 1988 and has since held various positions since.
Ronald D. Boire
Board: Senior Management
Job Title: Executive Vice President and General Merchandise Manager
Since: 2003
Age: 42
Mr. Boire joined Best Buy after a 17-year career with Sony Electronics. As President
of Sony Electronics consumer sales for two years, Mr Boire was responsible for
managing sales and distribution of the Park Ride, New Jersey, and the company’s
consumer electronics products throughout the United States. He also served on the
company’s operations committee as well as its consumer business council. Prior to
heading consumer sales, he was president of Sony’s Personal Mobile Products
company, including responsibility for new business development, strategic marketing,
product management and sales support.
Brian J. Dunn
Board: Senior Management
Job Title: Executive Vice President, Retail Sales
Since: 2002
Age: 43
Mr. Dunn joined the company in 1985 and has held positions as senior vice president,
regional vice president, regional manger, district manager and store manager.
Darren R. Jackson
Board: Senior Management
Job Title: Executive Vice President, Finance; and Chief Financial Officer
Since: 2002
Age: 39
Mr. Jackson joined the company in 2000 as senior vice president - finance and
treasurer and was promoted to chief financial officer in 2001. Prior to that, he served
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BEST BUY CO, INC.
Key Employee Biographies
as chief financial officer of the full-line store division at Nordstrom, from 1998 to 2000;
and as chief financial officer of Carson Pirie Scott, from 1996 to 1998
Michael A. Linton
Board: Senior Management
Job Title: Executive Vice President, Consumer and Brand Marketing; and Chief
Marketing Officer
Since: 2002
Age: 47
Mr. Linton joined the company in 1999 as senior vice president - strategic marketing.
Prior to that, he held positions as vice president of marketing at Remington Products,
vice president and general manager of a product category at James River and a
general manager at Progressive Insurance. He began his career at Proctor & Gamble,
in brand management.
Philip J. Schoonover
Board: Senior Management
Job Title: Executive Vice President, Customer Segments
Since: 2004
Age: 43
Mr. Schoonover was named executive vice president - new business development in
2002. Prior to that, he was promoted to executive vice president of digital technology
solutions, in 2001, after having served for five years as senior vice president merchandising. Prior to joining Best Buy in 1995, he was an executive vice president
for TOPS Appliance City.
John C. Walden
Board: Senior Management
Job Title: Executive Vice President, Human Capital and Leadership
Since: 2002
Age: 44
Mr. Walden has served as president of BestBuy.com, from 1999 to 2002. Prior to
joining Best Buy, in 1999, he served as chief operating officer of Peapod. He has also
held executive positions with Ameritech, and Storage Technology. Earlier he practiced
corporate and securities law with Sidley, Austin, Brown and Wood.
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BEST BUY CO, INC.
Key Employee Biographies
Robert A. Willett
Board: Senior Management
Job Title: Executive Vice President, Operations
Since: 2004
Age: 57
Mr. Willett joined Best Buy in 2002, as a consultant and special advisor to the board of
directors on matters relating to operational efficiency and excellence. Prior to that, he
was the global managing partner for the retail practice at Accenture, and was also a
member of its executive committee. He began his career as a store manager at Marks
and Spencer, and has held executive positions at F.W. Woolworth, as well as several
other retailers in the United Kingdom.
Susan S. Hoff
Board: Senior Management
Job Title: Senior Vice President and Chief Communications Officer
Since: 2004
Age: 39
Ms Hoff joined Best Buy in 1983. Since then she has served in various capacities
including vice president of corporate communications and public relations.
Joseph M. Joyce
Board: Senior Management
Job Title: Senior Vice President, General Counsel; and Assistant Secretary
Since: 1997
Age: 52
Mr. Joyce joined the company in 1991, as vice president - human resources and
general counsel. Prior to joining Best Buy, he worked with Tonka.
Bruce H. Besanko
Board: Senior Management
Job Title: Vice President, Finance
Since: 2002
Age: 45
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BEST BUY CO, INC.
Key Employee Biographies
Mr. Besanko joined the company in 2002 as vice president - finance/planning &
performance management. Prior to joining Best Buy, he spent approximately six years
with Sears serving in positions of increasing responsibility. He also brings finance and
treasury experience from Atlantic Richfield and more than eight years of service in the
United States Air Force in various leadership roles.
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BEST BUY CO, INC.
Major Products And Services
MAJOR PRODUCTS AND SERVICES
Best Buy is a consumer electronics and appliances retailing company engaged in
retailing consumer electronics, home-office products, entertainment software and
related services.
The company’s products and services are categorized under the following different
segments:
Computers and peripherals
Home Audio and Video
Personal audio
Photo and imaging
Consumer electronics
Entertainment software
Appliances
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BEST BUY CO, INC.
Products And Services Analysis
PRODUCTS AND SERVICES ANALYSIS
The company recorded revenues of $27.3 billion during the fiscal year ended
February 2005, an increase of 11.4% over 2004. The increase was primarily
attributable to the increase in demand for digital products. For the fiscal year 2005,
revenues from the US, the company’s largest geographical market, accounted for
90% of the total revenues.
Revenues by Geography
US, Best Buy’s largest geographical market, accounted for 90.1% of the total
revenues in the fiscal year 2005. Revenues from US reached $24.6 billion in 2005, an
increase of 10.8% over fiscal 2004.
Canada accounted for 9.9% of the total revenues. Revenues from Canada reached
$2.7 billion in 2005, an increase of 20.2% over fiscal 2004.
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BEST BUY CO, INC.
SWOT Analysis
SWOT ANALYSIS
Best Buy is a consumer electronics and appliances retailing company engaged in
retailing consumer electronics, home-office products, entertainment software and
related services. It is ranked as the number one consumer electronics retailer in the
US; however it is facing an increase in competition from discounters.
Strengths
Weaknesses
No 1 consumer electronics retailer
Customer-centric operating model
Strong comparables
Positive outlook for digital products
Structural advantage in digital TV market
LCD market
Opportunities
Threats
Low gross margins
Threat to credit promotion profitability
Over-dependence on domestic sales
Rising competition from lower price formats
High operating expense in Canada
Console hardware shortage
Strengths
No 1 consumer electronics retailer
Best Buy is a leading consumer electronics retailer in the US and Canada, with annual
sales reaching $27.3 billion in fiscal 2005, and a 16% market share of the consumer
electronics market. Due to its large size, the company is able to leverage its
bargaining power with consumer electronics vendors. The company’s financial
resources are such that it is able to spend money on promotion, advertising, new
products, restructuring and adapting quickly to market changes. Groups with lesser
resources are generally not able to take advantage of opportunities open to Best Buy.
Strong comparable store sales
The company has significantly gained in terms of same store sales (SSS) over its
largest competitor in the hardlined retail segment-consumer electronics; Circuit City, in
fiscal 2005. The company’s comps (comparative store sales) were 8.5% (first quarter,
2005), 4.4% (second quarter, 2005), 3.0% (third quarter, 2005) and 2.05 to 2.5%
(fourth quarter, 2005), while the comps for Circuit City were 6.4% (first quarter, 2005),
2.9% (second quarter, 2005), -4.3% (third quarter, 2005) and -5% to -6% (forth
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BEST BUY CO, INC.
SWOT Analysis
quarter, 2005) respectively. The company has also increased its market share, in
fiscal 2005, by 10.7% as compared to a 5-6% decline in market share of Circuit City.
This clearly indicates the effectiveness with which Best Buy is competing with its
largest competitor in the hardlined retail-consumer electronics segment.
Structural advantage in digital TV market
Best Buy has significant structural advantages in the digital TV market, which enable it
to compete effectively with its peers in hardline retailing and discounted retailers. The
company, in comparison to its competitors has an extensive assortment (more than 40
SKUs, stock keeping units) and the youngest store base in high-quality locations. The
company also benefits from its extensive customer service network, since digital
television and HD products are complex technologies, requiring large degrees of
customer education to drive purchase of such items. Best Buy has been recognized
as the ’Best HDTV retailer’ by the Academy of Digital Television Gadgets, in 2005,
based upon the company’s efforts to promote digital television through in-store
displays, promotions and highly trained sales staff. The company’s structural
advantage alongside a proactive approach to pushing HDTV sales has provided the
company significant competitiveness over its competitors.
Weaknesses
Low gross margins
The company experienced lower than industry average gross margins, in fiscal 2005.
The company’s gross margins were 23% as compared to the technology retail
industry average of 28% (fiscal 2005). Furthermore, the company’s gross margins
reduced by 0.1% in 2005. Lower gross margins for the company, as compared to its
competitors, reflects poorly on the company’s operations.
Over-dependence on domestic sales
The company is heavily reliant upon its domestic (US) consumer electronics retailing
market for revenue generation. In fiscal 2005, approximately 90% of the company’s
total revenues were sourced from the US. The US market, as of 2005, is expected to
show signs of a slow down in sales momentum in consumer electronics, caused by
the rising interest rates. Hence, an over-dependence on the US market, in the current
market scenario would significantly affect the company’s revenue.
High operating expense in Canada
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BEST BUY CO, INC.
SWOT Analysis
The company opened its first Best Buy Canadian Store in fiscal 2003, which marked
the start of expansion outside the US. While the group’s Canadian operations saw a
sales increase of nearly 7%, in fiscal 2004, the sales growth was offset by high
operating expenses. This ultimately led to a loss of about $1 million in fiscal 2004 from
the company’s Canadian operations. A continuation in the trend of rising operating
expenses from its Canadian operations would significantly affect the company’s
profitability in the region thereby affecting its international expansion plans.
Opportunities
Customer-centric operating model
The company is planning to accelerate the conversion of its store base to its customer
centricity operating model, after it witnessed an improved performance at the
company’s 67 segmented stores converted in October 2004. The converted stores
outperformed the other US Best Buy stores in terms of comparable sales (increase of
8.4% in the fourth quarter compared with 2.3% in the non-converted US Best Buy
stores). Each of the converted stores is expected to be designed to appeal to the
company’s five key customer segments: affluent professional males; young
entertainment enthusiasts; upscale urban mothers; technology adopter families and
small businesses with fewer than 20 employees. This consumer-centric model is
expected to help the company offer its customers a richer in-store experience and
better shopping assistance, which the company may be able to translate into better
revenue growth.
Positive outlook for digital products
Digital entertainment has become a popular concept in the consumer electronics
market in the US. Manufacturers of digital entertainment equipment have been
flooding the electronics markets with new models of DVD players, HD-DVD players
and, HDTV sets. The sales of DVD players in the US rose 34% to 34 million units in
2003, following a 50% increase in 2002 and a 69% increase in 2001. Americans spent
$10.7 billion in 2004 on high-tech digital televisions, compared with $3.5 billion on
analog models. The rising popularity of digital entertainment would boost the sales of
existing and upcoming digital entertainment products of retailers of consumer
electronics.
LCD market
The LCD (liquid crystal display) market has demonstrated a significant increase in
demand in 2004. This is indicated by the increase in global LCD TV shipments, which
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BEST BUY CO, INC.
SWOT Analysis
increased 123% to 8.8 million TVs in 2004. LCD TV’s comprised 5 percent of all
televisions sold in 2004 and the company expects they will reach 10% market
penetration in 2005. The LCD TVs are expected to account for approximately 21% of
the world’s television sales in 2007. This increase is attributable to lower street prices,
with many size categories experiencing double-digit sequential pricing declines. The
growth in the LCD market is a significant opportunity for Best Buy, which is also
engaged in the sale of LCD television sets.
Threats
Threat to credit promotion profitability
With the announcement of its 36 months no interest offer for home theater systems (in
January 2005), the company has increased its exposure to credit promotions. While
these offers are extended to attract customers, they involve a high cost of running.
This is due to the current hike in the short term interest rates, which reached 2.75%
(April 2005). The high cost of its credit promotions strategy, under the current rising
interest rates scenario, could severely limit the profitability of the exercise, thereby
affecting its attractiveness in terms of its ability to deliver an increase in earnings.
Rising competition from lower price formats
The consumer electronics retailers in the US have been facing stiff competition from
discount retailers and direct marketers. While Best Buy’s sales topped $27.3 billion in
2004, the consumer electronics sales of Wal-Mart accounted for 9% of its discount
store sales, amounting to $16 billion. Dell Computer has also seen strong sales in the
consumer electronics segment. Increasing competition from leading companies in
other markets as well as from other retail formats would lead to market share erosion
of technology retailers in the US.
Console hardware shortage
Hardware shortages of Sony’s PlayStation 2, Microsoft’s Xbox, and Nintendo’s Dual
Screen post Christmas, took a toll on the retail electronics market. Further, this
shortage is expected to continue for most of 2005. The unfulfilled demand in the US
for consoles has led to significant price premiums being paid for new hardware on
online auction sites such as eBay. This has increased market share of online auction
sites in the gaming segment, hurting sales of retailers of consumer electronics that
were already restricted by the shortages.
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BEST BUY CO, INC.
Top Competitors
TOP COMPETITORS
The following companies are the major competitors of Best Buy Co, Inc.:
Amazon.com, Inc.
BJ’s Wholesale Club, Inc.
Costco Wholesale Corporation
Dell Inc.
Gateway, Inc.
Kmart Corporation
OfficeMax, Inc.
P.C. Richard & Son
RadioShack Corporation
Sears Holdings Corporation
Staples, Inc.
Target Corporation
Toys "R" Us, Inc. (TRU)
Wal-Mart Stores, Inc.
Wherehouse Entertainment, Inc.
Home Depot
Systemax
Trans World Entertainment
Ultimate Electronics, Inc.
Good Guys, Inc.
Electronics Boutique Holdings Corp.
Brookstone, Inc.
Guitar Center, Inc.
Sharper Image, Inc.
Office Depot Inc
Circuit City Stores Inc.
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BEST BUY CO, INC.
Company View
COMPANY VIEW
The following is a statement from Bradbury H. Anderson, vice chairman and CEO of
Best Buy. The statement was taken from the company’s 2004 Annual Report:
To our shareholders,
Inside Best Buy, we are undergoing a transformation. The change, though quiet, is
palpable throughout our organization. Transformation at many companies is the child
of necessity. In contrast, at Best Buy, our business is hitting new records for both
revenue and earnings from continuing operations. We have several more years of
new-store openings to fuel our growth. We also foresee incredible growth in key digital
products, where we have the leading market share in North America. Our
transformation is driven instead by a sense of tremendous opportunity. We have
developed and tested an initiative called customer centricity, which enables us to
engage more deeply with customers by empowering employees to more effectively
deliver products, solutions and services through multiple channels. Our customer
centricity work has given us an entirely new lens for looking at our business. Through
tha’ needs. We see new services that no other North American retailer can offer. We
see possibilities for connecting more closely with customers through the
entertainment they love. We see a more flexible and more productive way to operate
that can help us anticipate changing customer needs.
In short, we see a significant growth opportunity.
For me, the case for change had its roots in our experience acquiring Musicland
stores and then selling them three years later. One of the Musicland lessons was that
we did not understand their mall-based customer. It also occurred to us that perhaps
we similarly needed to gain a better understanding of our customer in our core
business. This lesson, combined with the ideas of Larry Selden, Emeritus Professor of
Columbia University, developed into our customer centricity initiative. Professor
Seldon encouraged us to view our company as a portfolio of customers. Our premise
is that as we deliver superior customer experiences, we will earn commensurately
higher financial returns, a mutually beneficial value exchange.
At the same time, we saw a looming threat from other large retailers with lower cost
structures. We realized that we must boost our growth rate and capital efficiency in
order to compete more effectively for customers. These desires formed the basis of
our efficient enterprise initiative. The beauty of these two initiatives, customer
centricity and efficient enterprise, is how well they balance each other while providing
opportunities for growth. Today, we are:
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Company View
- Teaching our employees to focus on specific customers who have similar needs and
expectations, rather than just focusing on product categories.
- Decentralizing authority to allow the person closest to the customer to make
informed decisions using new, adaptive operating platforms.
- Teaching all store employees about the financial impact of their decisions so that
they can improve their ability to determine profitable ways to meet diverse customer
needs.
- Increasing investments in high-return, customer-facing areas, such as store labor
and new services.
- Increasing the efficiency and adaptability of back-office functions, such as sourcing
and supply chain.
The Opportunity to Transform Our Business
Our transformation began more than a year ago, when we first determined our four
strategic initiatives: customer centricity, efficient enterprise, win the home with service
and win in entertainment. Our leaders taught these initiatives to employees, and
dedicated work teams began to implement them. For example, we opened 32
customer centricity test stores, each focused on one or more of the five specific
customer segments. We set goals for profitable sales growth and asked our
employees to find efficiencies.
We challenged ourselves to find ways to grow our services business and to take the
lead in the entertainment business. We revamped our system of rewards and
recognition to focus on employee strengths, performance and company values.
Our goal: to transform into a talent-powered, customer-driven enterprise focused on
enhancing our customers’ enjoyment of technology.
Historically, consumer electronics retailers have competed by anticipating new
technologies and managing accelerating product cycles. We have mastered that
business, and our performance has led the industry. But all that wins for us is the right
to compete in the next round of retailing. And in the next round, not only is the
competition more powerful, but the rules will have changed because we are changing
them.
At Best Buy, we see a very different consumer electronics business in the future. This
future has critical implications for our customers and for our company. Key products
are converging, which works to our advantage as a leader in both consumer
electronics and home-office products. Technologies are becoming more complex,
which favors retailers with well-trained employees and a robust service offering. Our
customer centricity strategy is to serve as the advocate of customers, helping them
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BEST BUY CO, INC.
Company View
assemble the solutions that work for them - and backing up those sales with service.
Only a few large retailers excel in this environment, and none have our breadth of
product and services assortments. We will sharpen our advantage as well, through
our national rollout of Geek Squad services. Finally, customers today are unwilling to
pay for inefficiency. Low-cost providers have gained significant marke
The Opportunity to Reach New Customers
So we started on a journey toward the future. We envisioned a new culture within Best
Buy, one focused on specific customer segments and driven by a strengths-based
organization. In this culture, employees are energized because they have both the
responsibility and the accountability to make decisions and drive innovation based on
their knowledge of the customer. This culture treats customers as kings and queens,
and the employees closest to the customer as royalty. That leaves headquarters
employees - including me - as servant leaders.
The good news is that not only are employees ready for the change, but they have
been clamoring for it.
Based on the performance of our 32 lab stores, we expect to transform up to 110
additional Best Buy stores to our customer centricity format this year. We also plan to
deliver approximately 30 basis points of operating income rate improvement, fueled
by efficient enterprise activities. Delivering on these promises will be a challenge for
us. Yet we are very optimistic about the future because we know we have the talent
and creativity needed to complete our transformation. We are well known for the
ability, once we grasp an opportunity, to develop a rollout plan and to execute it across
North America. Moreover, behind the strategy is essentially the same management
team that led us to become North America’s No. 1 consumer electronics retailer.
Some investors have asked us to name a customer-centric retailer we hope to
emulate. Frankly, we are not aware of any other retailer who has successfully
implemented a customer-centered approach in this manner. Actually, that does not
dissuade us; rather, it encourages us. At Best Buy, we love to prove conventional
wisdom wrong. "No one has successfully sold hardware and software; you have to
choose one or the other," they said in 1986. "Nobody will buy high-end consumer
electronics from noncommissioned sales associates," they said in 1989. "Retailers
can’t make money selling computers," they said in 1997. "Dual branding works only
with consumer products," they said in 2000. Each time we challenged the status quo,
and by running our business for the long term, we frequently have achieved topquartile performance in total shareholder return.
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Company View
The Opportunity to Boost Results
The coming year will be a critical test for Best Buy. Our initial guidance for fiscal 2005
called for an 11- to 13-percent increase in revenue and a 15- to 20-percent increase in
diluted earnings per share from continuing operations. The opening of new stores and
comparable store sales gains are expected to drive our top line, while increased
efficiency is expected to boost our bottom line. Behind the scenes, we will be running
hard in our core business while we begin the work of transformation to a customercentric organization. In other words, we are attempting our transformation during a
period of success and prosperity.
My role as a leader will be to keep our employees inspired and focused on our vision
lest success were to erode our resolve to change.
Clearly we are winning in consumer electronics retailing today. We enjoyed a strong
performance from nearly every corner of the company last year. Comparable store
sales rose 7.1 percent. Revenue rose 17 percent to $24.5 billion. Earnings from
continuing operations jumped 29 percent to $800 million, or $2.44 per diluted share.
We increased cash provided by operations by more than $660 million. Our strong
cash position enabled us to initiate a quarterly, 10-cent dividend and to resume
repurchases of our common sharesa combination few retailers can deliver. We
believe that our market share attained a new high, including multiple product groups
that are key to our success. Customer loyalty, customer satisfaction, brand awareness
and employee attitude measures all are at all-time highs for us. We have positive
momentum.
The Opportunity to Win
Because we’re the leader in our category today and because we believe in the
importance of innovation, we continue to invest in long-term, strategic initiatives.
Great product-centric companies excel in product R&D. We need to research, develop
and test innovative ways to create truly differentiated customer experiences. We
began by spending approximately 0.3 percent of our revenue last year developing and
testing our customer centricity initiative (and we also generated additional revenue
and gross profit dollars from the test stores). While the experimentation will continue,
in the coming year we plan to convert up to 110 additional U.S. Best Buy stores to the
customer centricity platform. With a critical mass of these stores, we expect to glean
the insights needed to accelerate the rollout the following year. Our goal is to convert
the majority of our stores to the customer centricity platform within the next few years.
This transformation is no small bet. But we believe that it is the right direction for Best
Buy. As we succeed, we will widen the gap between us and all of our competitors.
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BEST BUY CO, INC.
Company View
Meanwhile, we will learn more about our customers, and that is always a worthwhile
investment.
We have incredible employees running our stores and operating our business. I would
like to thank them for the results they achieved in fiscal 2004. They are the reason I
am excited about the possibilities ahead of us and optimistic about the future.
With the support of our employees, vendors and, of course, my fellow shareholders,
we expect to have a prosperous year in fiscal 2005 and an even brighter future in the
years beyond.
Sincerely,
Bradbury H. Anderson
Vice Chairman and CEO
Best Buy Co, Inc.
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BEST BUY CO, INC.
Locations and Subsidiaries
LOCATIONS AND SUBSIDIARIES
Head Office
Best Buy Co, Inc.
7601 Penn Avenue South
Richfield
Minnesota
MN 55423
United States
P: 1 612 291 1000
F: 1 612 292 4001
www.bestbuy.com
Other Locations and Subsidiaries
Future Shop
Best Buy - Fresno
8800 Glenlyon Parkway
Marketplace At River Park
Burnaby
Fresno
British Columbia
California
V5J 5K3
CA 93720
Canada
United States
P: 1 604 412 1476
P: 1 559 446 0195
F: 1 604 412 5299
www.futureshop.ca
Best Buy - Colorado Springs
Best Buy - Pentagon City
Market At Chapel Hill
1201 South Hayes Street
Colorado Springs
Arlington
Colorado
Virginia
CO 80920
VA 22202
United States
United States
P: 1 719 593 0414
P: 1 703 414 7090
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