R

E

A

L

i l ey

dm onds

r i se

i gh t ner

Business Policy & Strategy Clark Atlanta University School of Business

April 22, 2014

Agenda

I N T E R N A L

AN ALY S I S

E X T E R N A L

A N A LY S I S

C O M PA N Y

O V E R V I E W &

C U R R E N T

S I T U AT I O N

I S S U E S &

R E C O M M E N D AT I O N S

Introduction

Source: Best Buy

• Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

• Founded by Richard Schultze in 1966

– Originally called “Sound of Music” until 1983

• Best Buy Growth

– 140,000 work for Best Buy globally

– BestBuy.com, CarphoneWarehouse.com, Five Star, The Geek Squad, Magnolia Audio Video, and PhoneHouse.com

– Nearly $50 billion in annual revenue (2013)

The Best Buy Promise

Source: Best BUy

To support you for the life of your products

The ability to shop when and where you want

Competitive prices

Knowledgeable, Impartial advice

The latest devices and services – all in one place

Current Situation

The anchor of Best Buy’s product portfolio is consumer electronics and computing and mobile technology. These business units are critical to their success Source: Best Buy

• Best Buy (2014) – World’s largest multi-channel consumer

electronics retailer

– #1 customer loyalty program

– Current CEO: Hubert Joly

Revenue Mix Feb ’14 Feb 13

Consumer Electronics 30% 32%

Computing & Mobile Phones

48% 45%

Entertainment 8% 10%

Appliances 7% 6%

Services 6% 6%

Other 1% 1%

• “Renew Blue” Initiative

– Named after blue shirt sales associates – Goal: Reduce cost by $725 million

– 2013: Eliminated approx $150 million (SG&A)

SWOT Analysis

o Chinese Market o Private Labels o Mobile Device Stores

o Largest specialty electronic retailer (SER)

o Customer centric business model o Strong support infrastructure

o Weak Financial Performance o 3rd-Party Vendors

o Pressurized Margins o Increased in Cost of Labor in

China

S

T

W

O

t r e n g t h s e a k n e s s e s

p p o r t u n t i e s h r e a t s

I N T E R N AL

E X T E R N AL

Best Buy is largest SER in the US and is expanding into international markets as it gains greater bargaining power. However, intensifying

competition in the market could affect the revenue growth and profitability of Best Buy.

Source: Market Line

Competitive Strategy

Source: Market Line

Differentiation through superior

customer experience

Intense competition has altered

tactics to remain competitive (Low

Cost Guarantee)

Best Cost

Strategy

Financial Analysis

Best Buy has a declining trend in operating profitability, closing stores (fixed assets) is only a temporary solution for maintaining its

viability. This is highly competitive industry for which Best Busy must improve operational profitability.

Source: Mergent, Hoovers

Balance Sheet Jan ’14 Jan ’13 Feb ‘12

Total Current Assets 10,485 12,047 10,297

Net Fixed Assets 2,598 3,270 3,471

Total Assets 14,013 16,787 16,005

Total Current Liabilities 7,436 10,810 8,855

Long Term Debt 1,612 1,153 1,685

Total Liabilities 10,027 13,726 12,260

Total Equity 3,986 3,061 3,745

Income Statement Jan ’14 Jan ’13 Feb ‘12

Revenue 42,410 49,621 50,705

COGS 32,720 37,783 38,132

Gross Profit 9,690 11,838 12,573

Gross Profit Margin (%) 23 24 25

Operating Income 1,140 162 1,085

Operating Margin (%) 3 0 2

Total Net Income 532 (249) (1,231)

Net Profit Margin (%) 1.25 -.5 -2.43

Financial Analysis

Best Buy has increase in cash is driven by less capital expenditures year to year, improvement in operating activities will be a future

source of cash, and provide additional liquidity to remain competitive.

Source: Mergent, Hoovers

Cash Flow Statement Jan ’14 Jan ’13 Feb ‘12

Beginning Cash 1,826 - 1,103

Operating Activities 1,094 1,422 3,293

Investing Activities (517) (602) (724)

Financial Activities 319 (396) (2,478)

Net Increase/Decrease in Cash 852 627 96

Ending Cash 2,678 1,826 1,199

Profitability Ratios Jan ’14 Jan ’13 Feb ‘12

ROA % (Net) 3.46 (2.92) (7.15)

ROE % (Net) 15.14 (14.08) (23.41)

Current Ratio 1.41 1.11 1.16

Net Current Assets % TA 21.76 7.37 9.01

LT Debt to Equity .40 .38 .45

Total Debt to Equity .42 .75 .59

DEGREE OF RIVALRY • Intense rivalry due to large number of

competitors (Wal-Mart, RadioShack, Apple Store)

• Wide strategies to secure market(more quality at economic pricing)

DEGREE OF RIVALRY: High

Porters 5 Forces Analysis

Best Buy’s greatest competition comes from Walmart who offers quality products at a low cost which decreases everyone else's margins. Source: Mergent, Hoovers

THREAT OF SUBSTITUTES • No substitute products • Electronic gadgets are

essential to everyday life and work

THREAT LEVEL: Low

SUPPLIER POWER • Limited number of

suppliers • Switching cost for suppliers

is low THREAT LEVEL: HIgh

BUYER POWER • Retailers provide price

matching • Switching cost for

buyer is low • E-Commerce have

buyers power BUYER POWER: High

THREAT OF NEW ENTRANTS • High industry imposed

barriers • Government regulations

(tariff rates, high capital requirements, entry restrictions)

THREAT LEVEL: Low

Industry Trends

Tablet computing will continue double digit growth

Smart phones are the industry’s primary driving force

Laptop/Notebook sales 26 million units by 2013

The industry shows that consumers are moving towards mobile technology and online purchases. Source: Forbes

E-Commerce 16.4%, Sales = $262 Billion

Strategic Issue

A DA P TA B I L I T Y

Best Buy’s inability to adapt to evolving consumer preferences has left them with weak financial performance and a loss in brand loyalty Source: Forbes, Best Buy

N O T T H E C H E A P E ST

U S E L E S S B LU E S H I R T S

I N C O N V E N I E N T

S LO W LY T R I M M I N G

FAT

C O ST S T R U C T U R E

D I S L O YA L C U S T O M E R S

Recommendations

Best Buy will experience cost savings as well as improved margins through the elimination of unprofitable stores and the advancement of

strategic alliances with Samsung, Apple & Microsoft

Source: Mergent, Hoovers

Strategically Sell off Big Box Stores

Expand Store Within A Store Strategy

• In Store Sales 0.9% U.S

• 0.1% Int’l

• Total Revenue 2.6%

• In Store Sales 0.4%

• 16% stock price

• $50 billion in revenue from this strategy

Financial Benefit of Big Box Reduction

Best Buy has said to close another 160 stores by 2015, each store closing generates over $5 million dollars in cost savings. By forecasting

store closures through 2018 we estimate that they will close a total of 250 big box stores.

Source: CNN MOney

Fiscal Year 2013 2014 2015 2016 2017 2018

Store Count 1056 1006 951 891 821 741

Cost Savings ($M) 250 275 300 350 400

Total Savings

1575

• Close 250 big box stores by 2018

• Generate total cost savings of over $1 billion

Financial Benefit of Store Within A Store

Best Buy has enjoyed a .4% increase in sales from stores that have adopted this Store Within A Store format, by enhancing this strategy

they can experience a $9 billion increase in revenue by the year 2018

Source: Time

Fiscal Year 2013 2014 2015 2016 2017 2018

Revenue ($Bil) 42,410 44,106 45,871 47,705 49,614 51,598

Increase in Revenue

9,188

• Close 250 big box stores by 2018

• Generate total cost savings of over $1 billion

Thank You!

ANY

QUESTIONS?