Best Buy Marketing Case Study

Robert Paul EllentuckEMBA 2011

Marketing ManagementProfessor Hassan16 October 2009

COPYRIGHT © 2009 ROBERT PAUL ELLENTUCK

Industry Overview Industry

Big box concept Specialty Store in Consumer Electronics Segment

Major Players for Consumer Electronics Top 5 2002: Best Buy, Wal-Mart, Circuit City, Dell, Amazon.com Top 5 2008: Dell, Best Buy, Wal-Mart, Circuit City, CDW

Market Development Emerging “discount” retailers emerging -consumer choosing price over

service/support

Competition online “etailers” growing - free delivery on large purchases

Consumer base evolving from technological novices to technologicallycompetent

Sources: Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006;, Spinali, L. and O’Hier, J. (2009); Pressler, M.W. (2004)

Industry Overview – cont’ “Big Box” push to increase sales of high margin products

Emphasis evolved to offering service and support tocustomers

Consumers now focusing more on price over service andsupport

Popularity of online purchasing increased; free shippingand delivery

“Big box” concept declining; scaled-down version ofstores emerging

Top 5 Consumer ElectronicsMerchandiser Comparisons

200310KCategory Best Buy Wal-Mart eBay Dell Amazon

Revenue($B)

21 256 2 35 5

GrossMargin (%)

25 22 81 18 17

Cash ($B) 2 5 1 4 1

Debt (%) 11 16 2 3 90

Source: United States Securities and Exchange Commission via their web (2009) and Lal, R. , Knopp, CC-I., and Tarsis, I,(October 2006)

Top 5 Consumer ElectronicsMerchandiser Comparisons

200810KCategory Dell Best Buy Wal-Mart

CircuitCity CDW Corp

Revenue($B)

61 40 374 12 NotAvailable

GrossMargin (%)

19 24 15 21 NotAvailable

Cash ($B) 10 2 47 1 NotAvailable

Debt (%) 2 6 21 6 NotAvailable

Source: United States Securities and Exchange Commission via their web (2009) and Spinali, L. and O’Hier, J. (2009)

Company Overview

Sound of Music1967- St. Paul, MN

“Best Buy” Sale @ SOMtornado hit 9 Stores -1981

Public Offering - $33.6M12 Stores - 1986

Best Buy Becomescompany name - 1983

“Grab and Go”–New Logo-1989

2nd Largest ConsumerElectronics Retailer - 1993

CustomerCentricityImplemented- 2003

Fortune names Best BuyTop 10 performing stock,2000

Best Buy Mobile stores &Geek Squad to Europe

2003

Global Expansion - Asia,Europe, Mexico, Turkey

2003-present Fortune 500 Top Co#56 - $45 Billion2009

CEO Dunn replacesretiring Anderson

2009

Source: Bestbuy.com, Fortune (5/4/09)

Company Overview(Consumer Driven)

“We believe that focusing on customers' needs generatesgrowth opportunities”

“At Best Buy, we aspire to be a responsible, values-drivenglobal corporation – we believe that's what you expect”

“And we believe in customer centricity - the idea is that acustomer isn't just looking for a product, but a solution orexperience that improves her life”

Ranked highest in customer satisfaction among national andmulti-regional from 2009 report by J.D. Power and Associates

Sources: Bestbuy.com, Wolfe (2009)

Company Overview(Evolving Customer Centricity)

Customer-centricity (CC) retailing Embraced by broad range of organizations Uses insights from analytics to identify/understand core group of

valued customers Predicts what motivates shopping behavior

Essential for retailers facing demands ofcompetitive marketplace

Forward-looking strategy; must permeateevery area of enterprise

Reinvents retailer's value propositionSource: Biggs, John (2009)

Company Overview(Products)

Branded products designed out of customer research and pricedto fill gaps Dynex, Init, Insignia, and Rocket Fish

Napster Working with Dell to have a streaming audio/video

computer

Geek Squad Affordable technological assistance services

Best Buy Mobile and Car phone Warehouse Smaller footprints focusing on mobile products and solutions

in US and Europe

Source: Bestbuy.com, Sidibe, G (10/7/09 )

Company Overview( Revenue by Product Group)

FY2008

Sales

CE 38%

HomeOffice 34%EntertainSW 17%Appliances6%Services7%

FY2005

Sales

EntertainSW 22%HomeOffice 34%CE 38%

Appliances6%

Source: Bestbuy.com 10 K(FY2008), (FY2005)

Product(Big Box Retailing)

Best Buy – Then (2005) Big Box large retail

footprints – Everythingunder one roof

Standard OperatingProcedures (SOPs)

Products Sold bycategory

OrganizationalStructure Top Down; One P&L

Best Buy Now (2009) Introducing Smaller

Foot- Print stores

Competitors arefollowing suit in SpecialtyMarkets

Overall lower costs

Customer Centricity

Source: Shevory, Christina (2009)

Product “Solution Based”(Customer Centricity)

Model California Based Test – Skewed Results

Roll-out: no financial modeling beyond Pilot testStores

Aggressive Rollout Plan - 12 labs to 32 pilots to 110stores nationwide

Leveraged prior acquisitions (e.g. Geek Squad)

Organizational structure - organized to unorganized

Product mix by solution based on Personas

Competitive Analysis

•Out of Business•CEO blamed demise on “poormacroeconomic conditions”•Unknowledgeable sales staff•“Late to the game with Firedog customerservice business, didn’t resonate withcustomers as well as Best Buy’s GeekSquad”•Unfortunate position Mid-level player

•Top retailer in the country•Lost leaders in drive traffic•Convenience & wide range of products inone store•17% margins in CE (Mid player)•Quality and service•General merchandise•Lack of flexibility

Dell

•Customized products•Reliability, Service and Support•Customers can’t go to retailers forcustom-built products

•Huge global brand•Customer Relationship Management andIT support business strategy•Addition of new categories to businessmay hurt brand•May need to reconsider free shipping tocustomers

Sources: Spolsky, Joel (2009), Kavilanz, Parifa (2009), Cuizon, Gwendolyn (2009) and www.marketingteacher.com

SWOT AnalysisStrengthsHeavily driven customersatisfaction/customer service basedStandard Operating Procedures;guaranteed standard experience acrossnetworkValued, trained, rewarded workforceCentral corporate structure/territory

Weaknesses•Customer Centricity model fragmented byindividual store locations•Creation of unified sales force more costlyin other markets•Valued, trained, rewarded workforceexpensive to replicate across other markets•”Turf battles” /Lack of synchronizationbetween business units

Opportunities•Centricity; max profit in high-end productsand solutions•Solution based to increase sales ofproducts and services•Expansion of CC model into all U.S. stores

Threats•Low priced “big box” stores playing intohighly competitive arena•Market expansion into othermarkets/regions•Online sales

Weaknesses to StrengthsFROM (2005): CC model fragmented byindividual store locations Creation of unified salesforce based on CC morecostly in other markets

Valued, trained, rewardedworkforce expensive toreplicate across othermarkets ”Turf battles” /Lack ofsynchronization betweenbusiness units

TO (2009): Still have major customer

segments; grouped bylocation more (eg. DMAs-cluster stores in market)

CC model working ifsolutions are sold;revenues justify expense

CC model working if workforce is trained to sale;“upsell” a customer & salesolution

Corporate needed to seesegment leaders mutuallybenefitted from CC model

Threats to Opportunities

FROM (2005):Low priced “big box”stores playing into highlycompetitive arena

Market expansion intoother markets/regions

Online sales

TO (2009): Sell products with

services and solutions;Best Buy also has theirown brands

Best Buy startedexpansion into China in2003

Best Buy now alsomultiple online channels

Linking Internal and External

Organization changing at same time as industry ischanging; extreme dynamic occurring

Pace and synchronization of rollout affected internalorganization and sales revenues

Customer Centricity model increases sales per foot andexpands externally because they hit saturation in US

Overall “big box” concept pushing for lower priceditems

Change from Input to Output Price of technology, appliances, home office equipment costs

dramatically reduced during time-period

Home offices continues to be sustainable with 34% of product mixrevenues year over year

Services increased 7% of revenues from FY08 vs. FY05

Down economy resulted in two competitors out of the market –more competition from “Big Box” retailers (e.g. Wal-Mart andTarget)

Increase in online purchasing for music, games, etc. impactingentertainment software

Source: Bestbuy.com 10 K(FY2008), (FY2005); Sidibe, G (10/7/09 )

Problem Definition

Implementation of Customer-Centricitycaused internal organizationalconflicts and it increased operatingexpenses, which led to a loss of theoverall brand image andfragmentation.

The organization had lost focus duringthe implementation process resulting inthe overall goal of providing anoutstanding customer experience.

Alternatives Evaluation

A. Continue to convert all stores toCustomer Centricity; allow time forconcept to mature

B. Create a hybrid; continue withCustomer Centricity; grouppersonas/segments to market levelinstead of individual store (e.g.DMAs/cluster stores into local market)

Alternatives Evaluation – cont’d

C. Abandonment of Customer Centricityto SOP “common” Best Buy (“BigBox”) customer experience

D. Shift channels of distribution fromprimarily offline retail “brick &mortar” to more online channels forcost efficiencies

Best Alternative Rationale Allow time for the concept to mature; continue to

convert all stores

Heritage of valuing customer relationship

Prepares for future of industry and competition – BigBox “price” driven vs. Big Box “solution”

Connects to company values & retains talent/staff

Localization and segment relate to closer community,customer, and retail experience

Creates opportunity for new products and services forhigh profit margin sales

Customer-Centric Best PracticeBest Practice

“Last mile” retail Localization Assortment Outperform peers Supply Chain inclusive Six weeks or less of inventory Above average annual sales

increases, year-to-year “Promo to Supply” Pricing

(Optimization) Overcome Organizational

Behavior

Best Buy Adoption rate among stores high Found Growth in localization:

Assortment, store size, globalization Out performed peers in specialty

(CE) Big Box Struggled in implementation phase Increases in year over year annual

sales, but diminishing No, higher than optimal to cover

expenses Organization struggled and now is

empowered

Source: Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report 2008.Copyright RSR Research, LLC. All rights reserved.

Customer CentricityPersonas

Marketers increasingly using personas Identify mindset and goals of customers/Better predictor

human behavior – Some companies report 400% conversionrate

Forrester survey - one in four companies withrevenues above $200M planned to increase spendingon persona research

Persona research made a dramatic difference in BestBuy performance and overall revenues duringturbulent times as their closest competitors filedbankruptcy.

Sources: Howlett, Greg (2007) and Gardener, Elizabeth (2007), Sidibe, G (10/1/09 )

Implementation Plan Communicate internally and externally that customer

centricity model is new mode of operation

Create task force that reviews strengths/weaknessesof model; make changes based on recommendations

Slow down pace of store conversions

Devise actions for implementation plan

Calculate how new model is affecting sales per sq foot

Make adjusts to model as needed

Implementation Plan -Time Schedule

One year for implementation based onwhen store was converted

Modify the conversion process (slowerpace) than the ones in initial conversionprocess

Benchmark in 3-6 month incrementsbased on how stores were initiallyconverted

ReferencesIndustry Overview (Slide 2)Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006). Best Buy Co., Inc.: Customer-Centricity. Harvard

Business School, exhibit 4aSpinali, L. and O’Hier, J. (March 2009). Dealerscope.com annual top 101 rankings report on consumer

electronics retailers/etailersPressler, M.W. (Sunday 11 July 2004). “Big-Box Stores Rule Top 10 List: Wal-Mart's No. 1 Rank Shows

U.S. Goes for Price”, Washington Post online edition, page F01

Top 5 CE Merchandiser ‘s and their 10K Select Category Comparisons (Slides 4 and 5)Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006). Best Buy Co., Inc.: Customer-Centricity. Harvard

Business School, exhibit 4bSpinali, L. and O’Hier, J. (March 2009). Dealerscope.com annual top 101 rankings report on consumer

electronics retailers/etailersUnited States Securities and Exchange Commission via their web (2009)

Company Overview (Slide 6)Bestbuy.com, Fortune (4 May 2009)

Company Overview (Consumer Driven) (Slide 7)Bestbuy.com, Wolfe (28 September 2009). Majap Survey: Best Buy Tops In Customer Satisfaction.Twice.

ReferencesCompany Overview (Evolving Customer Centricity) (Slide 8)Biggs, John. “Wal-Mart stepping into the big box breach.” Crunch Gear. 18 May 2009. CrunchGear,

Web. 4 Oct 2009. http://www.crunchgear.com/2009/05/18/wal-mart-stepping-into-the-big-box-electornics-breeech.

Company Overview (Products) (Slide 9)bestbuy.com, Sidibe, G (10/7/09 ) Interview

Company Overview (Revenue by Product Group) (Slide 10)Bestbuy.com 10 K(FY2008), (FY2005)

Product (Big Box Retailing) (Slide 11)Shevory, Christina. “A Recession Play – Mini Versions of Big-Box Stores.” New York Times 19 May

2009, Print.

ReferencesCompetitive Analysis (Slide 13)Spolsky, Joel. “Why Circuit City Failed, and Why B&H Thrives.” Inc. 1 May 2009.

http://www.inc.com/magazine/20090501/why-circuit-city-failed-and-why-bh-thrives.html#Kavilanz, Parija. “Circuit City to shut down.” CNNMoney.com. 16 January 2009.

http://money.cnn.com/2009/01/16/news/companies/circuit_city/Cuizon, Gwendolyn. “SWOT Analysis of Dell Computers.” Suite101.com 5 March 2009http://strategic-business-planning.suite101.com/article.cfm/swot_analysis_of_dell_computershttp://www.marketingteacher.com/SWOT/amazon_swot.htm

Change from Input to Output (Slide 18)Bestbuy.com 10 K(FY2008), (FY2005); Sidibe, G (10/7/09 ) Interview

Customer-Centric Best Practice (Slide 23)Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report

2008. Copyright RSR Research, LLC. All rights reserved.

ReferencesPersonas (Slide 24)Howlett, Greg. “Developing Personas to Boost Your Retailing Success.” Marketing Pilgrim. 13

November 2007. Marketing Pilgrim, Web. 4 Oct 2009.http://www.marketingpilgrim.com/2007/11/developing-personas-to-boost-your-retail-success.html

Gardner, Elizabeth. “Personalizing.” Retailer. November 2007. Internet Retailer, Web. 4 Oct 2009.http://www.intemetretailer.com/article.asp?id=24243

Sidibe, G (10/7/09 ) Interview

References (Interview)Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western

Territory for Best Buy via telephone on 10/7/09

Gail Sidibe has worked for Best Buy for close to four years in her present position. She also spent 6-months as aGeneral Manager of Store in the East Bay, CA. Prior to Best Buy, Ms. Sidibe worked for HEAR Music as theDirector of Music Acquisition.

Customer Centricity is very active program in all stores. Localization is at” the heart” of the Best Buy as abusiness. Ms. Sidibe is very proud of the companies commitment to communities that they serve throughtheir corporate responsibility program. It is reflected in the stores, employees from corporate, territories andstore levels and it includes volunteering.

In addition, Ms. Sidibe believes that most retailers use some sort of Customer Centricity. Merchandise mix reflectsthe retailers point of view, skewed to demographics and shopping patterns at the store level. (Her examplewas Nordstrom and Gap) It is no longer something we talk about as we have already put it into practice.She wasn’t part of the “growing pains” – most of the implementation came into being after I arrived.

Ms. Dunn inquired about the economic down-turn in the economy, if that had an impact on the merchandising mixand competition. Gail Sidibe made it a point that two of Best Buy’s competitors left the market; however, theTargets and Wal-Marts have been more active in consumer electronics . As for her Department, In-storeEntertainment, Best buy gas gain in market-share of CDs and DVDs over the new competitive retailers. Itwas noted that Gail did make mentioned that iTunes and Amazon as well as down-loadable software hadmade more of an impact on the business. Her Department is moving into more gadgets (eBooks readers(e.g. Sony), Leap frog and Sharper Image label products As a side note, Gail indicated that Dell is workingwith Best Buy in creating a bundle computer with Napster streaming audio and video.

.

References (Interview) – cont’Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western

Territory for Best Buy via telephone on 10/7/09

Finally, Ms. Dunn asked if Ms. Sidibe could comment on the transition between Mr. Dunn and Mr. Anderson asthe CEO. This was very smooth transition, corporate create virtual town halls for all employees.. We knewthat Mr. Anderson was retiring, so it wasn’t a surprise. The company is till focused on excellent customerservice even as it expands into other countries (Kalampour is a new location), new mobile focused storeswith the Carphone Warehouse have been very successful, She mentioned that the American ConsumerOrg and JD Power had named Best Buy number one in customer service. Gail has a lot of pride being apart of the Best Buy family.