Best Buy Swot 2006

Best Buy Co, Inc.

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Company Profile

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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.


BEST BUY CO, INC.Company Overview

COMPANY OVERVIEW

Best Buy is a consumer electronics and appliances retailing company, engaged inretailing consumer electronics, home-office products, entertainment software andrelated services. The company operates in the US and Canada. It is headquartered inRichfield, Minnesota and employs about 100,000 people.

The company recorded revenues of $27.3 billion during the fiscal year endedFebruary 2005, an increase of 11.4% over 2004. The increase was primarilyattributable to the increase in demand for digital products. The operating profit of thecompany 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% over2004.

KEY FACTS

Head Office Best Buy Co, Inc.7601 Penn Avenue SouthRichfieldMinnesotaMN 55423United States

Phone +1 612 291 1000

Fax +1 612 292 4001

Web Address www.bestbuy.com

Revenues/turnover(US$ Mn)

27300

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.


BEST BUY CO, INC.Business Description

BUSINESS DESCRIPTION

Best Buy is a specialty retailer of name-brand consumer electronics, home officeequipment, entertainment software, and appliances. The company currently offersapproximately 6000 products, exclusive of entertainment software titles andaccessories, in its four principal product categories. In addition, the company offers aselection of accessories supporting its principal product categories.

Best Buy operates in two geographical segments: domestic and international. Thedomestic segment is comprised of the United States Best Buy and Magnolia AudioVideo operations. Through the United States Best Buy stores offer a variety ofconsumer electronics, home-office equipment, entertainment software, appliancesand related services. Magnolia Audio Video stores offer high-end audio and videoproducts. The international segment comprises Best Buy Canada and its operatingdivision, Future Shop. Future Shop and Best Buy Canada stores offer products similarto 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 ofColumbia that averaged approximately 43,500 retail square feet, and 22 MagnoliaAudio Video stores in California, Washington and Oregon, that averagedapproximately 10,000 retail square feet. Collectively, the United States Best Buystores 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 Videostores totaled approximately 218,000 retail square feet at the end of fiscal 2003 (lessthan 1% of its total retail square footage).

The international segment of the company involves the operation of 108 Future Shopstores throughout all Canadian provinces and 19 Canadian Best Buy stores inOntario, Alberta and Manitoba. Collectively, international stores totalled approximately2.8 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 andrelated peripheral equipment, telephones, digital and cellular phones, pagers,answering machines, fax machines, copiers and calculators. Best Buy has also addedvendors such as Emachine and Micron to its list of home office brand name products,which already included brand names such as Canon, Epson, Fujitsu, Hewlett-Packard, Nokia, Panasonic and Toshiba amongst others.

Best Buy Co, Inc.


BEST BUY CO, INC.Business Description

Best Buy’s second largest product category is consumer electronics, consisting ofvideo 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 securitysystems. 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 compactdiscs, DVD movies, pre-recorded videocassettes, computer software and video gamehardware and software. The company is one of the few large consumer electronicsretailers that sell a broad selection of entertainment software in all of its stores. .

Its final category is major appliances, which includes microwave ovens, washingmachines, dryers, air conditioners, dishwashers, refrigerators, freezers, ranges andvacuum cleaners.

In addition to products in its four main categories, the company sells cameras andother photographic equipment, and ready-to-assemble furniture designed for use withcomputer 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/orreplacement for a specified period of time following the purchase of a product,extending and enhancing the manufacturer’s warranty.

Best Buy Co, Inc.


BEST BUY CO, INC.History

HISTORY

The foundations of the company were laid when Richard Schulze in 1969, with apartner, founded Sound Of Music, a Minnesota home/car stereo store. In 1971, hebought out his partner and began to expand the chain. In the early 1980s, Schulzebroadened his product line and targeted older, more affluent customers by offeringappliances and VCRs.

Best Buy grew rapidly between 1984 and 1987; it expanded from eight stores to 24and its sales jumped from $29 million to $240 million. The next year another 16 storeswere opened and the sales jumped by 84%.

To set Best Buy apart from its competitors, in 1989 Schulze introduced the Concept IIwarehouse-like store format. Schulze also cut payroll by taking sales staff offcommission and reducing the number of employees per store by about a third. Theconcept proved to be a major hit.

In 1994, the company announced the debut Concept III, an even larger store formatwith more hands on features such as listening stations. Best Buy opened 47 newstores 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 ledto a $15 million write-off.

The company started selling CD’s on its website in 1997. That year it realized it hadoverextended itself with its expansion, super-sized stores and financing promotionand quickly initiated a massive makeover. It scaled back expansion and narrowedinventory.

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 DVDdemonstrations. Also in 1999, Best Buy formed, for its online operations,BestBuy.com and invested $10 million in consumer electronics information web siteetown.com.

In early 2000, Best Buy began selling personalized computers directly from MicronElectronics through Kiosks in its stores. In addition, in the same year, it agreed topurchase Seattle-based Magnolia Hi-Fi, a privately held chain of 13 high-end audioand video stores, marking its entry into the higher-end consumer electronics retailsegment.

Best Buy Co, Inc.


BEST BUY CO, INC.History

In 2001, Best Buy announced the completion of its acquisition of Musicland, extendingits product offerings to include MP3 players, cellular telephones, satellite systems,digital imaging, game hardware and software, and an expanded assortment ofaccessories. In the same year, Best Buy completed the acquisition of Future Shop. Bythe end of fiscal 2002, Future Shop had expanded to over 90 stores and had attainedthe status as Canada’s largest consumer electronics retailer.

Best Buy reported in 2003, that it intended to sell its interest in the Musicland Group inorder to concentrate on its core business and assets as part of its strategic plan. InJune 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 USand Canada during the 2005 fiscal year. It anticipated opening 10 Best Buy stores inCanada, predominantly in the 30,000-square-foot format. New target marketsincluded Calgary, Alberta; Regina, Saskatchewan; and Langley, British Columbia.

In May 2004 Best Buy announced plans to improve its services to its customers aswell as attract new groups of customers by launching its customer centricity initiativein up to 110 additional US Best Buy stores during fiscal 2005.

In July 2004 the company entered into a seven-year strategic relationship withAccenture for consulting and outsourcing services.

October, 2004 saw the launch of Best Buy’s next generation stores in California.

Best Buy Co, Inc.


BEST BUY CO, INC.Key Employees

KEY EMPLOYEES

Name Job Title Board CompensationRichard M. Schulze Chairman Executive Board

Bradbury H. Anderson Chief Executive Officer and Vice Chairman

Executive Board

Allen U. Lenzmeier President and Chief Operat-ing Officer

Executive Board

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 General Merchandise Man-ager

Senior Management

Brian J. Dunn Executive Vice President, Retail Sales

Senior Management

Darren R. Jackson Executive Vice President, Finance; and Chief Financial Officer

Senior Management

Michael A. Linton Executive Vice President, Consumer and Brand Mar-keting; and Chief Marketing Officer

Senior Management

Philip J. Schoonover Executive Vice President, Customer Segments

Senior Management

John C. Walden Executive Vice President, Human Capital and Leader-ship

Senior Management

Robert A. Willett Executive Vice President, Operations

Senior Management

Susan S. Hoff Senior Vice President and Chief Communications Officer

Senior Management

Best Buy Co, Inc.


BEST BUY CO, INC.Key Employees

Joseph M. Joyce Senior Vice President, Gen-eral Counsel; and Assistant Secretary

Senior Management

Bruce H. Besanko Vice President, Finance Senior Management

Best Buy Co, Inc.


BEST BUY CO, INC.Key Employee Biographies

KEY EMPLOYEE BIOGRAPHIES

Richard M. Schulze

Board: Executive BoardJob Title: Chairman Since: 1966Age: 63

Mr. Schulze is a founder of Best Buy. He has been an officer and director since thecompany’s inception in 1966 and currently is chairman of the board. He is a trustee ofthe University of St. Thomas, chairman of the board of governors of the University ofSt. Thomas Business School and a member of the President’s Council of Twin CitiesPublic Television.

Bradbury H. Anderson

Board: Executive BoardJob Title: Chief Executive Officer and Vice ChairmanSince: 2002Age: 54

Mr. Anderson has been a director since 1986 and is currently Best Buy’s vicechairman and chief executive officer. He has previously served as president and chiefoperating officer since 1991. He has been employed in various capacities with BestBuy since 1973.

Allen U. Lenzmeier

Board: Executive BoardJob Title: President and Chief Operating OfficerSince: 2001Age: 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 chieffinancial officer and executive vice president, from 1991 to 2001. He is a nationaltrustee for the Boys and Girls Clubs of the Twin Cities and serves on its board ofdirectors.

Best Buy Co, Inc.



Robert T. Blanchard

Board: Non Executive BoardJob Title: DirectorSince: 1999

Mr Blanchard is currently the president of Strategic and Marketing Services. He wasformerly 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 aschairman of the board of executive advisors to Xavier University’s College ofBusiness.

Kathy J. Higgins Victor


Ms Higgins is the founder and president of Centera. She was formerly the senior vicepresident of human resources at Northwest Airlines, and has held senior executivepositions at The Pillsbury Company and Burger King.

Matthew H. Paull


Mr. Paull has worked closely with the board of directors of McDonald’s throughout his10-year career with the company. As chief finance officer, he is responsible formaintaining McDonald’s financial integrity and assisting McDonald’s chief executiveofficer. He is also a member of McDonald’s chairman’s council, which sets thecompany’s strategic direction. Prior to being promoted to the chief finance officer atMcDonald’s, he held the position of senior vice president of finance and tax, where hewas involved with negotiating and structuring all restaurant acquisitions, includingacquisitions in the United Kingdom and Italy. He also served as vice president ofcorporate tax for the organization and was responsible for all corporate tax matters inmore than 100 countries. Prior to that, he worked for 18 years with Ernst & Young. Heis a trustee of the Ravinia Festival Association and an advisory council member forthe Federal Reserve Bank of Chicago. He also has served as a board member of theLoyola Hospital chapter of the Ronald McDonald House.

Best Buy Co, Inc.



Frank D. Trestman


Mr. Trestman is the president of Trestman Enterprises, and chairman of The AvalonGroup. He had been a consultant to McKesson and is the former chairman of theboard and chief executive officer of Mass Merchandisers. He is also a director ofInsignia Systems and Metris Companies.

Hatim A. Tyabji


Mr. Tyabji has been executive chairman of Bytemobile. From 1998 to 2000, he servedas chairman and chief executive officer of Saraïde. From 1986 until 1998, he servedas president and chief executive officer (and as chairman from 1992 until 1998) ofVeriFone. He is also a chairman of DataCard, a director of SmartDisk, and eFundsand a trustee of the Carnegie Institute.

James C. Wetherbe


Dr Wetherbe he has been the Stevenson professor of information technology at TexasTech University. He was a professor of management information systems at theUniversity of Minnesota, from 1980 until 2000, and the Federal Express professor anddirector 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 informationtechnology and the author of 20 books and more than 200 articles in the field ofmanagement and information systems.

Michael R. Keskey

Board: Senior ManagementJob Title: President, US Retail Stores

Best Buy Co, Inc.



Since: 2004Age: 49

Mr. Keskey has previously served as executive vice president -retail sales from 2001to 2002 and as senior vice president - retail sales from 1997 to 2001. He joined thecompany in 1988 and has since held various positions since.

Ronald D. Boire

Board: Senior ManagementJob Title: Executive Vice President and General Merchandise ManagerSince: 2003Age: 42

Mr. Boire joined Best Buy after a 17-year career with Sony Electronics. As Presidentof Sony Electronics consumer sales for two years, Mr Boire was responsible formanaging sales and distribution of the Park Ride, New Jersey, and the company’sconsumer electronics products throughout the United States. He also served on thecompany’s operations committee as well as its consumer business council. Prior toheading consumer sales, he was president of Sony’s Personal Mobile Productscompany, including responsibility for new business development, strategic marketing,product management and sales support.

Brian J. Dunn

Board: Senior ManagementJob Title: Executive Vice President, Retail SalesSince: 2002Age: 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 ManagementJob Title: Executive Vice President, Finance; and Chief Financial OfficerSince: 2002Age: 39

Mr. Jackson joined the company in 2000 as senior vice president - finance andtreasurer and was promoted to chief financial officer in 2001. Prior to that, he served

Best Buy Co, Inc.



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 ManagementJob Title: Executive Vice President, Consumer and Brand Marketing; and ChiefMarketing OfficerSince: 2002Age: 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 ageneral manager at Progressive Insurance. He began his career at Proctor & Gamble,in brand management.

Philip J. Schoonover

Board: Senior ManagementJob Title: Executive Vice President, Customer SegmentsSince: 2004Age: 43

Mr. Schoonover was named executive vice president - new business development in2002. Prior to that, he was promoted to executive vice president of digital technologysolutions, 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 presidentfor TOPS Appliance City.

John C. Walden

Board: Senior ManagementJob Title: Executive Vice President, Human Capital and LeadershipSince: 2002Age: 44

Mr. Walden has served as president of BestBuy.com, from 1999 to 2002. Prior tojoining Best Buy, in 1999, he served as chief operating officer of Peapod. He has alsoheld executive positions with Ameritech, and Storage Technology. Earlier he practicedcorporate and securities law with Sidley, Austin, Brown and Wood.

Best Buy Co, Inc.



Robert A. Willett

Board: Senior ManagementJob Title: Executive Vice President, OperationsSince: 2004Age: 57

Mr. Willett joined Best Buy in 2002, as a consultant and special advisor to the board ofdirectors on matters relating to operational efficiency and excellence. Prior to that, hewas the global managing partner for the retail practice at Accenture, and was also amember of its executive committee. He began his career as a store manager at Marksand Spencer, and has held executive positions at F.W. Woolworth, as well as severalother retailers in the United Kingdom.

Susan S. Hoff

Board: Senior ManagementJob Title: Senior Vice President and Chief Communications OfficerSince: 2004Age: 39

Ms Hoff joined Best Buy in 1983. Since then she has served in various capacitiesincluding vice president of corporate communications and public relations.

Joseph M. Joyce

Board: Senior ManagementJob Title: Senior Vice President, General Counsel; and Assistant SecretarySince: 1997Age: 52

Mr. Joyce joined the company in 1991, as vice president - human resources andgeneral counsel. Prior to joining Best Buy, he worked with Tonka.

Bruce H. Besanko

Board: Senior ManagementJob Title: Vice President, FinanceSince: 2002Age: 45

Best Buy Co, Inc.



Mr. Besanko joined the company in 2002 as vice president - finance/planning &performance management. Prior to joining Best Buy, he spent approximately six yearswith Sears serving in positions of increasing responsibility. He also brings finance andtreasury experience from Atlantic Richfield and more than eight years of service in theUnited States Air Force in various leadership roles.

Best Buy Co, Inc.


BEST BUY CO, INC.Major Products And Services

MAJOR PRODUCTS AND SERVICES

Best Buy is a consumer electronics and appliances retailing company engaged inretailing consumer electronics, home-office products, entertainment software andrelated services.

The company’s products and services are categorized under the following differentsegments:

Computers and peripherals Home Audio and Video Personal audio Photo and imagingConsumer electronicsEntertainment softwareAppliances

Best Buy Co, Inc.


BEST BUY CO, INC.Products And Services Analysis

PRODUCTS AND SERVICES ANALYSIS

The company recorded revenues of $27.3 billion during the fiscal year endedFebruary 2005, an increase of 11.4% over 2004. The increase was primarilyattributable to the increase in demand for digital products. For the fiscal year 2005,revenues from the US, the company’s largest geographical market, accounted for90% of the total revenues.

Revenues by Geography

US, Best Buy’s largest geographical market, accounted for 90.1% of the totalrevenues in the fiscal year 2005. Revenues from US reached $24.6 billion in 2005, anincrease 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.

Best Buy Co, Inc.


BEST BUY CO, INC.SWOT Analysis

SWOT ANALYSIS

Best Buy is a consumer electronics and appliances retailing company engaged inretailing consumer electronics, home-office products, entertainment software andrelated services. It is ranked as the number one consumer electronics retailer in theUS; however it is facing an increase in competition from discounters.

Strengths

No 1 consumer electronics retailer

Best Buy is a leading consumer electronics retailer in the US and Canada, with annualsales reaching $27.3 billion in fiscal 2005, and a 16% market share of the consumerelectronics market. Due to its large size, the company is able to leverage itsbargaining power with consumer electronics vendors. The company’s financialresources are such that it is able to spend money on promotion, advertising, newproducts, restructuring and adapting quickly to market changes. Groups with lesserresources 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 itslargest competitor in the hardlined retail segment-consumer electronics; Circuit City, infiscal 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

Strengths WeaknessesNo 1 consumer electronics retailer

Strong comparables

Structural advantage in digital TV market

Customer-centric operating model

Positive outlook for digital products

LCD market

Opportunities ThreatsLow gross margins

Over-dependence on domestic sales

High operating expense in Canada

Threat to credit promotion profitability

Rising competition from lower price formats

Console hardware shortage

Best Buy Co, Inc.



quarter, 2005) respectively. The company has also increased its market share, infiscal 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 itslargest 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 itto compete effectively with its peers in hardline retailing and discounted retailers. Thecompany, in comparison to its competitors has an extensive assortment (more than 40SKUs, stock keeping units) and the youngest store base in high-quality locations. Thecompany also benefits from its extensive customer service network, since digitaltelevision and HD products are complex technologies, requiring large degrees ofcustomer education to drive purchase of such items. Best Buy has been recognizedas 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-storedisplays, promotions and highly trained sales staff. The company’s structuraladvantage alongside a proactive approach to pushing HDTV sales has provided thecompany 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 retailindustry average of 28% (fiscal 2005). Furthermore, the company’s gross marginsreduced by 0.1% in 2005. Lower gross margins for the company, as compared to itscompetitors, reflects poorly on the company’s operations.

Over-dependence on domestic sales

The company is heavily reliant upon its domestic (US) consumer electronics retailingmarket for revenue generation. In fiscal 2005, approximately 90% of the company’stotal revenues were sourced from the US. The US market, as of 2005, is expected toshow signs of a slow down in sales momentum in consumer electronics, caused bythe rising interest rates. Hence, an over-dependence on the US market, in the currentmarket scenario would significantly affect the company’s revenue.

High operating expense in Canada

Best Buy Co, Inc.



The company opened its first Best Buy Canadian Store in fiscal 2003, which markedthe start of expansion outside the US. While the group’s Canadian operations saw asales increase of nearly 7%, in fiscal 2004, the sales growth was offset by highoperating expenses. This ultimately led to a loss of about $1 million in fiscal 2004 fromthe company’s Canadian operations. A continuation in the trend of rising operatingexpenses from its Canadian operations would significantly affect the company’sprofitability 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 customercentricity operating model, after it witnessed an improved performance at thecompany’s 67 segmented stores converted in October 2004. The converted storesoutperformed the other US Best Buy stores in terms of comparable sales (increase of8.4% in the fourth quarter compared with 2.3% in the non-converted US Best Buystores). Each of the converted stores is expected to be designed to appeal to thecompany’s five key customer segments: affluent professional males; youngentertainment enthusiasts; upscale urban mothers; technology adopter families andsmall businesses with fewer than 20 employees. This consumer-centric model isexpected to help the company offer its customers a richer in-store experience andbetter shopping assistance, which the company may be able to translate into betterrevenue growth.

Positive outlook for digital products

Digital entertainment has become a popular concept in the consumer electronicsmarket in the US. Manufacturers of digital entertainment equipment have beenflooding the electronics markets with new models of DVD players, HD-DVD playersand, HDTV sets. The sales of DVD players in the US rose 34% to 34 million units in2003, 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 onanalog models. The rising popularity of digital entertainment would boost the sales ofexisting and upcoming digital entertainment products of retailers of consumerelectronics.

LCD market

The LCD (liquid crystal display) market has demonstrated a significant increase indemand in 2004. This is indicated by the increase in global LCD TV shipments, which

Best Buy Co, Inc.



increased 123% to 8.8 million TVs in 2004. LCD TV’s comprised 5 percent of alltelevisions sold in 2004 and the company expects they will reach 10% marketpenetration in 2005. The LCD TVs are expected to account for approximately 21% ofthe world’s television sales in 2007. This increase is attributable to lower street prices,with many size categories experiencing double-digit sequential pricing declines. Thegrowth in the LCD market is a significant opportunity for Best Buy, which is alsoengaged 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 (inJanuary 2005), the company has increased its exposure to credit promotions. Whilethese 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 risinginterest rates scenario, could severely limit the profitability of the exercise, therebyaffecting 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 fromdiscount retailers and direct marketers. While Best Buy’s sales topped $27.3 billion in2004, the consumer electronics sales of Wal-Mart accounted for 9% of its discountstore sales, amounting to $16 billion. Dell Computer has also seen strong sales in theconsumer electronics segment. Increasing competition from leading companies inother markets as well as from other retail formats would lead to market share erosionof technology retailers in the US.

Console hardware shortage

Hardware shortages of Sony’s PlayStation 2, Microsoft’s Xbox, and Nintendo’s DualScreen post Christmas, took a toll on the retail electronics market. Further, thisshortage is expected to continue for most of 2005. The unfulfilled demand in the USfor consoles has led to significant price premiums being paid for new hardware ononline auction sites such as eBay. This has increased market share of online auctionsites in the gaming segment, hurting sales of retailers of consumer electronics thatwere already restricted by the shortages.

Best Buy Co, Inc.


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 CorporationDell Inc.Gateway, Inc.Kmart CorporationOfficeMax, Inc.P.C. Richard & SonRadioShack CorporationSears Holdings CorporationStaples, Inc.Target CorporationToys "R" Us, Inc. (TRU)Wal-Mart Stores, Inc.Wherehouse Entertainment, Inc.Home DepotSystemaxTrans World EntertainmentUltimate Electronics, Inc.Good Guys, Inc.Electronics Boutique Holdings Corp.Brookstone, Inc.Guitar Center, Inc.Sharper Image, Inc.Office Depot IncCircuit City Stores Inc.

Best Buy Co, Inc.


BEST BUY CO, INC.Company View

COMPANY VIEW

The following is a statement from Bradbury H. Anderson, vice chairman and CEO ofBest 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, ispalpable throughout our organization. Transformation at many companies is the childof necessity. In contrast, at Best Buy, our business is hitting new records for bothrevenue and earnings from continuing operations. We have several more years ofnew-store openings to fuel our growth. We also foresee incredible growth in key digitalproducts, where we have the leading market share in North America. Ourtransformation is driven instead by a sense of tremendous opportunity. We havedeveloped and tested an initiative called customer centricity, which enables us toengage more deeply with customers by empowering employees to more effectivelydeliver products, solutions and services through multiple channels. Our customercentricity work has given us an entirely new lens for looking at our business. Throughtha’ needs. We see new services that no other North American retailer can offer. Wesee possibilities for connecting more closely with customers through theentertainment they love. We see a more flexible and more productive way to operatethat 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 Musiclandstores and then selling them three years later. One of the Musicland lessons was thatwe did not understand their mall-based customer. It also occurred to us that perhapswe similarly needed to gain a better understanding of our customer in our corebusiness. This lesson, combined with the ideas of Larry Selden, Emeritus Professor ofColumbia University, developed into our customer centricity initiative. ProfessorSeldon encouraged us to view our company as a portfolio of customers. Our premiseis that as we deliver superior customer experiences, we will earn commensuratelyhigher financial returns, a mutually beneficial value exchange.

At the same time, we saw a looming threat from other large retailers with lower coststructures. We realized that we must boost our growth rate and capital efficiency inorder to compete more effectively for customers. These desires formed the basis ofour efficient enterprise initiative. The beauty of these two initiatives, customercentricity and efficient enterprise, is how well they balance each other while providingopportunities for growth. Today, we are:

Best Buy Co, Inc.



- Teaching our employees to focus on specific customers who have similar needs andexpectations, rather than just focusing on product categories. - Decentralizing authority to allow the person closest to the customer to makeinformed decisions using new, adaptive operating platforms. - Teaching all store employees about the financial impact of their decisions so thatthey can improve their ability to determine profitable ways to meet diverse customerneeds. - Increasing investments in high-return, customer-facing areas, such as store laborand new services. - Increasing the efficiency and adaptability of back-office functions, such as sourcingand supply chain.

The Opportunity to Transform Our BusinessOur transformation began more than a year ago, when we first determined our fourstrategic initiatives: customer centricity, efficient enterprise, win the home with serviceand win in entertainment. Our leaders taught these initiatives to employees, anddedicated work teams began to implement them. For example, we opened 32customer centricity test stores, each focused on one or more of the five specificcustomer segments. We set goals for profitable sales growth and asked ouremployees to find efficiencies.

We challenged ourselves to find ways to grow our services business and to take thelead in the entertainment business. We revamped our system of rewards andrecognition to focus on employee strengths, performance and company values.

Our goal: to transform into a talent-powered, customer-driven enterprise focused onenhancing our customers’ enjoyment of technology.

Historically, consumer electronics retailers have competed by anticipating newtechnologies and managing accelerating product cycles. We have mastered thatbusiness, and our performance has led the industry. But all that wins for us is the rightto compete in the next round of retailing. And in the next round, not only is thecompetition more powerful, but the rules will have changed because we are changingthem.

At Best Buy, we see a very different consumer electronics business in the future. Thisfuture has critical implications for our customers and for our company. Key productsare converging, which works to our advantage as a leader in both consumerelectronics and home-office products. Technologies are becoming more complex,which favors retailers with well-trained employees and a robust service offering. Ourcustomer centricity strategy is to serve as the advocate of customers, helping them

Best Buy Co, Inc.



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 ofproduct and services assortments. We will sharpen our advantage as well, throughour national rollout of Geek Squad services. Finally, customers today are unwilling topay for inefficiency. Low-cost providers have gained significant marke

The Opportunity to Reach New CustomersSo we started on a journey toward the future. We envisioned a new culture within BestBuy, one focused on specific customer segments and driven by a strengths-basedorganization. In this culture, employees are energized because they have both theresponsibility and the accountability to make decisions and drive innovation based ontheir knowledge of the customer. This culture treats customers as kings and queens,and the employees closest to the customer as royalty. That leaves headquartersemployees - including me - as servant leaders.

The good news is that not only are employees ready for the change, but they havebeen clamoring for it.

Based on the performance of our 32 lab stores, we expect to transform up to 110additional Best Buy stores to our customer centricity format this year. We also plan todeliver approximately 30 basis points of operating income rate improvement, fueledby efficient enterprise activities. Delivering on these promises will be a challenge forus. Yet we are very optimistic about the future because we know we have the talentand creativity needed to complete our transformation. We are well known for theability, once we grasp an opportunity, to develop a rollout plan and to execute it acrossNorth America. Moreover, behind the strategy is essentially the same managementteam 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 toemulate. Frankly, we are not aware of any other retailer who has successfullyimplemented a customer-centered approach in this manner. Actually, that does notdissuade us; rather, it encourages us. At Best Buy, we love to prove conventionalwisdom wrong. "No one has successfully sold hardware and software; you have tochoose one or the other," they said in 1986. "Nobody will buy high-end consumerelectronics from noncommissioned sales associates," they said in 1989. "Retailerscan’t make money selling computers," they said in 1997. "Dual branding works onlywith 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 top-quartile performance in total shareholder return.

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The Opportunity to Boost ResultsThe coming year will be a critical test for Best Buy. Our initial guidance for fiscal 2005called for an 11- to 13-percent increase in revenue and a 15- to 20-percent increase indiluted earnings per share from continuing operations. The opening of new stores andcomparable store sales gains are expected to drive our top line, while increasedefficiency is expected to boost our bottom line. Behind the scenes, we will be runninghard in our core business while we begin the work of transformation to a customer-centric organization. In other words, we are attempting our transformation during aperiod of success and prosperity.

My role as a leader will be to keep our employees inspired and focused on our visionlest success were to erode our resolve to change.

Clearly we are winning in consumer electronics retailing today. We enjoyed a strongperformance from nearly every corner of the company last year. Comparable storesales rose 7.1 percent. Revenue rose 17 percent to $24.5 billion. Earnings fromcontinuing 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 strongcash position enabled us to initiate a quarterly, 10-cent dividend and to resumerepurchases of our common sharesa combination few retailers can deliver. Webelieve that our market share attained a new high, including multiple product groupsthat are key to our success. Customer loyalty, customer satisfaction, brand awarenessand employee attitude measures all are at all-time highs for us. We have positivemomentum.

The Opportunity to WinBecause we’re the leader in our category today and because we believe in theimportance of innovation, we continue to invest in long-term, strategic initiatives.Great product-centric companies excel in product R&D. We need to research, developand test innovative ways to create truly differentiated customer experiences. Webegan by spending approximately 0.3 percent of our revenue last year developing andtesting our customer centricity initiative (and we also generated additional revenueand 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 thecustomer centricity platform. With a critical mass of these stores, we expect to gleanthe insights needed to accelerate the rollout the following year. Our goal is to convertthe 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 BestBuy. As we succeed, we will widen the gap between us and all of our competitors.

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Meanwhile, we will learn more about our customers, and that is always a worthwhileinvestment.

We have incredible employees running our stores and operating our business. I wouldlike to thank them for the results they achieved in fiscal 2004. They are the reason Iam 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 theyears beyond. Sincerely,Bradbury H. AndersonVice Chairman and CEO

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BEST BUY CO, INC.Locations and Subsidiaries

LOCATIONS AND SUBSIDIARIES

Head Office

Best Buy Co, Inc.7601 Penn Avenue SouthRichfieldMinnesotaMN 55423United StatesP: 1 612 291 1000F: 1 612 292 4001www.bestbuy.com

Other Locations and Subsidiaries

Future Shop8800 Glenlyon ParkwayBurnabyBritish ColumbiaV5J 5K3CanadaP: 1 604 412 1476F: 1 604 412 5299www.futureshop.ca

Best Buy - FresnoMarketplace At River ParkFresnoCaliforniaCA 93720United StatesP: 1 559 446 0195

Best Buy - Colorado SpringsMarket At Chapel HillColorado SpringsColoradoCO 80920United StatesP: 1 719 593 0414

Best Buy - Pentagon City1201 South Hayes StreetArlingtonVirginiaVA 22202United StatesP: 1 703 414 7090

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Documents

Best Buy Swot 2006