Effects of the Recession
But if vendors were clamoring for on-the-floor education, it was the recession that convinced the company’s board that becoming the connected-world expert was right for Best Buy, Dunn notes. Before Lehman Brothers filed for bankruptcy in September 2008, comparable-store sales growth had been clipping along at 6 percent to 8 percent month over month. “Then business hit the wall,” he recalls. “It wasn’t gradual — it was bang! All of a sudden, we were playing for survival.”
For the quarter ended November 29, just before the 2008 holiday season, Best Buy reported total revenues of $11.5 billion, an increase of 16 percent over the same period in 2007. Dunn attributes this to the addition of 181 new stores worldwide during that time frame. But, he says, troublesome news canceled any optimism: Same-store sales fell 5.3 percent for the period. As he reported results, then CEO Bradbury Anderson (who retired as CEO after seven years at the end of the fiscal year the following June but remains vice chairman) told analysts the company would cut capital spending by half and open “significantly fewer stores” through the rest of fiscal 2009. The retailer avoided across-the-board price cuts, Dunn explains, but it discounted some appliances, provided free installation for televisions selling for more than $999 and enhanced Geek Squad service contracts. And while headquarters staff shrank from 4,000 employees to the current 3,500 as workers accepted enhanced buyout packages, he adds, the average in-store head count remained the same, at 140, allowing Best Buy to maintain its level of in-store customer guidance.
By June 29, when Dunn made his preannounced move to CEO from president and chief operating officer, Best Buy had regained its footing, the company says. It attributes this to the addition of 136 new stores in the U.S. during fiscal 2009, when annual revenues rose 12.5 percent, to $45 billion.
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Pointing to the demise of Best Buy’s largest — and now bankrupt — rival, Circuit City Stores Inc., analyst Dan Binder* at Jefferies Group Inc. (JEF) notes that Best Buy also gained market share in fiscal 2009. “With former Circuit City customers wandering the streets trying to figure out where to make their next consumer electronics purchase, Best Buy is seizing the opportunity,” he says. The company not only mailed and e-mailed offers to holders of Circuit City credit cards, it also purchased an undisclosed number of Circuit City stores and converted them to Best Buys.
“You will see us continue to be aggressive on price,” says Chief Marketing Officer Barry Judge, “but we think about ‘price plus,’ meaning price plus service.”
While sales in the consumer electronics category fell in the period from 2008 to mid-2009, two exceptions offered a striking endorsement of the new connected strategy, says Dunn: Both notebook computers and smartphones continued to deliver double-digit increases in month-over-month sales. “What became truly obvious was how important connections were to people,” he observes. “The notion of being connected, of sharing the things that matter, made these devices utilitarian rather than discretionary purchases.” In response, the company says, it stepped up its expansion of Best Buy Mobile, opening 20 stand-alone stores during fiscal 2009 to bring that brand’s store count to 29. “You will see us continue to be aggressive on price,” adds Best Buy Chief Marketing Officer Barry Judge, “but we think about ‘price plus,’ meaning price plus service, plus a great selection. That’s value.”
Center of the Stores
Recognizing that showing is superior to telling, in November 2009, Best Buy debuted the first of its newly configured prototype stores, which are meant to highlight the connected world. Smack in the middle of each store sits the new “connected world” area. At its heart is what Dunn calls the “entry ramp to the digital highway”: a variety of flat-screen televisions, notebook computers and smartphones, all capable of working together. Such a configuration is meant to illustrate “the art of the possible,” says the CEO.
For example, he points to a typical exchange between customers shopping for a notebook computer and store employees, known in Best Buy speak, Dunn says, as Blue Shirts. When asked how they will use the computer, customers might say they intend to share pictures. “So the store associate shows the customer how a smartphone allows them to take photos and automatically distribute them in real time via a wireless network anywhere they want, including sending them to Aunt Martha’s PC in Winnipeg,” he explains.
While the new center-of-the-store strategy may seem intuitive, it’s far more complicated than moving fixtures into new configurations, notes Dunn. He launches into a discussion of how Best Buy merchandises its stores, including the mix of products it orders from suppliers. Instead of segregating TVs or computers into their own departments, the approach builds collections of devices around networked experiences, he says. Helping customers connect their home equipment has also enhanced visibility for the Geek Squad, which the company says has grown from one person with a cell phone and a bike in 1994 to a squadron of more than 20,000 “agents” today.
