November 8, 2004

Interesting view of Best Buy

I have developed a bit of a bad feeling for Best Buy - their store name no longer reflects its identity as most of their items are being sold at full M.S.R.P. and the rebate deals are minimal if anything. Until I get to know a couple good locally owned computer stores (recently moved to this area), I generally use Circuit City for the general nuts-and-bolts stuff (cables, media, etc...) Now, I find out that Best Buy is actively looking to kill the 20% of it's customer base who is looking for a... "Best Buy" From an article in the Wall Street Journal: bq. Analyzing Customers, Best Buy Decides Not All Are Welcome Retailer Aims to Outsmart Dogged Bargain-Hunters, And Coddle Big Spenders;Looking for 'Barrys' and 'Jills' bq. Brad Anderson, chief executive officer of Best Buy Co., is embracing a heretical notion for a retailer. He wants to separate the "angels" among his 1.5 million daily customers from the "devils." bq. Best Buy's angels are customers who boost profits at the consumer-electronics giant by snapping up high-definition televisions, portable electronics, and newly released DVDs without waiting for markdowns or rebates. bq. The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on "loss leaders," severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. "They can wreak enormous economic havoc," says Mr. Anderson. bq. Best Buy estimates that as many as 100 million of its 500 million customer visits each year are undesirable. And the 54-year-old chief executive wants to be rid of these customers. And Mr. Anderson's reasons for this shift in tactics: bq. Anderson says the new tack is based on a business-school theory that advocates rating customers according to profitability, then dumping the up to 20% that are unprofitable. The financial-services industry has used a variation of that approach for years, lavishing attention on its best customers and penalizing its unprofitable customers with fees for using ATMs or tellers or for obtaining bank records. bq. Best Buy seems an unlikely candidate for a radical makeover. With $24.5 billion in sales last year, the Richfield, Minn., company is the nation's top seller of consumer electronics. Its big, airy stores and wide inventory have helped it increase market share, even as rivals such as Circuit City Stores Inc. and Sears, Roebuck & Co., have struggled. In the 2004 fiscal year that ended in February, Best Buy reported net income of $570 million, up from $99 million during the year-earlier period marred by an unsuccessful acquisition, but still below the $705 million it earned in fiscal 2002. bq. But Mr. Anderson spies a hurricane on the horizon. Wal-Mart Stores Inc., the world's largest retailer, and Dell Inc., the largest personal-computer maker, have moved rapidly into high-definition televisions and portable electronics, two of Best Buy's most profitable areas. Today, they rank respectively as the nation's second- and fourth-largest consumer-electronics sellers. The article goes into a lot more detail and is very much of interest if you follow business -- not only large but small as well since this is a market driven economy and Best Buy's CEO is seeing a potential squeeze and reacting to it. The problem here (one of them) is that the geeks that Best Buy is trying to get rid of are the very same people that Barry and Jill will ask when they are looking for places to buy their bling. Word of mouth still counts for a lot here so unless they do a major turnaround, I would say Buh Buy to Best Buy. The fact that they had a couple other disastrous deals: bq. Best Buy's troubled acquisitions of MusicLand Stores Corp. and two other retailers had caused its share price and price-to-earnings ratio to tumble. Mr. Selden recalls advising Mr. Anderson: "The best time to fix something is when you're still making great money but your [price-to-earnings ratio] is going down." only serves to drive this home. How's this - charge 5% to 15% below M.S.R.P., nix the mail-in rebates in favor of immediate store cash rebates and bend over backwards on customer support. Loose everything except the computers, computer media and appliances. Loose the movie and music disk sales. Carry more SKU's of computer software, not the top 80. Look at FRY's as a model and go big with it. Just my two cents if I were invited to become CEO of Best Buy which I would probably turn down because I really like it where I am. Posted by DaveH at November 8, 2004 8:53 PM