Best Buy Marketing Case Study

Robert Paul Ellentuck EMBA 2011 Marketing Management Professor Hassan 16 October 2009

COPYRIGHT 2011 ROBERT PAUL ELLENTUCK

Industry Overview

Industry

Big box concept Specialty Store - Consumer Electronics Segment

Major Players for Consumer Electronics

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 technical competent

Industry Overview

Big Box push to increase sells of high margin products Emphasis evolved to offering service and support to customers Consumers now focusing more on price over service and support Popularity of online purchasing increased; free shipping and delivery Big box concept declining; scaled-down version of stores emerging

Top 5 CE Merchandiser 10Ks Select Category Comparisons

2003
10K Category Revenue ($M) Gross Margin (%) Cash (%M) Debt (%) 1. Best Buy 21 25 2 11 2. Wal-Mart 256 22 5 16 3. eBay 2 81 1 2 4. Dell 35 18 4 3 5. Amazon 5 17 1 90

Top 5 CE Merchandiser 10Ks Select Category Comparisons

2008
10K Category Revenue ($M) Gross Margin (%) Cash (%M) Debt (%) 1. Dell 61 19 10 2 2. Best Buy 40 24 2 6 3. Wal-Mart 374 15 47 21 4. Circuit City 12 21 1 6 5. CDW Corp Not Available Not Available Not Available Not Available

Company Overview
Sound of Music 1967; St. Paul MN Grab and Go New Logo1989 Best Buy Becomes company name - 1983 Global Expansion - Asia, Europe, Mexico, Turkey 2003 Fortune 500 Top Co #56 - $45 Billion Customer FY2009 Centricity Implemented 2005

Best Buy Mobile stores & 2nd Largest Consumer Best Buy Sale @ SOM Electronics Retailer - 1993 Geek Squad to Europe 2003 tornado hit 9 Stores 1981 CEO Dunn replaces Public Offering - $33.6M retiring Anderson 12 Stores - 1986 2009 Fortune names Best Buy Top 10 performing stock, 2000

Company Overview (Consumer Driven)

We believe that focusing on customers' needs generates growth opportunities At Best Buy, we aspire to be a responsible, values-driven global corporation we believe that's what you expect

And we believe in customer centricity - the idea is that a customer isn't just looking for a product, but a solution or experience that improves her life. Ranked highest in customer satisfaction among national and multi-regional from 2009 report by J.D. Power and Associates

Background (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 of competitive marketplace Forward-looking strategy; must permeate every area of enterprise Reinvents retailer's value proposition

Source: Biggs, John (2009)

Company Overview (Products)

Branded products designed out of customer research and priced to fill gaps

Dynex, Init, Insignia, and Rocket Fish

Napster

Working with Dell to have a streaming audio and video

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

( Revenue by Product Group)

FY2008
Sales
CE 38% Home Office 34% Entertain SW 17% Appliances 6% Services 7%

Company Overview
FY2005

Sales
Entertain SW 22% Home Office 34% CE 38% Appliances 6%

Product (Big Box Retailing)

Best Buy - Then

Big Box large retail footprints Everything under one roof Standard Operating Procedures (SOPs) Products Sold by category Organizational Structure

Best Buy Now Introducing Smaller Foot- Print stores

Competitors are following suit in Specialty Markets Overall lower costs Customer Centricity

Top Down; One P&L

Background/Product (Customer Centricity)

Model California Based Test Skewed Results Roll-out: no financial modeling beyond test market Aggressive Rollout Plan - 12 labs to 32 pilots to 110 stores nationwide Leveraged prior acquisitions Organizational structure - organized to unorganized Product mix by solution based on Personas

Competitive Analysis (Changes in Landscape)

Big Box push to increase sells of high margin products Emphasis evolved to offering service and support to customers Consumers now focusing more on price over service and support Popularity of online purchasing increased; free shipping and delivery Big box concept declining; scaled-down version of stores emerging

Competitive Analysis

Audra - can we do a four square on Key Competitors reduces slides Amazon Missing?

Competitive Analysis (Circuit City)

Out of business - January 2009 Financials???? CEO blamed demise on poor macroeconomic conditions Unknowledgeable sales staff Lack of quality stock (What does this mean product mix) Late to the game with Firedog customer service business, didnt resonate with customers as well as Best Buys Geek Squad Unfortunate position Mid-level Player

Competitive Analysis (Wal-Mart)

Strengths: financials Top Retailer in the country - $$$$

Lost leaders to drive traffic Convenience & wide range of products in one store Poised to be solid position in a down economy increase of consumers 17% margins in the Consumer Electronics (Mid-player) (Strength or weakness)

Weaknesses: Quality and service

General Merchandiser; not specialized in consumer electronics Lack of flexibility as some of its more focused competitors due to large range of products (clothing, food, electronics)

Competitive Analysis (Dell)

Strengths: financials

Customized products Reliability, Service and Support Other forms of products and services ???? Unsuccessful at attracting college segment of market (Is this important?) Customers cannot go to retailers for custom-built products Lack of use of distribution channels (cant they go to best buy for a dell?)

Weaknesses

Competitive Analysis (Other Competitors)

Other competitors have entered consumer electronics retailer market over time

Target (isnt mentioned in the case study?)

Costco and Sams Club (???) what about this and can it go on another slide Large retailers creating more stand-alone shops (remove on another slide)

SWOT Analysis
Strengths
Heavily driven customer satisfaction/customer service based Standard Operating Procedures; guaranteed standard experience across network Valued, trained, rewarded workforce Central corporate structure/territory

Weaknesses
Customer Centricity model fragmented by individual store locations Creation of unified sales force more costly in other markets Valued, trained, rewarded workforce expensive to replicate across other markets Turf battles /Lack of synchronization between business units

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

Threats
Low priced big box stores playing into highly competitive arena Market expansion into other markets/regions Online sales

Weaknesses to Strengths
FROM:
CC model fragmented by individual store locations Creation of unified sales force based on CC more costly in other markets Valued, trained, rewarded workforce expensive to replicate across other markets Turf battles /Lack of synchronization between business units

TO:

Still have major customer segments; grouped by location more (e.g. DMAs cluster stores in market) CC model working if solutions are sold; revenues justify expense CC model working if work force is trained to sale; upsell a customer & sale solution Corporate needed to see segment leaders mutually benefitted from CC model

Threats to Opportunities
FROM: Low priced big box stores playing into highly competitive arena Market expansion into other markets/regions

Online sales

TO: Sell products with services and solutions; Best Buy also has their own brands Best Buy started expansion into China in 2003 Best Buy now also multiple online channels

Linking Internal and External

Organization changing at same time as industry is changing; extreme dynamic occurring Pace and synchronization of rollout affected internal organization and sales revenues Customer Centricity model increases sales per foot and expands externally because they hit saturation in the US Overall big box concept pushing for lower priced items

Change from Input to Output

Price of technology, appliances, home office equipment costs are dramatically reduced between FY2003 and FY2009 People setting up home offices sustain the growth (these people also need serviced) Services are now at 7% of Best Buys revenue vs FY 2005 when it didnt exist Down Economy resulted in two competitors out of the market more competition from other retailers (e.g. WalMart and Target) Increase in online purchasing for music, games, etc impacting entertainment software

Problem Definition

Implementation of Customer Centricity caused internal conflicts, increased expenses, and loss of the common customer experience from an overall brand image to a fragmented model Needs to be refined

The Following slides are real busy

Need to decide who will speak to these sildes

Alternatives Evaluation

Continue to convert all stores to Customer Centricity; allow time for concept to mature

Advantages

Company already invested resources and time Instill investor confidence for concept Gives time for customer to adjust to concept Wal-Mart continues to take market share Expensive; continue to mount without seeing pay-off Negative impact on earnings Solutions and service may not be needed as technology gets easier

Disadvantages

Alternatives Evaluation contd

Create a hybrid; continue with Customer Centricity; group personas/segments to market level instead of individual store (e.g. DMAs/cluster stores in market) Advantages:

Company already invested resources and time Not a drastic change; makes concept more mainstream(would increase investor confidence) Makes customer experience more uniform by market area Marketing and promotions less expensive; customized by market not individual stores Wal-Mart continues to take market share Wal-Mart, Target, Office Depot can still take away from Best Buy Still expensive; but not as costly as converting each store (may have an impact on technocrats)

Disadvantages

Alternatives Evaluation contd

Abandonment of Customer Centricity to SOP common Best Buy (Big Box) customer experience

Advantages

Proven customer experience Less costly Cohesive brand experience Economies of scale drives pricing Wal-Mart continues to take market share Costs associated with model are fixed costs that will impact bottom line Negative impact on earnings, sales by square foot would continue to decline

Disadvantages

Alternatives Evaluation contd

Shift channels of distribution from primarily offline retail brick & mortar to more online channels

Advantages

Less costly way of doing business (staff, operations, real estate) Gain market without going beyond market saturation point Create companion user experience Cannibalize retail sales Greater competition with manufacturers and online retailers Lose opportunity to upsell or provide a solution Declining market share

Disadvantages

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 Big Box 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 for high profit margin sales

Customer-Centric Best Practice Needs refinement

Best Practice

Best Buy

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 Technology Strength (asset visibility, RFID)

Yes Not fully Yes Struggled to implement Yes or no??? Yes, but diminishing No, higher than optimal to cover expenses Struggled with this No

http://www.redprairie.com/resources/resources_detail.aspx?contentid=de57de32bf5b-4dba-8d1e-938fb2a1ddee&type=7&lid=1

Background (Personas) Good information for Selection

Marketers increasingly using personas

Demographics dont always explain/predict human behavior

Money being spend by a lot of companies on persona research Forrester survey - one in four companies with revenues above $200M planned to increase spending on persona research Persona research can make a dramatic difference

Sources: Howlett, Greg (2007) and Gardener, Elizabeth (2007)

Implementation Plan

Communicate internally that customer centricity model is new mode of operation Ensure all levels of organziation have buy-in - new way of doing business Create task force that reviews strengths/weaknesses of 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 on when store was converted Modify the conversion process (slower pace) than the ones in initial conversion process Benchmark in 3-6 month increments based on how stores were initially converted

Implementation Plan Budget

RUSS TO ASSIST WITH THIS SECTION INCORPORATE SOME BUDGET BULLETS BASED ON BEST PRACTICE RESEARCH Need to find out from Russ what he found

Background (Personas) Good information for Selection

Marketers increasingly using personas

Demographics dont always explain/predict human behavior

Money being spend by a lot of companies on persona research Forrester survey - one in four companies with revenues above $200M planned to increase spending on persona research Persona research can make a dramatic difference

Sources: Howlett, Greg (2007) and Gardener, Elizabeth (2007)

References to be checked
Industry Overview (Slide 2) Taylor, Dave (02 June 2008). Intuitive.com business blog annotating a TWICE (This Week in Consumer Electronics) 2007 review Spinali, L. and OHier, J. (March 2009). Dealerscope.com annual top 101 rankings report on consumer electronics retailers/etailers Pressler, 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 Background (Big Box Retailing) (Slide 9) Shevory, Christina. A Recession Play Mini Versions of Big-Box Stores. New York Times 19 May 2009, Print. Background (Evolving Customer Centricity) (Slide 10) 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-bigbox-electornics-breeech.

References contd to be checked

Background (Personas) (Slide 13) 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-retailsuccess.html Gardner, Elizabeth. Personalizing. Retailer. November 2007. Internet Retailer, Web. 4 Oct 2009. http://www.intemetretailer.com/article.asp?id=24243 Competitive Analysis (Circuit City) (Slide 15) 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/ Competitive Analysis (Dell) (Slide 17) Cuizon, Gwendolyn. SWOT Analysis of Dell Computers. Suite101.com 5 March 2009 http://strategic-business-planning.suite101.com/article.cfm/swot_analysis_of_dell_computers