Best Buy Co., Inc.June 11, 2019. Best Buy (BBY) appoints Corie Barry as CEO from her prior CFO position to replace Hubert Joly, who served as CEO since 2012 and remains as chairman of the board.1 Since 2014, Best Buy’s stock performance has exceeded the S&P 500, but it has lagged behind Amazon—a firm that has redefined retail. Exhibit 1 depicts a stock price comparison of retailers from 2014 to July 2019.Best Buy’s performance reflects a stark contrast from many retailers that have declared or are facing bankruptcy, such as RadioShack, Sears, and Toys-R-Us. The strategy developed by Hubert Joly was to engage customers in “high touch” products that allow customers to interact with competitively INTERNATIONAL EXPANSION THEN RETRENCHMENTBest Buy expanded internationally before refocusing on the North American market, and in 2016 only 8.4 percent of its sales were international.28 Its first cross-border expansion was the 2001 acquisition of Futureshop Ltd., a Canadian electronics chain, which added annual sales of $1.32 billion.29 Maintaining Futureshop as a wholly owned subsidiary, Best Buy later strengthened its Canadian presence by opening 77 branded stores of its own.30 Best Buy established an active presence in the growing Asian markets with its 2006 acquisition of a majority interest in the retail chain Jiangsu Five Star Appliance Co., Ltd., China’s fourth-largest appliance and consumer-electronics retailer, for $180 million.31 A year later on January 26, 2007, the first Best Buy store in China—touted as the largest Best Buy in existence—opened in Shanghai.32 Other regions quickly followed. By 2008, Best Buy had announced the opening of its first pilot stores in Mexico and Turkey, as well as multiple branded superstores in the United Kingdom and other European countries.33 However, Best Buy exited Turkey in 2011,34 the United Kingdom in 2011 and all of Europe in 2013,35, and China in 2014.36 In 2019, Best Buy only had a presence in North America (United States, Canada, and Mexico),37 which is only the second largest consumer electronics market after China.38LEADERSHIP CHANGESAfter having just two CEOs in its first 43 years of operations (Richard Schulze and his successor Brad Anderson), Best Buy went through three top leaders in a six-month period in 2012.39 Brian Dunn assumed the helm, in June 2009, and he had been trying to “right” Best Buy’s “ship” for three years. Dunn believed that the company’s physi-cal stores were an asset: “There are still things in the physical world that are going to be important: expert advice and the ability to see and touch the latest tablets.”40 But to cut costs, he announced in 2011 that Best Buy would reduce its “big box” real estate by 10 percent over five years by closing some stores, renegotiating leases, and letting some leases expire.41 Thousands of workers, including some 600 highly trained Geek Squad staffers, were laid off.42Moving forward, Dunn planned to open 600 to 800 new Best Buy Mobile stores, focusing on smartphones and other mobile devices.43 The goal was to increase the number of retail points of contact while decreasing square foot-age, thereby increasing the company’s flexibility as a multichannel retailer.44 He also increased Best Buy’s online offerings by more than 20,000 items to broaden its “virtual” footprint.45Unfortunately, the company’s stock price continued to decline. Analysts felt Dunn had been slow to recognize the company’s problems, and he was not being aggressive enough in shutting down underperforming units. Dunn announced his resignation in April 2012 after 28 years as a Best Buy employee after allegations of personal relation-ship with an employee.46The fallout did not stop there. Richard Schulze, who was then serving as chairman of the board, stepped down from his position at the June 2012 board meeting. The board “expanded his role” by granting him the honorary priced products, including private label brands. Further, Best Buy offers complements, such as recycling and in-home installation, to further engage with customers. The result was a clear value proposition reflected in the slogan “Expert Service. Unbeatable Prices.”2The strategic initiative’s past success is reflected in Best Buy’s performance, and Hubert Joly’s selection as the “retailer of the year” by Forbes for 2016. Still, Corie Barry faces multiple challenges, including being the young-est CEO of a S&P 500 company and one of the few women to run a Fortune 100 company. In addition, Best Buy continues to face considerable head winds.34Competition in the consumer-electronics industry remains cut-throat. While Best Buy is no longer considered doomed to follow other national consumer electronics retail superstores into extinction, several concerns suggest it will be harder for Best Buy to meet expectations for continued performance. First, Best Buy may simply have received a temporary boost due to struggles by other traditional retailers. Second, Best Buy depends on consumer electronics, a product category increasingly caught up in U.S.-China trade tensions that do not appear to have an easier or quick resolution.6, 7 Third, five suppliers (Apple, Samsung, Hewlett-Packard, Sony and LG) supply Best Buy with over half its inventory.8 Best Buy actively partners with its suppliers. For example, Best Buy pioneered the “store within a store” concept with Samsung in 2013 to highlight Samsung products within Best Buy locations.9 The expansion of this program to other firms (e.g., Microsoft and Apple) adds another source of revenue for its stores, but it also increases Best Buy’s dependence on suppliers. Fourth, retail continues to change as people adapt to technology and relationships between retailers, customers, and manufacturers adapt.10 Best Buy’s “high touch” approach to retail rests on attracting and retaining qualified employees, and this may hurt profitability if automa-tion by competitors is successful.11 In support of seeing continued challenges for Best Buy, roughly 70 percent of inside stock trades by executives at Best Buy were sales of shares (rather than buying of shares).12At the same time, Amazon remains a formidable competitor in the electronics retail industry. For example, Amazon has begun offering in-home consultation with its digital assistant Alexa hosted on its Echo speakers. By comparison, Best Buy does not offer a digital assistant that may substitute for its trained sales staff. Amazon is also creating increased physical presence through the expansion of warehouses,13 its purchase of Whole Foods, and partnering with Kohls and Rite Aid for returns.14 While the purchase of Whole Foods by Amazon drove grocery chain companies stock lower, 15 it also gives Amazon a physical presence where customers will be able to pick up purchases. As a result, Best Buy and CEO Barry cannot simply rest on its past success as the competition continues to evolve. Opening a can of Diet Coke and booting up her laptop, Barry is thinking about the next earnings call with investors ...A Brief History of Best BuyTogether with his business partner, James Wheeler, Richard Schulze founded Sound of Music, an audio spe-cialty store, in Minnesota in 1966. The fledgling company ended its first fiscal year with gross sales of $173,000 and continued to grow rapidly over the next few years. By the time of its initial public offering in 1969, the home-town enterprise had acquired two of its local competitors16 and it opened two new outlets near the University of Minnesota in downtown Minneapolis.Schulze bought out Wheeler in 1971,17 shortly after Sound of Music hit the $1 million mark in annual rev-enues.18 In 1979, Sound of Music became the first supplier of video and laserdisc equipment from companies such as Panasonic, Magnavox, Sony, and Sharp. After a tornado hit the Roseville, Minnesota, store in June 1981, the company responded with a “Tornado Sale” that became an annual event, storm or no storm. This strategy boosted Sound of Music’s average sales per square foot to $350, compared with an industry average of $150 to $200. ARRIVAL OF THE SUPERSTOREWith ambitions to capture an even larger market share, Sound of Music changed its name, in 1983, to Best Buy Co., Inc. Soon, it adopted its now-familiar superstore format, with an increasingly diversified product range. Best Buy proceeded to grow from 8 to 24 stores and saw its revenues increase from $29 million in 1984 to $290 million in 1987.19 On July 20, 1987, Best Buy made its debut on the New York Stock Exchange (NYSE: BBY) with an initial offering of 8.3 million shares of common stock.Best Buy changed its logo to the yellow tag in 1987, and in 1989 its stores adopted a new “grab-and-go” store format, called Concept II. Schulze’s revolutionary new approach to big-box retailing combined Walmart’s prices with Circuit City’s assortment, in a shopping warehouse with a 35,000-square-foot footprint.20 The new stores consisted of well-stocked showrooms with self-help information so that people could make their product selections independently and check out in a single stop. Answer centers were still available for people who desired assistance, but salespeople no longer needed to attend to each individual customer or fetch merchandise from storage. This change reduced Best Buy’s employment costs by one-third, which compensated for the corresponding de-emphasis on service contracts. However, Best Buy’s store format has continued to evolve, and it currently operates Concept IV stores that provide an open floor format and cash registers throughout the store, as well as dedicated spaces to vendors.

GROWTH THROUGH ACQUISITIONSThe year 2000 marked the launch of a new phase of inorganic growth through acquisitions. Best Buy grew its rev-enues from $12.5 billion in 2000 to nearly $51 billion in 2012.22 The company first purchased Magnolia, a high-end consumer-electronics chain with 13 locations throughout Washington, California, and Oregon, for $88 million in 2000.23 The next year, Best Buy purchased Musicland for $425.1 million. The acquisition of the mall-based music and entertainment retailer gave Best Buy access to an additional 1,300 stores across the United States and Puerto Rico, including 650 Sam Goody and 400 Suncoast Motion Picture outlets. In 2002, the company acquired Geek Squad, a 24-hour computer-support task force. By 2004, Geek Squad precincts were in all of its stores.24 In contrast to the rapid expansion of Geek Squad, Best Buy divested Musicland, in 2003, due to declining sales, and increased competition from Walmart and Target in the CD segment, as well as iTunes in digital music. Sun Capital Partners Inc., a private equity firm, purchased the failing firm for only the assumption of Musicland’s debt and lease obligations. Brad Anderson, who succeeded Schulze as CEO in 2002, described the Musicland venture as “a very expensive but powerful learning experience for Best Buy.”25After a two-year hiatus from acquisitions, Best Buy purchased AudioVisions and Pacific Sales in 2005.26, 27 In 2007, Seattle-based Speakeasy Inc. was bought, and following that purchase, Best Buy acquired Napster and Dealtree in 2008. The acquisition of Mindshaft followed in 2011 (which was then divested in 2014). But since becoming CEO, Joly has not made a purchase, but Best Buy has divested operations outside North America. title of “Founder and Chairman Emeritus” and permitted him to finish out his term as director through 2013. The investigative report indicated that Schulze had learned about Dunn’s actions, confronted him, warned him that such behavior was contrary to company policy, but then dropped the issue when Dunn denied the allegations. To rectify this breach of ethics, the board named Hatim Tyabji, chair of the audit committee, as the new chairman and hired an external consultant to run the search process for a new CEO. In the interim, George Mikan III, another director, agreed to take on the day-to-day responsibilities for running the company.47 The board also recommended that shareholders approve the declassification of the board, making each director subject to annual re-election.48Hailing from Nancy, France, Hubert Joly was appointed Best Buy CEO on August 20, 2012.49 In prior jobs, Joly had engineered successful turnaround strategies for Vivendi and Carlson Wagonlit Travel,50 and he saw no reason why Best Buy would be any different. Still, several investors were not happy with his appointment. Some saw Joly’s lack of retail experience as a significant limitation, while others wondered if the company had rushed the search just so it could proceed with its restructuring plan.51 It was not until 2015 that Joly began to win some respect for his turnaround efforts (see Exhibit 2 for Best Buy financial data). Hubert Joly’s success is reflected in his selection of Corie Barry as his successor and his continuing as the chairman of the board.5

Question

1) Conduct a brief Competitive Analysis of Best Buy and Amazon by identifying if Amazon is stronger than, equal to, or weaker than Best Buy in the following: supplier relationships, product portfolio, distribution, and customer experience. Provide data from the case to support your analysis.

2) Based on your Competitive Analysis describe one strategic action and one tactical action that Best Buy could take to compete with Amazon. Provide data from the case to support why these actions could be effective.

Answer rating: 100% (QA)

1 Best Buy vs Amazon Both companies will likely outperform the broader market over the long run Howe... View the full answer