Best Buy Marketing Case Study

Robert Paul EllentuckEMBA 2011

Marketing ManagementProfessor Hassan16 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 10K’sSelect Category Comparisons200310K Category

1. Best Buy

2. Wal-Mart

3.eBay

4. Dell

5. Amazon

Revenue ($M)

21 256 2 35 5

Gross Margin (%)

25 22 81 18 17

Cash (%M)

2 5 1 4 1

Debt (%) 11 16 2 3 90

Top 5 CE Merchandiser 10K’sSelect Category Comparisons200810K Category

1. Dell

2. Best Buy

3.Wal-Mart

4. Circuit City

5. CDW Corp

Revenue ($M)

61 40 374 12 Not Available

Gross Margin (%)

19 24 15 21 Not Available

Cash (%M)

10 2 47 1 Not Available

Debt (%) 2 6 21 6 Not Available

Company Overview

Sound of Music 1967; St. Paul MN

“Best Buy” Sale @ SOMtornado hit 9 Stores 1981

Public Offering - $33.6M 12 Stores - 1986

Best Buy Becomescompany name - 1983

“Grab and Go”– New Logo-1989

2nd Largest Consumer Electronics Retailer - 1993

Customer Centricity Implemented 2005

Fortune names Best Buy Top 10 performing stock,2000

Best Buy Mobile stores & Geek Squad to Europe 2003

Global Expansion - Asia, Europe, Mexico, Turkey 2003 Fortune 500 Top Co

#56 - $45 BillionFY2009

CEO Dunn replaces retiring Anderson 2009

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 propositionSource: 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

Company Overview( Revenue by Product Group)

FY2008

Sales

CE 38%

Home Office 34%

Entertain SW 17%

Appliances 6%

Services 7%

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

Top Down; One P&L

Best Buy Now Introducing Smaller

Foot- Print stores

Competitors are following suit in Specialty Markets

Overall lower costs

Customer Centricity

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, didn’t resonate with customers as well as Best Buy’s 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 it’s 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 ????

Weaknesses 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 (can’t they go to best buy for a dell?)

Competitive Analysis (Other Competitors)

Other competitors have entered consumer electronics retailer market over time

Target (isn’t mentioned in the case study?)

Costco and Sam’s 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 networkValued, 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 StrengthsFROM: 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 Buy’s revenue vs FY 2005 when it didn’t exist

Down Economy resulted in two competitors out of the market – more competition from other retailers (e.g. Wal-Mart 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

Disadvantages 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

Alternatives Evaluation – cont’d

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 Disadvantages

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”)

Alternatives Evaluation – cont’d

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

Disadvantages 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

Alternatives Evaluation – cont’d

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

Disadvantages Cannibalize retail sales Greater competition with manufacturers and online retailers Lose opportunity to “upsell” or provide a solution Declining market share

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 PracticeNeeds refinementBest Practice “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)

Best Buy 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=de57de32-bf5b-4dba-8d1e-938fb2a1ddee&type=7&lid=1

Background (Personas)Good information for

Selection Marketers increasingly using personas

Demographics don’t 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 don’t 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 reviewSpinali, L. and O’Hier, J. (March 2009). Dealerscope.com annual top 101 rankings report

on consumer electronics retailers/etailersPressler, 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-big-box-electornics-breeech.

References – cont’d 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-retail-success.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 2009http://strategic-business-planning.suite101.com/article.cfm/swot_analysis_of_dell_computers