At crossroads, Best Buy charges ahead with Customer Centricity

DSN Retailing Today, Jan 10, 2005 by Laura Heller

Best Buy has been at crossroads more than once in its history, and so it finds itself today. The retailer is faced with the reality that it is a mature company in need of a growth vehicle. To address this, the chain has launched multiple tests and new formats, realigned the executive team, outsourced some internal operational tasks and embarked on enhanced-services businesses.

As problems go, the curse of success is hardly the most tragic. Best Buy's sprint to the top of its category has been swift, and analysts are looking carefully at the company's prospects. The retailer has been turning out impressive numbers, most recently beating earnings expectations by a penny and delivering a 22 percent bottom-line increase for its third quarter ended Nov. 27.

For the first nine months of the current fiscal year, the company grew revenue 13 percent to $18.21 billion, comp-store sales jumped 5.1 percent, operating income as a percent of revenue increased by 0.2 percent, SG&A declined by 0.2 percent, and earnings per share was $1.24, compared with $1.01 for the same period in 2003.

"Our ability to deliver double-digit revenue and earnings increase in a more modest growth environment demonstrates how well we execute the business," said vice chairman and ceo Brad Anderson.

Competition in the CE category is intensifying from other specialty chains, discounters and online retailers, and Best Buy is now focused on trying to differentiate, win customer loyalty and ensure ongoing business.

To this end the company has rolled out its Geek Squad computer-services business to all stores nationally, is growing the Reward Zone loyalty program and testing a multitude of store formats (see story page 14).

The most ambitious initiative is the Customer Centricity program, which segments out specific demographics and realigns stores in applicable markets to serve each segment. The test began in 32 stores in 2003 and since has been expanded to 67 units.

The strategy is meant to increase Best Buy's market share and further differentiate the chain in an increasingly crowded marketplace. "While store design and assortment can be mimicked, culture and know-how are far more difficult to replicate," said Goldman Sachs analyst Matthew Fassler after learning of the program's details. "The very few retailers that maintain high levels of energy and empowerment tend to generate outsized returns."

But Centricity is not without risk. The company has invested millions in the initiative, although most are non-recurring costs that will be leveraged over more stores as the program rolls out.

As of the third quarter 2003, the test is already yielding positive data. The segmented stores outperformed other U.S. Best Buy stores with higher comp-store sales gains and gross-profit rates while the expenses associated with these test stores came in slightly lower than expected, according to the company. Although the chain did not release specific results for the segmented stores, management told analysts last spring that the expectation was for the effort to produce comp-store sales gains of roughly 8 percent to 10 percent in the Centricity stores compared with 4 percent to 6 percent for the entire chain.

Not everyone thinks Centricity is the key to Best Buy's future. Merrill Lynch analyst Danielle Fox applauded the paring back of the test program, which initially was meant to extend to 110 stores, saying she was not a fan of the stores as initially conceived. And Stephen Chick with JP Morgan initiated coverage on the retailer by forecasting "a bumpy ride ahead."

"Costs and execution risks of internal initiatives should weigh on earnings," he said in the report. "We remain apprehensive about the precision required and the potential customer alienation."

But the retailer is sticking to its guns with Centricity. "Our commitment to this initiative and our excitement about the outcomes have never been greater," said Anderson.

"You had a choice whether to own this stock back when we went to noncommissioned sales, you had a choice to own this stock when we went to the superstore format," Darren Jackson, cfo and evp, finance and treasurer told analysts in May, after touring a test store. "You had a choice then and you have a choice now. You can own the stock at the beginning of the transformation, or at the end."

BET BUY | Richfield, Minn.,

YEAR FOUNDED: 1966

NUMBER OF STORES: 825 (including Canadian stores, Future Shop, Magnolia and studio stores)

AVERAGE STORE SIZE: 45,000 square feet

ANNUAL SALES: $24.547 billion (FY2004 ended Feb. 28, 2004)

HOME STRATEGY: To grow the enterprise through store expansion, entering new markets and better serving specific demographics, to win the customer with service and selection in the entertainment and electronics categories.

Source: Best Buy