Magnolia fills out Best Buy family - Magnolia Hi-Fi - Brief Article

DSN Retailing Today, April 2, 2001 by Laura Heller

SEATTLE -- When GE giant Best Buy announced last December that it was buying Seattle-based Magnolia Hi-Fi, many in the industry were hard pressed to identify the regional retailer. Privately owned and very high-end, 13-store Magnolia has been a destination for audiophiles since 1954. And while many might question the fit and say the two have little in common, this is exactly the way the companies want it.

Magnolia is so high-end that there is little to no overlap in product mix or services with its new parent company. On average, Best Buy's highest priced product is typically the lowest-end product at Magnolia. "Where they leave off, we begin," said Jim Tweten, president of Magnolia Hi-Fi.

Custom-installation projects can cost upwards of $0.5 million with labor and $100,000 home-theater systems aren't uncommon. A meeting room used to go over blueprints and product choices for custom jobs is so high tech that it makes a Microsoft board room look like a fourth grade class.

Product is showcased in individual listening rooms for both audio and video, as well as mobile systems for the car. Product is then grouped into three categories: low-, mid-and high-end.

Entry-level systems range from $1,500 to $2,500, but the majority of sales are in the midrange, where speakers start at $1,000 a pair.

Higher-end product includes $10,000 amplifiers, $3,500 speaker cables, German-made TVs and hand-built Italian speakers made with cured woods and granite bases. "This is not something that we just have; we actually sell it," said Rick Moore, store manager at the company's flagship location, next door to the design center.

In spite of the high prices, the store is decidedly not stodgy. "One thing we are not is elitist," said Moore. "If we did that we would shrink our customer base."

Custom installation comprises about 15% of the business, according to Tweten, and "it's the fastest growing part of our business." Despite a worsening economy and a home market that includes such hard hit companies as Amazon.com, Microsoft, Real Networks and Infospace, the company has yet to experience a noticeable slowdown in this business.

The retailer does carry some more mundane products such as cordless phones and clock radios as "convenience items," Moore said.

Of course the phones are all in the highest price range and the alarm clock is $300 with his and her units, a CD player and a subwoofer that fits under the bed. "We don't sell lower priced product; we don't participate in that commodity end of the business," he said.

(Editor's note: About this time in the store tour, the floor started to shake, the lights began to swing and everyone made a mad-dash for the door.)

Best Buy has no intention of tinkering with Magnolia's format or business model. Current management will remain in place, and the established growth plan will continue on schedule.

Magnolia currently operates 13 stores: seven in Seattle, two in the San Francisco Bay Area, two in Portland and one in Spokane, Wash. Plans are to open three to four additional units next year near San Francisco.

Expansion is one area where synergies with its parent company are expected to come into play. "Best Buy is known for being a very sophisticated company in the analysis and selection of new stores," explained Thomas Conrad, Magnolia Hi-Fi senior vp and coo. "In our decisions about new Magnolia Hi-Fi locations, we think we will benefit from that."

The chain is already utilizing some of Best Buy's resources, particularly in advertising. The retailer is now able to run weekly Sunday inserts by piggy backing Best Buy's contracts to reduce the costs of paper, printing and insertion rates. "We expect there will be other ways in which Best Buy's purchasing power can help us," said Conrad.

Going from a privately-held company to a public one practically overnight will of course require a sizable learning curve. Decisions have yet to be made about how to break out sales from Best Buy's different businesses (which also include Musicland stores and its four formats), track inventory or compute gross margin. Still in its "quiet period," as the deal officially closed in January, these are subjects management is still working out.

Although Best Buy management has promised it would not interfere with the way Magnolia runs it business, it clearly has high hopes for it.

"It's another brand that addresses a different segment of the market," said Allen Lenzmeier, Best Buy president of retail stores, at a recent investment conference. "This is a strategy that eventually we think we can roll out on a national scale."

But for now, Magnolia HiFi is getting used to its newfound spotlight. "It truly has been quite exciting and quite fun to have these extremely successful and sophisticated people [offer] an organization that we can access," said Conrad. "It's like befriending the biggest guy on the playground."