Best Buy converts On Cue stores to Sam Goody name - Brief Article

DSN Retailing Today, April 22, 2002 by Laura Heller

MINNEAPOLIS -- Best Buy's On Cue stores are set to get a little more than the new product mix promised at the time of its acquisition. Beginning this summer, the chain will receive a new name, as well. All of the company's rural market On Cue stores will be renamed Sam Goody and remerchandised to reflect the change.

When Best Buy acquired Musicland in December 2000, chairman and ceo Richard Schuize was particularly enthusiastic about the growth potential of On Cue, Musicland's rural chain of 200 stores. He said at the time that On Cue will allow the retailer "to introduce new technology to rural markets Best Buy just couldn't get into," and announced plans to open as many as 750 new On Cue outlets during the next 10 years.

That expansion strategy still holds true nearly 18 months later. Allen Lenzmeier, Best Buy president and coo, said the company will open 30 small-market Sam Goody (formerly known as On Cue) stores this fiscal year and will continue to expand at a rate of 75 new stores per year beginning in calendar year 2003. He expects expansion of this format to max out at 750 units in 10 years.

But the expansion will go forward under the Sam Goody name. The company opened 17 rural stores last year under the new name as a test, and then converted 16 On Cue units earlier this year.

"The results were dramatic," said Jon Estes, senior vp of Sam Goody. "There's a certain amount of confidence in and respect that comes from the Sam Goody name in these markets."

According to Lenzmeier, the chain experienced higher sales in stores with the Sam Goody name than identical units with On Cue signage, virtually from the day each opened.

On Cue stores typically are 6,000 square feet and are located either 30 minutes or 30 miles outside a major metropolitan area, with an average local population of approximately 12,000 people.

Thanks to Musicland's Replay Rewards loyalty program, the company knew the majority of On Cue customers already were shopping at a Sam Goody in the closest mall. "On Cue really had no brand awareness," Estes said.

But Sam Goody offers cohesiveness for both the consumer and the company, as Best Buy can now take advantage of the advertising and marketing synergies that come with operating a single brand. Now the aggressive remerchandising of both chains begins in earnest. All 200 On Cue units will be converted and remerchandised by this fall, with less prerecorded music and more DVD and gaming products, both hardware and software. A limited apparel selection is being added, as well--mainly T-shirts and music-themed products that aren't readily available in rural areas.

Part of this remerchandising is being driven by a higher rate of decline in sales of prerecorded music than anticipated. Sales were down 5% to 6% on a unit basis for the overall industry, said Lenzmeier. Unit sales are forecast to be down 10% to 12% for calendar year 2003.

"But we can't sit on our hands," he said. "We are actively exploring ways to increase sales of music for the entire enterprise, but we must be pragmatic. Music sales will continue to be soft."

The company originally intended to shuffle Sam Goody's merchandise mix to include more CE products, such as portable audio. While this is still part of the plan, more gaming products are now a focus thanks to the successful launch of new gaming platforms in the past year.

"Faster-growing products, such as DVD software and video gaming, are going to offset the decline in prerecorded music," said Lenzmeier. The lower margins associated with these products will put pressure on Best Buy's gross margin in 2003, but should be offset somewhat by a marginal increase in comp store sales due to this shift, he told analysts during a conference call.

Wall Street doesn't appear to be worried. Salomon Smith Barney analyst Bill Sims said that although saturation is not an immediate issue, it is on the horizon for both Musicland and Best Buy stores. By renaming On Cue as Sam Goody, it will allow them to enter new markets and reach a more female-oriented customer base than Best Buy stores do. "We view that as a positive," Sims said. "It's another way Best Buy can diversify its revenue base."

But will the soon-to-be-former On Cue grow more aggressively than other Musicland formats. "We anticipate that the rural market stores will eclipse the mall units," said Estes. "There's a lot of uniqueness in those markets, and no overlap with Best Buy stores."