Customer-centric model future focus at Best Buy

DSN Retailing Today, April 25, 2005 by Laura Heller

MINNEAPOLIS -- Best Buy's customer-centric program is no longer a test but rather a platform on which the chain is basing its future. The company announced earlier this month that all its U.S. stores would incorporate at least some elements of the program by the end of this year.

"We believe so deeply in this transformation that we are going to accelerate it in [the current fiscal year]," said Best Buy ceo, Brad Anderson. "We are planning for all of our U.S. Best Buy stores to convert to our customer-centric operating model within three years."

During this current fiscal year, Best Buy will accelerate the customer-centricity operating model rollout from 85 U.S. test stores in three markets to an additional 150 to 200 units beginning later this spring. Additionally, all stores will adopt some elements of the program, which targets five key customer segments: affluent professional males, young entertainment enthusiasts, upscale suburban moms, families who are practical technology adopters and small businesses with less than 20 employees.

By the end of the fiscal year, the company expects to be operating 250 to 300 customer-centric stores including new stores slated to open this year.

All U.S. Best Buy stores will begin to receive the tools needed to implement centricity including employee training in financial terminology and processes, a new customer service model, enhanced employee management techniques and a deeper understanding on individual customer segments, according to the company.

"We believe this new operating model offers our customers a richer in-store experience, including better shopping assistance as well as more of the products and services they want," said Anderson. "Over time, we believe that our customer-centricity work will help us attract new customer segments to our stores, which leverages our existing assets. In addition, it gives us an engine for continuing to innovate and respond to changing customer needs."

Centricity is also yielding financial results. The 67 segmented stores converted last year outperformed the rest of the chain, producing comp-store gains during the fourth quarter of 8.4% compared to 2.3% at other stores. And, gross profit rate was higher due to a more profitable merchandise mix, according to Anderson.

But centricity is still not without risk. "Customer centricity is a conundrum for Best Buy," said Dan Wewer, analyst with CIBC World Markets. "While the acceleration in customer-centricity store rollouts could help lift [same-store sales] and gross margin, it is at the sacrifice of higher expenses and lower earnings growth in the short term. By the end of 2005, 37% of U.S. stores will be segmented stores."

Best Buy has stated that the higher initial operating costs in the segmented stores will be quickly offset by the sales gained from higher-gross-margin products and ramped-up overall sales as the stores mature. "The company believes the profitability profile of segmented stores will improve after the expected three-year conversion process is complete, similar to its historical experience with new store openings," the company said in a statement.

Expenses are also expected to be higher as Best Buy expands its Geek Squad business. "Consumers' response to Geek Squad has been tremendous," said Anderson. The chain will expand its team of service agents from 7,000 to 12,000 in the current fiscal year and will add new services for segments including network installations, server installations and server maintenance services to small businesses in select markets, Anderson said.

Finally, Best Buy announced it would phase out mail-in rebate offerings over the next two years and told analysts it would explore ways to offer more value to consumers and compete with retailers who may still offer such rebates. Several analysts who follow the CE sector speculate that Best Buy's move to end rebates may spur other retailers to do the same as federal regulators have begun to investigate consumer complaints and sue vendors and retailers for better compliance.