Best Buy hits San Fran; NY next - Statistical Data Included

Discount Store News, Sept 6, 1999 by Laura Heller

SAN FRANCISCO -- Best Buy officially debuted in San Francisco two weeks ago and then nearly upstaged itself by simultaneously announcing the chain's long-awaited entry into the New York metropolitan market.

Seven stores grand-opened in the Bay Area Aug. 20: Dublin, Milpitas, Pinole, Pleasant Hill, San Carlos, Mann City and Santa Rosa. Best Buy plans to have 16 stores in this market by holiday 2000.

As of yet, there are no locations in the city of San Francisco itself where real estate is pricy and suitable space hard to come by. But chairman and ceo Dick Schulze told DSN that plans for two to three locations in the city are currently in the works. "Don't be too surprised if some combination of the small-store format surfaces here in San Francisco," he said.

This new format, which debuted last month in two markets--Mankato, Minn., and Bowling Green, Ky.--will play a prominent role in Best Buy's expansion. Limited retail space will pose a problem in New York, and the smaller, 30,000sq.-ft. unit will likely be employed there as well. Best Buy has already signed leases for five locations: Westbury, Bay Shore, West Nyack, and Kingston N.Y., and Woodbridge, N.J. Plans call for stores to measure either 45,000 sq. ft. or 30,000 sq. ft., depending on available space.

Best Buy also upped the number of stores it plans to open in the current fiscal year, increasing the total from the 45 to 50 stores previously announced to 50 to 55 stores with the New York expansion. This, in turn, will increase its long-term sales projections from $20 billion by 2004.

According to Rebecca Yarchover, an analyst with US Bancorp Piper Jaffray, "There's the potential for the whole chain to increase the return on investment" with the small stores. Cost-wise and labor-wise the formats can be more efficient and profitable than the larger, standard store, she said.

The two stores already open "are running considerably ahead of expectations," Schulze said. However, he was quick to point out that "it's too early to tell how much is Back-to-School or grand-opening hoopla." A third site in College Station, Texas, opened the same day as the San Francisco stores. Additional sites are in the works in Longview, Texas; Hyannis Port, Mass.; Concord, N.H.; Kennewick, Wash; and Billings and Missoula, Mont.

The Internet will also play a large role in Best Buy's strategy, particularly in these stores. For one thing, integrating kiosk-type ordering will give customers access to the 20% of inventory eliminated from the smaller units. But the retailer is still keeping the details of its expanded on-line strategy under wraps, although Schulze did say that the revamped site will have new screens, new linkages, new services and new product assortments.

"We're hoping to have the first version of the new [Internet] direction out by the holiday season," Schulze said. Everything will be linked to the retail stores.

The Bay Area stores represent Best Buy's most updated version of its Concept 4 format.

The focus here is in creating centers or clusters of products that require more intensive service. The latest version of the format further breaks out some technology categories. Camcorders and digital cameras have been moved to a separate dedicated service area away from the department that features wireless phones, handheld devices, satellite services and broadband products, which has been expanded.

"This area is really going to explode," said Wade Fenn, executive vp, marketing. Additionally, all cameras priced less than $150 have been moved to a self-serve display with models mounted on stands and boxes stacked underneath. The section is adjacent to a service counter but no longer has a dedicated sales staff

Product mix in the northern California stores is only slightly specialized, given the techno-savvy population and proximity to Silicon Valley. In a meeting just prior to the store openings, Schulze told analysts that he expects this market to represent 20% of Best Buy's overall business potential.

With the New York market entry imminent, Seattle and Portland are the only remaining major U.S. markets left to conquer. That raises the question of international expansion. Schulze has said that Best Buy will eventually become a global retailer and that certainly Canada is the first logical step in that growth.

But the company has a lot of room to expand within the United States. Management has stated it could open more than 250 additional stores in the United States before it considers expanding over the border.

Don't dismiss the possibility of it happening sooner. Schulze was tight-lipped about the New York announcement, dropping no hints during an interview barely an hour before the news was released. He adopted the same stance regarding the rollout of the small-format stores and the national launch of subsidized PCs.