Best Buy to rely on software, appliances - includes related article on Best Buy's foray into gourmet kitchen products marketing - Company Profile

Discount Store News, July 1, 1996 by Pete Hisey

EDEN PRAIRIE, MINN. - Best Buy's mission over the next three years is to become the No. 1 player in the entertainment software industry and the No. 2 retailer of major appliances in the United States - and to become one of the most profitable consumer electronics chains ever.

That may be a tall order, but that was chairman Dick Schulze's message to shareholders at the company's annual meeting June 19th.

Vendors and shoppers have reaped the real benefits from Best Buy's meteoric rise to $7 billion in sales, Schulze said, "but employees and shareholders have not profited to the same extent."

The company, as previously announced, will slow its store growth from 50 or so a year to about 25 to create the "pause that refreshes," Schulze said, and it will concentrate on operations and productivity, thereby improving a chronic out-of-stock problem and boosting sales.

Meanwhile the chairman is aggressively pursuing upper-end brand names and more fully featured, margin-rich products, particularly in appliances, video and audio.

Exec vp, marketing Wade Fenn noted that Nikon has just signed on as a vendor, and prior to the meeting, senior vp Phil Schoonover said that Best Buy is close to agreements with major audio vendors that will place new upper-end products on-shelf by the fourth quarter.

Failing that, the company may shift to "Plan B" and negotiate with existing vendors for exclusive products, as it has done with its Eoson and Cambridge speakers and most recently with Magnavox, which has made Best Buy the only distributor of its MX Series video line.

A high-end car audio line is also on the shopping list, Schoonover said.

President Brad Anderson laid out four technological advances that will spur sales in the coming years. DVD (digital versatile disk) topped the list, followed by flat screen TV, cellular communications, and convergence of the PC and consumer electronics.

Schulze noted that these and other changes in Best Buy's business mark a "new road," one that will be as significant as the chain's heralded shift to its revolutionary Concept II prototype, from which virtual overnight success and subsequent profitability stagger sprung.

The chain has relied too heavily on expected price advantages as Best Buy grew - advantages that never materialized as national competition grew, Schulze said.

Best Buy has now brought in consultant Arthur Andersen to revamp its outmoded systems and institute a best practices culture in areas in which the chain is weak.

Staying in-stock for a $7 billion chain requires skills that "go way beyond present management's experience," Schulze conceded. The chain went outside the company for seasoned pros, like former Payless exec Kevin Freeland, to improve merchandise flow.

"We plan to go from 75% or so to much loftier heights," Schulze said. "Companies that follow best practices are in the high 90s."

The goal, he said, is to reduce "disappoints" and boost rate-of-sale dramatically. "It may not happen this year or next year, but by `98 we'll see dramatic results. There are immense sales opportunities out there," he said.

The company also plans to focus on computer software, where Best Buy is too often sold out of hot new titles.

According to Anderson, the company will now move to flush out slow-moving titles and clear shelf space for more productive ones. Best Buy will also increase its budget and value lines.

Investors have been skeptical about Best Buy's ability to improve profitability. It's seen as too dependent on computer products and too thin in profitable areas like major appliances and big screen TVs.

Schulze responded that "all the pieces are in place" to make appliances a success story "after 11 years of failure."

The chain now has eight of the top 10 appliance brands, up from two a year ago. It will boost its sku count to 201 from less that 150, and it hopes to boost its $500 million in sales last year to over $1 billion, which will push it past Circuit City and Montgomery Ward (about $1 billion each). Sears, at $4.5 billion, is probably out of reach.

Appliance sales are projected to rise from 7% of its total sales to 9%, while computer sales should drop from 41% to 38% of sales, with a rise in sales of more profitable products like peripherals, memory, training classes, service contracts and in-home setup.

Extended service programs as a whole add something to the profit picture. A new third-party program from A1 Warranty Guard will allow Best Buy to recognize profits when sold, and the company is raising prices as well. Its $39 flat price left too much money on the table, Schulze said, since consumers rarely decide to purchase an ESP until after purchasing an electronics product. The $39 dollar price point, therefore, wasn't doing its job in attracting shoppers.

With products getting more complex, ESPs will no longer sit passively on the shelf, Schulze said. The chain will still undercut competitors, but prices will rise to $99 on computers and projection TVs and $79 for camcorders.

Can Best Buy really boost its profitability to the best in the industry, as cfo Allen Lenzmeier predicted?