Best Buy planning expansion: new format stores seen as key to beating slowdown - Best Buy Company Inc., discount consumer electronics stores

Discount Store News, Jan 7, 1991

Best Buy Planning Expansion

New Format Stores Seen as Key to Beating Slowdown

MINNEAPOLIS -- Despite the tough consumer electronics market of late 1990, Best Buy plans to expand aggressively in the coming year.

According to executive vice president of marketing, Brad Anderson, "We plan to pick up business during what we think will be an overall slowdown. Those retailers who can hold on will be well-positioned for when the economy turns around."

Long-term, he said, the prospects for the consumer electronics industry are bright. "There are a number of exciting technologies coming down the pike," he said. "HDTV, DAT, CD-I and advanced computers all have enormous potential; perhaps none of them, except possibly HDTV, will ever equal the VCR, but in their totality, they will have at least as much impact."

But to reach that future success, CE retailers will have to spend a few years, or at least several months, in a grueling struggle.

Christmas sales, Anderson said, improved over the final two weeks leading up to the holiday. "But that's not from a particularly great base," he added. "We were doing great until mid-October, and then things just slowed down. We're just seeing an improvement [in mid-December]; we're a little ahead of November and the first week of December."

And the market looks even worse for 1991. "We think there will be a significant slowdown in the economy, starting right after Christmas," Anderson said. "We're selling products with a large installed base and a long life expectancy. I expect people to make do with what they have."

But Best Buy plans to exploit what it sees as its advantages in a down market. "Our new format stores are performing significantly better than older stores," he said, referring to the company's 20 or so warehouse style Concept II outlets.

"We think we have a head start in serving the customer the way the customer wants to be served, upon customer demand, not our demand." The new stores have moved away from the hard sell dominant in the CE industry to "silent salesmen," who react only upon customer request.

"Our focus group research showed us that the customer wants to be left alone to a certain extent," Anderson said. "Our industry has become dependent upon the extended warranty; that's where our profit, to a large extent, has come from, and that has required a great deal of sales help. We're moving away from that approach, particularly in light of the FASB decision on accounting for those sales."

Instead, the company is looking for ways to become more productive. The new stores highlight self-service, for instance. "Most of the businesses in this industry are essentially catalog showrooms," Anderson said. "And our research shows that customers don't like the extra steps in actually getting their merchandise. In our stores, goods are massed out, and a number of steps are cut out."

According to George Foutz, regional vice president responsible for Texas and four Midwest states, who has supervised the opening of virtually all of the Concept II stores, "the results at the new stores have been terrific. A major advantage is that customers stay in the store longer because of the lack of hassle and confrontation.

"We've tripled our holding time, which means that shoppers are seeing our entire selection, not just the one product they came to look at."

Customers are also trading themselves up, ostensibly the primary reason to employ floor salesmen. "We're definitely selling a richer mix in the new stores," Foutz said. "The customer today is more knowledgeable than ever before, and he or she will buy what they can afford."

Best Buy plans to open some 30 stores over the next two to three years, with much of that growth coming in the Texas market. Leases have already been signed in San Antonio and are expected in Austin, buttressing the company's presence in the Dallas metroplex.

"Of course, that's subject to revision, depending on the economy," Anderson said. "We plan to be very careful, very prudent about expansion."

The chain doesn't plan to retrofit its traditional stores, at least in the near future. "We converted St. Louis to fight off Circuit City when they moved in," Foutz said, "but in the present thin market, we'd have to have pressing reasons to dedicate that kind of capital expenditure. Where our older stores are dominant, there's really no need to change over."

The "prudence" Anderson referred to goes for business as a whole. "We're going to be very conservative in the coming year," Anderson said. "Margins have been dropping in recent months, partly because of pressure from Sears and Ward. Revenue is still reasonably strong, but we're not seeing a lot of profitability.

"Texas has been a good market for us, but otherwise, the trend seems to be nationwide. So we're going to move very carefully."

That will mean concentrating on product areas that are growing. "Camcorder sales, particularly 8mm and compact VHS, particularly JVC products, have been terrific," Anderson said, adding that supplies of Sony 8mm camcorders have been tight heading into Christmas.