Best Buy builds computers, entertainment software into mega categories - Computer Product Retailing - Company Profile

Discount Store News, Jan 2, 1995 by Pete Hisey

When chairman Dick Schulze and president Brad Anderson first contemplated Best Buy's shift from traditional superstores to warehousestyle megastores, the two were pretty sure the new approach would be a success. But could they have guessed that two product categories that were virtually nonexistent in the Best Buy stores of 1989 would account for half of the chain's sales in 1994?

Not likely. But in the past five years, the Eden Prairie, Minn.-based chain has grown its computer products and entertainment software businesses from near zero to mega categories that at times overshadow the core audio and video businesses that were, until recently, Best Buy's raison d'etre.

At nearly $2 billion of Best Buy's $5 billion in projected 1994 sales, and 35% of Best Buy's overall business, computing products now has become the chain's single leading category; Best Buy arguably is the nation's leading computer retailer, a position attained from a standing start in just half a decade.

Much of the credit goes to a young cadre of merchandisers who have built the department from a scattered collection of clones and a handful of software titles to a selection that rivals, and in some cases exceeds, that of computer superstores Comp USA and Computer City.

At the same time, the chain has built a far lower cost of doing business into its formula, which allows it to outprice most competitors while remaining profitable on computing's lean margin structure. Best Buy's cost of doing business averages about 13% of sales (Wal-Mart-type numbers), while most competitors (with the exception of Tandy's megastore concepts and a handful of others) average close to 20% and some approaching 30%.

That advantage is vital in the computer business, where the strongest brand name products have finally established a pricing equilibrium that returns low-cost retailers a very thin, but reliable, profit. Best Buy remains a pricing leader, but is probably more profitable in the category than all, or nearly all, of its competitors.

A criticism often leveled at Best Buy is that it serves only the first-time buyer; that those in the market for more advanced and presumably more profitable systems generally go elsewhere. But Best Buy says that might not necessarily be so.

Senior buyer, hardware Debbie Meagher notes that "our fastest growing segment is in Pentium, and notebooks are growing fast as well." All but one of Best Buy's 35 CPUs are multimedia models, she noted, and Best Buy, like the industry as a whole, "is going through a transition now. Pentium is really taking off, and as the price point becomes similar, we expect to see a rapid shift away from DX2."

Added senior buyer, software Gary Sousa, "we've consolidated floppy and CD titles because, frankly, most of our customers have CD drives now. This way, the customer can see everything that there is to see in each category, without having to check in two or three places." The company has started its own stickering program, with a bright silver CD shape, because vendor packaging too often downplays the format.

While Best Buy may cater to the novice at times, its product mix, with a dominant selection of hit software (2,000 titles at newer stores) and deep Pentium and feature-rich notebook assortments, addresses every major market segment. Pentium is so popular with Best Buy shoppers that its new Concept III stores now include a focal wall of Pentium overstock to emphasize its commitment to the product.

One measure of Best Buy's effectiveness in the computer industry is the rapid shift by competitors away from the national brands the company sells. A major entry into the market for smaller manufacturers has become "and we won't give it to Best Buy." Regional chains like Adray's of L.A. are jumping on Pionex, Canon and a bewildering array of non-branded and private label clones that pack a few extra features into a box that sells in the same range as the brands.

Meagher noted that Best Buy's brand assortment, which includes IBM, Apple, Packard Bell, Acer and Compaq, is performing well across the board. "There have been a few supply problems with IBM," she said at the November opening of the first Concept III stores in Los Angeles, "but we expect that those problems will be resolved by Christmas."

Meagher added that color inkjet printers are "going nuts," particularly a Hewlett-Packard unit at $279 with a $30 color upgrade.

But the future, she feels, is in video. "I think 1995 will be the year for video," she said. "At least, we hope it will be." Best Buy shoppers have jumped on every major innovation as it has become available, and she hopes to see the same happen with the flood of video-related products coming on the market.

Voice, connectivity and online communications are also showing growth, she said, and she expects those segments to continue their upward trajectories.

The Concept III store marks the full-scale introduction of on-site service and a one-price training program intended to serve the core customer better. Computer superstores have offered such services for years, but consumer electronics chains have been slow to bring them online. Many shoppers who buy a multimedia computer either upgrade the memory on the spot, or quickly return for a few more megs. Best Buy now offers free installation of RAM purchased there, and offers authorized service for the brands it sells.