Best Buy expands into D.C., L.A.; drastically cuts extended warranty prices - Washington D.C., Los Angeles, California

Discount Store News, Nov 21, 1994

WASHINGTON -- Best Buy chose the openings of eight almost-Concept III megastores in the Washington/Baltimore market in late October to launch another strike at the heart of its superstore competitors.

The company introduced a new extended warranty program in which every service plan in the store (up to four years in duration) is priced at $39 or less.

That compares to as much as $150 for identical programs elsewhere.

Coupled with aggressive advertising of the new policy, the pricing could hurt competitors like Circuit City that rely on the near-keystone margins on service plans for all (and in many cases, more than all) of their net profits. According to Johnson Rice analyst David Childe, Best Buy's margin on its service plans will dip to 25% or less from 45%, compared to the 70% to 80% many superstores are realizing.

The company introduced a similar pricing policy when its first full Concept III stores debuted two weeks later in Los Angeles on Nov. 7.

The company will then probably roll out that policy nationwide.

Johnson Rice's Childe also noted after the opening that Washington-area Best Buy stores, which face only aging Circuit City stores in the market, were expected to gross close to $40 million per store in the affluent market, about $10 million more than Best Buy's average. The lack of competition should also keep margins above chain averages, Childe noted. He further added that in the long term, competitors may be forced to lower their warranty prices, and to raise product prices to make up for those lost sales.

Best Buy, which several years ago weaned itself from the service plans as a profit center, will then enjoy an even more significant price advantage than it does today.

Best Buy can afford to cut profits on its service agreements to the bone because its sales staff is uncommissioned, unlike most competitors' sales staffs whose commissions rely on the sales of accompanying service plans. Best Buy also announced that October comparable store sales rose 26%, with total sales rising 75% to $379 million.

Year to date, sales rose 74% to $2.6 billion, compared to $1.5 billion last year, and same store sales have risen 25%. Same store sales have been paced by strong demand for computers, which rose 39% in same store sales despite usual seasonal and in-store promotions.

But all was not rosy at the chain. Best Buy announced the issuance of $230 million in MIPS securities, and Moody's Investors Services immediately downgraded its opinion of the company from neutral to negative.

The securities were rated at ba3, which Moody's said recognizes both Best Buy's competitive strengths and the risk associated with aggressive expansion, "growing dependence on low-margin computer sales," and increasingly competitive markets.

The negative rating was triggered primarily by pressure on margins industrywide, a recent buildup in inventory, and the much higher expense of operating in costly markets like Los Angeles and, sometime in the future, New York.

Metro N.Y. Trader Horn files for Chapter 11

HASBROUCK HEIGHTS, N.J. -- The anticipated shake-out of New York metro area CE chains has begun.

Trader Horn, the 16-unit CE retailer based here, filed Chapter 11 earlier this month. Most of its stores serving New York City, Long Island, Westchester and Rockland Counties, and Northern New Jersey will remain open, said Steven Kirschner, executive vp.

The company declined to disclose how many of its units would darken, but sources indicate anywhere from four to seven stores could be shuttered. Four stores that will most likely survive, said local sources, are three units in Bergen County, N.J., and a Manhattan store.

Trader Horn will concentrate on its core market and re-focus its advertising. Mishandled advertising was a factor in the Chapter 11 filing, Kirschner told local papers. The New York Times reported that the retailer owed creditors $32 million.

This appears to be the first casualty in what is sure to become a major battle for New York CE customers. Entrenched local chains are bracing for competition from newcomers or soon-to-be-entrants like CompUSA, Computer City, Best Buy, and The Incredible Universe.