Schulze's innovation builds Best Buy into CE powerhouse - Dick Schulze; consumer electronics - includes related article on compact disc sales

Discount Store News, Dec 6, 1993 by Pete Hisey

To look at it, perhaps you would have thought catalog showrooms were tearing up the retail world a decade ago. Back in the mid-'80s, when Dick Schulze was formulating his plans for what would become the Concept II consumer electronics superstone, the CE industry was firmly locked into a showroom mentality not far removed from the catalogers of the day.m the catalogers

Schulze, however, noticed that the real growth in retail came from high-volume, low-service formats, particularly Wal-Mart and membership wholesale clubs. At the time his Best Buy chain was a small, local operation based in Minneapolis with outposts, in the upper Midwest. The industry was dominated by Circuit City, Silo, Highland Superstores, and The Federated, amdong others, all of which looked and acted pretty much alike.

As did Best Buy. Until the first Concept II store debuted in October 1989, there was little to distinguish Best Buy from its competitors, who were rapidly moving into the few major markets Best Buys served. Circuit City moved into St. Louis in force, setting off a bitter war taht still hasn't ended, and Best Buy's sole remaining urban markets (Milwaukee, Kansas City and Minneapolis) were threatened.

The first Concept II superstore debuted quietly in Rockford, Ill. in October 1989 (Shulze wanted to keep the concept out of the limelight until he could perfect it and vendors could be introduced to it in a non-threatened manner). As it was that Rockford store marked the first significant innovation in the consumer electronics industry in a generation, when the original showrooms replaced the old-fashioned TV stores from the '50s.

Only four years later, the first edition of Concept II looks crude. At 33,000 sq. ft., it was twice the size of most competitors (with exceptions like Tops, which along with Americand TV, pioneered the larger format) and was the first CE store to mass out its entire product line. However, its stark cement floor and dim lighting owed too much to the standard warehouse club, and several vendors (particularly Onkyo) refused to have their products displayed there.

Cruder or not, the first Concept II introduced a fistful of innovations overnight. The most obvious was mass market display, which dispensed with the pick-up dock, an exta step for consumers. But equally important were the use of noncommissioned sales help, which eliminated the high pressure sales customers dreaded at most CE stores, and the de-emphasis of service contracts, which, while highly profitable, alienated customers and, in the words of Best Buy president Brad Anderson, tended to drive out the chain's most conscientious and customer-friendly sales representatives. Best Buy put its sales help on salary, and service contracts (discounted to about half of what the competition charged) on self-service pegboards.

Today, Schulze credits Sears and Montgomery Ward, indirectly, with his decision to develop a new kind of store. "When they decided to go with branded merchandise, it made me dig more deeply into the motivation of the customer," he said. "There was enormous confusion in the market as the two of them rolled out ads that mirrored our own. Pretty soon, all the major players looked exactly alike--Circuit City, Silo, Polk Bros., ABC, Wards and Sears. We felt we were distinctive, but the consumer lumped us in with everyone else."

The result was a pie with indistinguishable pieces. "We had to differentiate ourselves to earn a larger piece of that pie, and in deference to the enormous buying power of Sears and Ward, we had to build something that not only looked different, but cost a lot less to open and to operate." The company conducted focus groups over the next year, and in 1989 the concept was born. Salariesd decompressed the traditional high-pressure environment, and self-service (with plenty of well-trained help standing by) eliminated the sometimes lengthy waif for merchandise once the sale was completed, addressing two major consumer gripes.

At the time the first unit opened, Best Buy was on the way to a healthy $Q3 million in sales on a base dof 49 stores. It had grown from less than $20 million and eight stores in 1983, when the company changed its name from Sound of Music and went public, but much of that growth was stimulated by the VCR boom.

Concept II set offf a sales explosion that has rocketed Best Buy into the national (and perhaps soon, international) marketplace, and Schulze has constantly tinkered with the format as the chain expanded. The floors replaced the bare cement, and lighting was improved drastically. The stores get larger, fixturing was improved, the company jumped into music software in a major way (building from about 7,000 skus in 1991 to as many as 65,000 this year) and vastly upgraded its computer department.

Today, Best Buy operates 150 stores, all now converted to the Concept II format (with Concept III in the works), and has the lowest cost of doing business in the industry (about 15% vs. 22% to 30% at most competitors). It now operates in many of the nation's most vital markets, including Dallas, Chicago and Atlanta, and in just a few months since opening, is a dominant force in new markets such as Detroit and Phoenix.