Best Buy Adds New Services

These are risky moves in the ever-shifting tides of retail. The company is spending an estimated $80 million a year on what it's calling "customer centricity," a massive effort to identify and serve its most profitable shoppers by rebuilding stores, adding to staff and upgrading wares. Best Buy has little choice. It also has some experience in navigating through the most treacherous storms. Twenty-two years ago, when the chain was called Sound of Music, a tornado ripped through its largest store, in St. Paul, resulting in a $200,000 loss for the year and a near-brush with bankruptcy. "We'd forgotten to buy business-interruption insurance," says Anderson. The water-damaged inventory was sold at a "best buy" sale — resulting in a cash bonanza for the company and a name change.

Best Buy's first superstore opened in 1984, a carbon copy of Circuit City Stores, which was then nearly 40 times its size. A year later Best Buy went public and began a climb that sent it past its chief rival in 1995; it has enjoyed the lead ever since. Then came the next calamity — a 1989 price war with Highland Superstores, which hurt Best Buy's bottom line and shoved Highland into bankruptcy. Emerging from the cocoon this time, Best Buy was then a bare-bones, warehouse-style electronics retailer and looked it every square inch: open ceilings, concrete floors, fluorescent tube lighting. Staff on commission gave way to hourly employees who did their best to make themselves invisible to shoppers simply wanting cheap electronics. Best Buy grew rapidly from sales of $240 million in 1987 to $7.2 billion in 1996. And nearly drove itself off a cliff. A year later Best Buy squeaked out a profit of $1.7 million on $7.7 billion in sales. Why? A problem familiar to watchers of Motorola camera phones: Best Buy missed out on the introduction of the new Intel MMX microchip — powering PCs that could run more sophisticated games, better graphics and music synthesizers, and video conferencing — during the Christmas season. Cheap credit promotions by others eroded Best Buy's top line.

Time for another makeover. Trimming overhead and revamping its supply chain, the company reshuffled its product categories into home office, electronics, entertainment software and appliances. Customers saw the difference, as higher-margin DVD players and camcorders replaced PCs, and they bought. Best Buy's gross margins climbed from 13.5 percent in 1997 to 21.3 percent in 2002.

During those fat years the company for the first time reached outside for growth, spending $1.2 billion to buy three electronics and music retailers — with mixed results. Magnolia Hi-Fi, a chain on the West Coast, and Future Shop, in Canada, put Best Buy into higher-end electronics, wares made by the likes of Mitsubishi and Klipsch. That proved to be a good move against Ultimate Electronics and other pricey competitors.

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