Best Buy Adds New Services

Acquiring Musicland, which operated as Sam Goody, Media Play and On Cue stores, proved less of a bargain. The acquisition was supposed to give Best Buy a national presence in malls and greater concentration in so-called packaged media. Although CDs and DVDs were a break-even proposition, they could stimulate sales of CD and DVD players. Moreover, Musicland's 1,300-plus stores would give Best Buy sufficient heft to negotiate bigger discounts with record companies and Hollywood studios. Or so the theory went. But weak sales, high rents, music piracy and a post-Sept. 11 drop in traffic forced Anderson to dump the money-losing chain in June 2003 for $500 million (in assumed debt alone), booking a $70 million charge to earnings.

Not a huge setback, in Anderson's view, but an opportunity … to refocus. Musicland fiasco aside, maybe there was a better way to combine hardware and software sales — and marry them to services. The slippery business of retail always comes back to figuring out what the shopper wants. So, store by store, Best Buy began reviewing each of its 25,000 or so SKUs to see what sells and what doesn't in order to adjust merchandise according to the income level and buying habits of shoppers at every location. To help sketch that customer profile, Anderson last summer introduced a Reward Zone program, which costs $10 to join and gives $5 in gift certificates for every $125 worth of purchases. By year-end the company was predicting 2 million members. That comes at a cost: up to an estimated half a percentage point of full-year gross margins, which were 26 percent for the year.

One thing learned from such numbers games and focus groups was the near universality of customer frustration. People loved the idea of buying the latest gadgets. But once they left the store and opened the box, many of them didn't know how to hook up the home entertainment center or how to make the remote-control surround-sound system talk to the DVD player. Digital warriors need some form of boot camp.

So changes in staff, as well as inventory, were built into Best Buy's new 45,000-square-foot stores, like the one in Maple Grove. Out went the lower-end toasters, blenders and coffee-makers (more pricey versions stayed). Photo-finishing labs replaced racks of CDs in the center of the larger stores, allowing customers to get instant prints by popping a memory stick into a self-service printer. And everywhere the eye alights, high-ticket office and home entertainment equipment are found. Sales folk might push a new DVD player on the poor schlub who comes in to buy the $30 set of the recent Rolling Stones tour, a four-disk DVD box set produced for and sold exclusively by Best Buy, until February. But they're really after bigger fish.

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