CASE SYNOPSIS BEST BUY CO., INC



GROUP CASE

SYNOPSIS BEST BUY CO., INC

BUS 478 // GROUP 3

JENNY LAM SHIYU LIU ALVIN MUI

RICHARD YUAN CONGCONG ZHAO

BUS478 // GROUP CASE SYNOPSIS

HISTORY/BACKGROUND

Best Buy Co., Inc. is a US based specialty retailer of consumer electronics. Headquartered in Richfield, Minnesota, it also operates in Canada, China, Puerto Rico, and Mexico. In 1966, Richard Schulze, along with his business partner Gary Smoliak, opened Sound of Music in St. Paul, Minnesota. The name "Best Buy" was first introduced in 1981 when a tornado hit Minnesota on June 14. In response to the tornado, Sound of Music introduced the "Tornado Sale" also known as a "Best Buy" which later became an annual event. By 1983, Sound of Music was rebranded as Best Buy Co., Inc., with the establishment of a flagship store in Burnsville, Minnesota. In 1993, Best Buy became the second-largest consumer electronics retailer in the US. Later in 1999, a partnership was established between Best Buy and Microsoft. The following year, was launched which marked Best Buy's entrance into the online-retailing business.

In 2001, Best Buy took its first step into the international market by acquiring Future Shop, Canada's own consumer electronics chain. After acquiring Geek Squad, the 24/7 computer-support force was introduced in every Best Buy in 2004. Continuing on its international presence, in 2006, Best Buy spent $180 million towards the acquisition of Jiangsu Five Star Appliance in China. This gave Best Buy the majority share of 136 stores across eight provinces within China. Later on in 2007, Best Buy opened its first retail store in China. Four years later, announcements were made regarding the closure of all nine Best Buy stores in China. Executives at Best Buy decided to focus their resources towards expanding the Jiangsu Five Star Appliances business. In May of 2008, a 50% share of The Carphone Warehouse in the UK was taken over by Best Buy for approximately 1.1 billion Euros. This purchase officially launched the Best Buy Europe joint venture. This joint venture led to the opening of many Best Buy superstores in the UK. Unfortunately, the eleven stores opened in the UK had to close down two years later due to poor sales and income.

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ENVIRONMENT

BUS478 // GROUP CASE SYNOPSIS

General Environment

Currently, North America, Asia Pacific, and Europe are the major retail markets of consumer electronics. The global economic recession in 2009 had a great impact on the industry in terms of both retail value sales and volume. However, with the GDP growth of 2% in the third quarter of 2012 and unemployment rate declining to 7.9% in October 2012, the US economy is slowly recovering. The ongoing Eurozone crisis has pushed the unemployment rate higher and caused a GDP decline of 0.7% in Q2 of 2012. Although Europe's weakness is no longer a regional crisis, it has already spread to other entrants of the global economy. Chinese exports to the Eurozone has decreased sharply in 2012, contributing to the country's GDP growth slowdown. Moreover, Japan's GDP has shrunk an annualized 3.5% in Q3 of 2012, which is the largest decrease since the March 2011 earthquake and tsunami.

The US federal government started the 2013 budget year with a $120 billion deficit, which is the nation's fifth straight $1 trillion-plus annual deficit. In order to re-balance the books during times of budget deficits, the government has announced an increase in levels of taxation and decrease in the level of public spending. The foreseeable downtrend in consumers' disposable incomes will likely lead to a sales decline for consumer electronics retailers.

On the other hand, the People's Bank of China has been cutting interest rates this year to soften the economic slowdown. In 2011, China has replaced the US in retail value sales of consumer electronic products to become the world's largest and most promising market. As we can see from the chart below, the increasing purchasing capability of Chinese customers bring large potential revenue for the retailers.

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BUS478 // GROUP CASE SYNOPSIS

CHART 1. CONSUMER ELECTRONICS RETAIL SALES 2007-2015

As a technology based industry, the consumer electronics retailers have to adopt the latest products in order to maintain their market share. The ability to keep their display fresh and up-to-date is critical to the retailers since the lifecycle of some of the new technologies are getting shorter and shorter. The rapid growth of the Internet, smartphone, and tablet technology is encouraging Internet retail sales in every possible way. In order to attract the young and tech-savvy consumers, retailers have been working to develop Internet retailing as a part of their multi-channel distribution strategy. Internet based retailing has increased significantly in all of the major markets from 2006 to 2012 and the trend is expected to continue in the future. With more and more females entering the job market and gaining financial independence, consumer behavior is expected to shift. Designs and sizes of products need to be improved in order to meet female consumers' needs. A global trend of aging population can be foreseen as a result of decreasing birth rates and progressing medical technologies which rises the importance of silver dollar (elderly), especially in the developed countries. Elder people have distinct needs from other age groups, requiring the manufacturers to develop more easy-to-use products. Retailers need to adjust their product collection in order to attract the elders.

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BUS478 // GROUP CASE SYNOPSIS

Industrial Environment

THREAT OF NEW ENTRANTS

The threat of new entrants is relatively low in the consumer electronics retail industry. The capital requirement to enter the market is affordable compared to other industries. However, it is hard for new entrants to expand their business scales considering the brand reputations established by the existing retailers. Consumers prefer to shop at large chainretailers believing that they can provide the latest products at comparably low prices with excellent customer service. Moreover, it is even harder for the startup retailers to attract customers by offering lower prices, since they have not yet established their relationships with the suppliers.

BARGAINING POWER OF SUPPLIERS

The bargaining power of suppliers in the consumer electronics retail industry is high. In order to attract customers, electronics retailers have to keep their inventory fresh with up-todate products. Currently, there are only limited number of suppliers. Examples of large suppliers include Apple, HP, Sony, Samsung, LG, and Panasonic. Suppliers can choose to distribute their products in several different stores which gives these suppliers a substantial control over the prices of their products.

BARGAINING POWER OF BUYERS

The bargaining power of buyers is relatively low within the industry. Since the purchasing volume of an individual or a family consumer is very low, the buyers do not have much influence on the prices. However, due to the low switching cost, retailers have to maintain their competitive advantages by offering lower prices and better services.

THREAT OF SUBSTITUTE PRODUCTS

The threat of substitutes is low in consumer electronics retail industry. Today, people are relying heavily on modern technologies and electronics. As a result, there are only few substitutes towards electronics, such as books and magazines. However, retailers are more

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BUS478 // GROUP CASE SYNOPSIS

worried about other substitute products, counterfeits. Counterfeit products have similar looks and functions as the original one but can be purchased at a much lower price. This situation is more critical in some developing countries with lower disposable income levels such as China.

INTENSITY OF RIVALRY AMONG COMPETITORS

The consumer electronics retail industry is highly competitive. According to Yahoo Finance (2012), major retailers within the industry includes Best Buy, Wal-Mart, Dell, RadioShack, Target, and Costco. Competition is fierce among rivals primarily because switching costs are very low. Consumers can choose to shop at any electronic store since the products are not differentiated: similar products are offered at almost all of the different electronic stores. As a result, companies are striving to maintain their market share by competing on prices and non-tangibles, such as customer service and goodwill.

COMPETITOR ANALYSIS

For many years, Best Buy's most direct competition comes from Circuit City, the second largest consumer electronics retailer. After Circuit City filed for bankruptcy protection in November 2008, Best Buy was able to capture 40% of its market share, making itself the largest specialty consumer electronics retailer in the world. However, Best Buy still has a significant number of competitors:

1. Unspecialized discount retailers such as Walmart and Costco. 2. Online retailers such as Amazon, eBay, and Dell. 3. Consumer electronics producer such as Apple and HP Below is the table containing key financial information of Best Buy's top three direct competitors: Amazon, Apple, and Walmart.

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BUS478 // GROUP CASE SYNOPSIS

TABLE 1. DIRECT COMPETITORS COMPARISON

Market Cap Employe e s Qtrly Rev Growth (yoy) Revenue (ttm) Gross Margin (ttm) EBITDA(ttm) Operation Margin (ttm) Net Income(ttm) EPS(ttm) P/E(ttm) PEG(ttm) P/S(ttm)

Best Buy 4.63B 167000 -0.03 50.70B 0.25 3.30B 0.05 -1.06B -3.36 N/A -1.87 0.10

Amazon 102.02B 56200 0.27 57.26B 0.24 2.09B 0.01 40.00M 0.08 2681.31 -619.83 1.75

Apple 496.38B 72800 0.27 156.51B 0.44 58.52B 0.35 41.73B 44.15 11.95 0.48 3.16

Walmart 228.85B 2,200,000 0.03 464.41B 0.25 35.99B 0.06 16.59B 4.86 14 1.51 0.50

Indus try 850.57M 17.00K 0.11 4.35B 0.29 95.82M 0.01 N/A -0.64 46.94 0.82 0.11

Walmart is a US based corporation that runs discount departments and warehouse stores in fifteen countries. Unlike Best Buy, a pure consumer electronics retailer, Walmart offers various products in different categories including apparel, appliances, automotive parts, electronics, furniture, and groceries. As a result, Walmart has a much larger market capital of $228.85 billion compared to Best Buy's $4.63 billion.

, Inc. is an American multinational electronic commerce company and also the largest online retailer in the world. Amazon not only sells consumer electronics online but also produces and sells its own consumer electronics--Amazon Kindle e-book reader and the Kindle Fire tablet computer. As online shopping is becoming a popular lifestyle these days, Best Buy is facing a worrisome situation of losing market share to its online competitors.

Apple Inc. is a US multinational corporation that sells its own designed products including consumer electronics, computer software, personal computers, MP3 players, and tablets. Apple is acting as both the supplier and competitor to Best Buy today. The company wants to reach a wider customer base by cooperating with different retailers and telecommunication companies.

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CURRENT SITUATION

BUS478 // GROUP CASE SYNOPSIS

Financial Performance

With new management in place, Best Buy aims to achieve an operating margin of 5-6 percent and invested capital of 13-15 percent over time. However, Best Buy is going through some rough times as the third quarter financial performance released in August shows negative results for the company. As of November 16, Best Buy's share price dropped by 9.84% to $13.75, which is the lowest price since 2002. Many factors could have led to this poor performance. Best Buy has difficulties competing with online retailers such as eBay and Amazon. Online sales for Best Buy only rose by 18% as compared to Amazon's growth of 48%. This decline in sale growth had resulted in a $1.2 billion loss in the previous year, which is a significant change from the $1.4 billion profit four years ago.

Retailers like Best Buy have long been affected by competition from online retailers because of the "showroom" trend, where customers would visit retailers to see the physical object, but buy the actual product from an online retailer that usually offers cheaper prices. With benefits like lower online prices and subscription services such as Netflix, the need for physical retailers such as Best Buy is diminishing. With the poor results in financial performance and the new management in place, many employees have begun making necessary preparations to protect their future by searching for employment elsewhere. Therefore, expenses have been on the rise as Best Buy has to train new employees. The increase in employee training costs is also part of the new CEO Joly's plan, "Renew Blue", which aims to provide expertise that customers cannot find online.

Retail Shrinkage

Best Buy has been experiencing pressures from their online and offline operations. As a result, the company has suffered major decline in profits, market value and major retreat from their initial global expansion efforts. After pulling all eleven stores from the European market, the US division has announced the closing of fifty "big box" superstores across the nation. This was not simply a cost-reduction solution, but part of the proposed strategy to

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