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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