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Will Best Buy Survive Amazon?

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16:02   |   May 30, 2019

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Will Best Buy Survive Amazon?
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  • Once an online bookstore, Amazon now sells just about anything you would
  • find in a home or business, and has developed a formidable formula.
  • Meanwhile storied and once dominant U.S.
  • retail chains everywhere are struggling.
  • Faced with monumental shifts in the way consumers shop. Once
  • remarkably durable brands have shuttered their stores, which sometimes
  • number in the hundreds.
  • The more than century-old retailer, Sears, once the country's largest
  • chain, filed for Chapter 11 bankruptcy in 2018.
  • Just one of the many victims of the so-called retail apocalypse.
  • There is no question, the world is dramatically different than it was
  • even a decade ago.
  • So how do traditional retailers survive?
  • Some answers may lie with Best Buy.
  • It might seem to be a relic of a bygone era.
  • Much of its business model is based on large format physical stores.
  • Pretty much the very definition of what is failing across the industry.
  • But Best Buy is killing it.
  • Shares are hovering near an all time high fueled by a transformation
  • centered on in-store service and stocking its shelves with new key
  • products in health care and smart homes.
  • It is a rebirth many in the industry consider miraculous.
  • In 2012, Best Buy was in dire shape.
  • Sales were plummeting, morale had tanked, and executives were scrambling
  • to save the company.
  • Within the space of just a few years, a retail giant that employed
  • nearly 170,000 people and dominated its industry, nearly died.
  • Then, somehow, it didn't.
  • While retailers such as Toys R Us bit the dust, Best Buy bucked the
  • trend.
  • Now the CEO who pulled off this miraculous turnaround is stepping down,
  • and the company's CFO will now steer the revived retailer and fend off
  • still growing threats.
  • So how did Best Buy engineered such a renaissance?
  • Is its massive recovery sustainable?
  • And can it be replicated?
  • Best Buy's origins can be traced back to St.
  • Paul Minnesota in the late 1960s.
  • Electronics salesman, Richard Schultz, founded a store in the area
  • called Sound of Music.
  • It sold stereos, speakers, vinyl records and other audio equipment.
  • It grew into a chain but the business found greater success after
  • Schultz adopted the big box format.
  • The Best Buy concept was born, and Schultz renamed the store in 1983.
  • Two years later it went public.
  • Growth was slow at first in its first decade as a public company.
  • Its stock only peaked at a high of five dollars and three cents in late
  • 1994.
  • But over the next 20 years, Best Buy became the largest U.S.
  • seller of electronics in the Golden Age of America's big box retailers.
  • These big stores, modeled on warehouses, really rose to dominance in the
  • 1980s and 1990s and they spread across segments.
  • Home Depot and Lowe's became major home improvement stores.
  • Petco and Petsmart ruled the pets category.
  • Stores such as Bed Bath and Beyond and Linens and Things dominated home
  • goods.
  • Best Buy was considered a best in class retailer and the growth was
  • spectacular.
  • Best Buy had 679 stores at the end of 2003.
  • By the end of 2009, it had 3,889.
  • Sales climbed from roughly 21 billion to 45 billion over the same
  • period.
  • Its stock jumped to above 50 dollars a share.
  • But Amazon was starting to rise in the late 1990s and it seemed to offer
  • deals too good to refuse.
  • It could sell a customer the same exact products they could find in a
  • store, but often at lower prices and with free shipping due to the
  • nature of e-commerce.
  • Amazon often did not have to charge sales tax which could make a huge
  • difference in price on high ticket items like televisions and
  • appliances.
  • Amazon's first wave of success began to shake out smaller competitors
  • such as Comp USA and Twitter.
  • But it took a bit longer and a few other blows to dent bigger players
  • like Circuit City, which during Best Buy's heyday, was its biggest
  • competitor in 2008.
  • Circuit City was fending off an active investor who wanted to shake up
  • its management.
  • Then the financial crisis hit and sparked a slowdown in consumer
  • spending that culminated in the Great Recession in November 2008.
  • It filed for bankruptcy, and with the lack of credit, was forced to
  • liquidate.
  • Circuit City closed its last 567 stores in 2009.
  • At that point, the retailer had been around for more than 60 years, and
  • it had more than 700 stores in its heyday.
  • Circuit City's demise gave Best Buy a bit of a tailwind.
  • Industry sales were down about 10 percent that year.
  • But as Circuit City began closing up stores, shoppers shifted to Best
  • Buy. The result: Best Buy's sales fell only five percent.
  • It had gone from being the biggest of several national electronics
  • chains to the only one left.
  • But, competing with fellow brick and mortar stores like this was what
  • Best Buy was used to, and the rapidly ascending Amazon was a another
  • beast entirely.
  • Analysts who follow Best Buy say the company might have underestimated
  • the threat from the Seattle based e-commerce giant.
  • The Amazon threat, for years, had been masked by the arrival of the flat
  • screen television.
  • Massive technological leaps to sleek televisions with crystal clear
  • pictures motivated people all over the country to go out and buy new
  • sets.
  • Perhaps the best years for the product cycle were 2005 and 2006.
  • B
  • ut retailers benefited for the better part of the decade as e-commerce
  • continued to quietly strengthen its grip on the market.
  • But by the time the Great Recession began to hit, Best Buy started to
  • suffer. A slowing housing market in 2007 hit sales of appliances and
  • large home electronics. The
  • following financial crisis dried up credit and tightened consumer
  • spending around the country.
  • Finding the lowest prices possible on what items a buyer could afford
  • became even more of a priority.
  • Best Buy same store sales fell 1.3
  • percent in 2008.
  • Things turned around briefly in 2009, but same store sales fell again
  • every year from 2010 through 2013.
  • Best Buy went from pulling in 1.2
  • billion dollars in net income in 2011, to a one billion dollar loss in
  • 2012, and another forty three million dollar loss in 2013.
  • Other things happening at the company did not exactly inspire
  • confidence among investors.
  • Then CEO Brian Dunn a lifelong best buy employee who had started as a
  • blue shirt worker on the store floor resigned in 2012.
  • This came after news surfaced that he may have had a relationship with
  • a younger female employee.
  • The fallout from the episode led Schultz to resign as chairman in 2012
  • Best Buy's board brought in Zubair Joly a relative outsider who had
  • previously worked at McKinsey and Vivendi where approved the launch of
  • successful video games such as World of Warcraft.
  • It is Jolie's tenure that is credited with turning the company around
  • when he joined.
  • It was a very tumultuous time at Best Buy as a retail analyst with
  • almost 20 years of experience.
  • There are very few retailers that have experienced going through such a
  • period of hatred and concern as Best Buy.
  • I was going through in 2012 if you looked at valuation metrics the
  • stock was priced as if this was a company that was going to go bankrupt
  • within five years.
  • And the initial reaction from the Wall Street community and investors
  • was who is who bear Jolie and how is this man going to save Best Buy.
  • The new CEO and his staff began cutting costs and investing in parts of
  • Best Buy's business that gave it advantages over its online competitors
  • that started with service and stores up to that point.
  • Best Buy was one of many retailers faced with a problem sometimes
  • referred to as showroom where customers would walk into a store to
  • inspect and learn about products they wanted only to go home and buy
  • them online often via Amazon and usually at cheaper prices.
  • So Best Buy had to take the fight to them and it did so by leveraging
  • its large network of stores matching Amazon's prices and focusing on
  • providing the customer service and online retailer can't.
  • In 2012 Best Buy began matching any price on an item anyone could find
  • elsewhere. That meant a customer checking out a stereo system computer
  • or phone could walk out of one of Best Buy stores with that product.
  • On that day and pay the same price.
  • The company also started shipping online orders directly from stores
  • turning every store into a small warehouse which increased Best Buy's
  • available inventory and shorten delivery times.
  • They also put in place an easy process for returning online products in
  • stores saving customers the trouble of packing something back up in a
  • box.
  • If you think about it all or all of retail right now is working
  • aggressively to become omni channel and that's their advantage versus
  • the web.
  • They have physical stores.
  • Why not leverage that use those stores as pickup points drop off points
  • shipping points.
  • The Web can't really do that.
  • The web that last mile is really where the stores can come in and try
  • to be more effective.
  • And you've seen that you know Wal-Mart Target Costco they're going big
  • time after the omni channel consumer.
  • Best Buy also begin working closely with the store's vendors which many
  • say has been a crucial step in the company's turnaround.
  • The company started giving electronics makers their own dedicated
  • sections at Best Buy stores.
  • This store within-a-store concept was mutually beneficial to both Best
  • Buy and these tech firms.
  • The first deal during Jolie's tenure was with Korean electronics maker
  • Samsung in April of 2013. Then
  • Microsoft followed.
  • Best Buy also made a deal with Apple to revamp its displays even worked
  • with Amazon to be the exclusive seller of smart TV's embedded with
  • Amazon's fired TV technology.
  • The retailer keeps the exact details of these deals close to its chest,
  • but essentially it shares the cost of investments and the revenues with
  • each manufacturer in turn.
  • Device makers can exercise greater control over how their products are
  • presented to customers.
  • They can set up their displays and tailor the shopping experience much
  • the way they want.
  • They often bring their own staff into the stores who obviously know
  • their products best.
  • Customers can learn about something directly from its manufacturer and
  • Best Buy employees can receive training from the vendors.
  • This arrangement gives sometimes fierce competitors such as Google Apple
  • and Amazon a kind of neutral ground where each can sell their competing
  • products side by side.
  • The store within a store concept deepened the symbiotic relationship
  • between the retailer and suppliers and kept them invested in Best Buy
  • survival and success.
  • Best Buy's troubles had spelled danger from any of these device makers
  • who do not really have their own physical retail networks and
  • suppliers.
  • That was a scary time for them.
  • All of a sudden they started to think about.
  • What if we're in a world where there is no Best Buy.
  • Suppliers realized that was not a pleasant world.
  • And I think that the message was to suppliers
  • from Best Buy was, "You need us as much as we need you. So, you
  • know, help to support us and we will showcase and sell your products."
  • The company also bet on service both inside and outside its stores Best
  • Buy invested in training for its floor employees commonly known as blue
  • shirts for the polo shirts they wear.
  • The retailer figured that a store can offer customers something online
  • typically does not flesh and blood authorities on products who can
  • answer questions and make recommendations.
  • One of the pillars of Best Buy's approach to service is its Geek Squad
  • division which it acquired back in 2002.
  • Geek Squad sends technicians to homes to set up troubleshoot and repair
  • electronics bought at Best Buy or elsewhere.
  • The group has a membership program and aims to be a comprehensive
  • in-home service that will set up fix or troubleshoot anything that
  • plugs into a wall from home theaters to networking devices to
  • appliances. Geek Squad has 23 years of experience making house calls
  • and currently employs 20000 people who make 33 million total
  • interactions with consumers a year including one point eight million
  • home visits according to Jefferies, Geek Squad and other services make
  • up a small but growing portion of Best Buy's revenues.
  • The chain pulled in about five percent of its sales from services in
  • 2018 up from about four percent the previous year.
  • Best Buy is betting that as our homes fill up with complex
  • interconnected devices customers will increasingly want one company
  • that can tackle everything.
  • It is also pushing a new product areas it thinks offer potentially high
  • margins such as smart home technology and health care.
  • In 2018 it acquired Great Call for $800 million dollars.
  • Great call makes smartphones and wearables aimed at older adults and
  • sells the service customers can use to quickly access caregivers and
  • first responders.
  • The work has paid off.
  • Best Buy shares have risen from a high of $44.66
  • a share in 2013 to $75.95
  • cents a share in 2019.
  • Same store sales have grown every year since 2015.
  • In the process the company is becoming something of a model for other
  • retailers showing how businesses can steer through a competitive and
  • rapidly changing technology fueled retail market.
  • Now that Best Buy has turned itself around though the question is: Where
  • does it go from here?
  • Joly is stepping down, and Best Buy has appointed its chief financial
  • officer Corie Barry to the top job.
  • Barry oversees the company's service division and its Health Division
  • and was a key player in the Great Call acquisition and she's a veteran.
  • She's worked at the company since 1999.
  • Analysts say Barry is certainly qualified to take the job and she's
  • well liked by Wall Street.
  • But Joly's shoes will not be easy to fill.
  • Corie Barry is a very strong leader within their Best Buy organization
  • and I think she's going to be great as the next CEO.
  • She has big shoes to fill.
  • Hubert Joly did a phenomenal job turning Best Buy around and making it
  • relevant again.
  • But I think Corey Barry has a very strong operating background and
  • strategic thinking background that's going to help her to achieve great
  • things in the future for Best Buy.
  • For now the company is focused on execution.
  • It has put together some plans that give it a solid chance at a future.
  • But what about competitors.
  • Amazon after all surprised the world by buying Whole Foods and entering
  • the grocery business.
  • Best Buy is still the largest seller of electronics.
  • It sold 32.4
  • billion dollars in electronics in 2017, a five percent increase over
  • the previous year according to industry publication twice.
  • But Amazon was not far behind, selling 30.1
  • billion dollars worth a four percent increase over 2016.
  • Could the online giant move on to Best Buy's turf?
  • Once again this time with its own stores.
  • For now, Best Buy has found a way to dig deep into what it knows:
  • electronics. It is also leveraged its strengths in stores and service
  • while beefing up its online presence.
  • Analysts are optimistic but this is an era of unprecedented disruption
  • and there is a long list of retailers that have gone out of
  • business, in electronics alone.
  • If Best Buy expects to stick around it needs to keep a pretty wide moat
  • between it and rivals especially Amazon.

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Amazon has shattered traditional brick-and-mortar stores across sectors, but there's one retail giant that still stands amid the rapidly changing retail market: Best Buy. In 2012, the electronics chain almost went under. Then, somehow, it didn't.

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