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Best Buy: Saving the Big Box Strategy

Best Buy

A corporate strategy article by Thunderbird students Ahmed, Farrow, Goosen, Jones, Kortgard and Turra

Are the days of big box consumer electronics retailers coming to an end, or can Best Buy prove it has what it takes to adapt and compete in a changing global marketplace?

Rapid growth in the 90’s and early 2000’s propelled Best Buy to become the world’s largest and most successful consumer electronics (CE) retailer with global revenue exceeding $50 billion. However, myriad challenges have converged to create a hostile environment for traditional CE retailers. Accelerating commoditization of products and increasing acceptance of online purchasing are allowing non-traditional competitors, such as Amazon, to capture an ever-growing share of the global electronics market.  Some Wall Street analysts suggest Amazon should purchase Best Buy to complement its online growth strategy and capitalize on Best Buy’s strengths, namely its 1,400 brick & mortar locations[1]. Others argue that Best Buy will ultimately experience the same demise as Circuit City, CompUSA, and Borders.  Hulking shells of former big box stores are a stark reminder of how global markets are evolving at rates never seen before.  At best, the triumphant days of big box retail are being severely challenged. At worst, they could come to an end.

How did Best Buy go awry?  For many years the company failed to capitalize on the trend toward online sales, and instead focused its strategy on physical locations, assuming that consumers preferred to experience firsthand their pending electronics purchases. The company was correct. However, what it didn’t anticipate was the concept of “showrooming” – that people shopping physical locations would leave the store and avail themselves of Amazon’s lower pricing, free delivery and easy return policy.

While ecommerce may be the main culprit in Best Buy’s eventual demise, it is not the only one. The global expansion of Best Buy’s big box model into markets such as China, UK and Turkey have been complete failures, resulting in significant write-offs and a tarnished brand. Failures in these geographies have been attributed to Best Buy’s failure to localize its strategies, too often attempting to transplant what worked in the US into other countries, and underestimating local competition, assuming they lacked marketing and strategic ability.

Amidst these recent setbacks and failings, Best Buy has been agile enough to redefine its strategy within the United States. Yet the question looms - should the company look to enhance its abilities to compete head-to-head with its online competitors,  should it search for additional international markets like Canada that have proven to be successful in recent years, or find a niche market and even a Blue Ocean in the global economy?

Best Buy Canada – Can its success be replicated?

Best Buy’s Canadian subsidiary has fared much better than its parent company in the age of internet shopping. In contrast to its domestic and international performance, Best Buy Canada has been expanding with an increase in net profit of 19% in the fiscal year. Not only is this success indicative of the inherent differences between the two operations, but also reflective of the differing consumer trends, and BBY Canada’s proactive strategy to adapt to a changing market.

The answer as to why its northern neighbor is successful could help BBY explore its future global strategy. Here are some reasons why BBY Canada has an edge over its US operations:

  • The local Legacy brand ‘Future Shops’ – Best Buy entered Canada by acquiring a successful electronics firm, Future Shops, that has brand recognition for high value products and prices as well as practical warranties and service packages. Currently, of the 225 stores operated by Best Buy Canada, approximately 145 of these stores are Future Shops.
  • Smaller stores in more locations equals less cost and better coverage.
  • On July 10, Best Buy Canada announced that it will meet any Canadian competitor’s online price, which will help the company secure customer loyalty and keep them from buying elsewhere.
  • Future shop has developed a separate section in its stores which focuses on the video gaming market (a growing opportunity in Canada).
  • Postal service in Canada is not as efficient as it is in the U.S. and may also play a role in the greater success of BBY in Canada; slower, less reliable delivery times by Amazon.

Applying a new model to potential Latin American Markets

Emerging markets such as Brazil have great potential for the Big Box retailers such as Best Buy. Amazon’s logistics and delivery operations struggle in developing markets, the Latin American consumer’s preference for an excellent physical retail experience, and the slow adoption of online shopping, provide BBY with a temporary socio-economic based advantage.

High Consumer Electronics Spending in Brazil

According to research by Ivan Scarpelli, consumer electronics spending in Brazil is among the highest in the world, however the majority of Brazilian customers are dissatisfied with their retail experience due to a lack of focus on high product quality and customer service. Retailers such as Walmart sell large amounts of consumer electronics internationally, but there is much to be desired when it comes to the customer experience offered. The question remains, however – would customers pay more for an experience with a retailer that employs professionals that really know and understand the products, provide excellent customer service (going forward where BBY is concerned), and quality products similar to BBY Canada’s operations?

As is the case in Canada, where postal service is notoriously slow and costly, Brazilian consumers are not yet buying online at high rates, and therefore, Best Buy would encounter less online competition from the outset. According to a recent article in the New York Times, “Brazil has clearly embraced the online universe, with one in every three people having access to the Internet. But that figure is not translating into online luxury sales for social and economic reasons.” Shopping is an important part of Brazilian culture and is considered something of a social occasion. Additionally, Brazilians are used to a high degree of quality customer service - something the internet cannot offer – not to mention the fact that most items need to be shipped from the US, which is quite expensive.

All of the above factors point to a low probability that in Brazil, Best Buy would face as much e-retail competition as it does in the US and in other Western markets. This, combined with the fact that there is room for growth in the Brazil market, and that Best Buy’s current model is compatible with the Brazilian consumer, make for a good emerging market entry point. Best Buy needs to be innovative and forward thinking, which means anticipating the growth of local online consumers and investing accordingly. These markets may be a better focus for growth, capitalizing on historic Best Buy quality operations, while streamlining global operations to compete more as a quality, service-oriented retailer with smaller stores, but better educated employees that can provide that quality experience.

Second Chance in China?

Some may ask why BBY would want to re-enter China after having failed once, but suggestions are to re-enter with a new strategy based on the valuable lessons learned from the previous attempt. Surprisingly, the winning formula in Canada may suit Best Buy’s re-entry into China. Best Buy’s relationship with Five Star Appliance, with access to local management and a local brand with widespread recognition, provides an opportunity to leverage this local knowledge and its substantial market share.

Best Buy’s newsworthy splashy blue monoliths that were several stories tall and contained myriad products were not practical for the Chinese market where small street level stores are the norm.  Local competitors, Gome and Suning, recognized this shortcoming and opened traditional small, street level stores nearby. To succeed the second time around, Best Buy must open a large number of smaller stores to improve coverage and get more bang for the buck.

Lastly, Best Buy needs to develop a robust online presence to compete against Taobao, the Chinese equivalent to Amazon. Although the Chinese market is not yet as sophisticated as the US market the adoption rate of online purchasing is growing exponentially. If Best Buy fails to develop its online presence it will be destined to struggle much like it has been in the US.

Where do we go from here?

While there is no question that ecommerce will continue to grow at a rapid pace globally, there is still an amazing amount of potential for big box electronics stores in emerging markets.  By using its more innovative model from successful markets such as Canada or Mexico, BBY can enter new markets with its brick and mortar stores, focusing on creating lasting JVs and developing online retail capabilities before local or global online competitors.

Having physical locations sets Best Buy apart from the many online eCommerce businesses. As has been proven by the recent Apple and Sony trends to open more showrooms, consumers in both mature and emerging markets still exhibit a propensity to want to ‘see’ the product before buying it. More importantly, the global economic situation has led to worldwide expectations of low prices as well.

If it is to succeed and endure, Best Buy will need to continue to find ways to reduce costs while still having a physical B&M network at the competitive level. Through careful implementation of JV’s, product knowledge and expertise, excellent customer service, smaller stores, and strategic global expansion based on localization, Best Buy should be able to embrace a promising future.

Best Buy Global Strategy

BBY Global Strategy US Canada Lat Am & China
Think global and act local – seek information at the geographic level Like Apple and Sony, BBY could retain its showrooms (while reducing space), with in-store payment kiosks and product advisors. Continue to maintain access to local resource markets for talent and conduct local information analysis via the Future Shop. Implement the Canada formula via JV’s (Five Star Appliance in China).
Seek information at the product level TVs, smartphones, tablets (43% of domestic revenue and 62% of international revenue), with software, internet connection, and insurance. BBY will close 50 Big Box stores and open 100 BBY mobile stores. As strategic leader, Future Shop is Canada’s largest CE retailer, with a focus on the top-sellers: gaming, home entertainment and appliances. BBY could continue to operate FS as a separate division to maximize on responding to local feedback. As empowered subsidiaries, Five Star and other Lat Am local BBY brands will sense and respond to the local market pulse (currently, domestic appliances and CE).
Seek information at the functional level BBY could develop a Netflix-type personalized, sophisticated website, with customer-specific product suggestions/comparisons, purchases and reviews history. Canada’s ecommerce is expected to grow 14% annually, with Amazon already having made inroads. BBY could replicate its US website and seize the opportunity before it’s too late. While direct-sales is 3 times ecommerce sales, ecommerce is expected to triple in the next 5 years in emerging markets. BBY could capitalize on this trend.

Sources:

  1. http://www.nytimes.com/2011/11/10/fashion/10iht-r.html
  1. http://www.marketing-trends.com/2011/04/us—retail-to-grow-137-to-188.html
  2. http://.wsj.com/article/SB10001424052748703300904576178740814079726.html
  3. http://web.ebscohost.com.ezproxy.t-bird.edu/ehost/pdfviewer/pdfviewer?sid=6d67131e-2fe4-4403-8acf-76c744276223%40sessionmgr112&vid=5&hid=125 (Marketline, 2011 Industry Report)
  4. http://www.latinbusinesschronicle.com/app/article.aspx?id=4909
  5. http://www.internetretailer.com/2012/04/23/amazons-new-arrival-baby-shop-canadians
  6. http://quicktake.morningstar.com/Stocknet/558229/best-buy-shares-surge-on-wsj-report-of-potential-founder-led-buyout-but-deal-faces-several-hurdles.aspx?symbol=BBY, Morningstar, 7/10/12,
  7. Digital Trends blog. ‘US Online Retail to Grow 13.7% to $188 Billion’, Online Marketing Trends, Apr 5 2012.
  8. Ehrmann, Eric, “Global Retailers Battle for Big Box Brazil.” Huffington Post, 02/01/09

10. Enright, Allison. ‘Amazon’s New Arrival: A Baby Shop For Canadians’, Internet Retailer, Apr 23 2012.

11. Jannarone, John. ‘Forecast For Best Buy: Worst is Yet to Come’, WSJ, Mar 4 2011.

12. Kirk, Susan. “Future Shop Launches New ConnectPro Installation Services.” Canada Newswire. July 15, 2012. Web. August 1, 2012.

13. Latev, Daniel. ‘Latin America: E-Commerce Leader’, Latin Business Chronicle, May 13 2011.

14. Marketline, 2011 CE Industry Report. http://web.ebscohost.com.ezproxy.t-bird.edu/ehost/pdfviewer/pdfviewer?sid=6d67131e-2fe4-4403-8acf-76c744276223%40sessionmgr112&vid=5&hid=125

15. Michault, Jessica. ‘Brazil is Online, But Not Shopping There Yet’, NYT, Nov 23 2011, Web August 1, 2012.

16. Scarpelli, Ivan, “Consumer Electronics Ownership, Spending in Brazil Ranks Highest Among 8 Countries; Tops China, Germany and the U.S.” Accenture, April 27, 2011

17. Shaw, Hollie. “Canada Takes Aim at Online Rivals with New Pricing Strategy.” Financial Post. July 10, 2012. Web. August 1, 2012.