MUSICLAND WAS ‘A TREMENDOUS MISTAKE,’ BEST BUY SHAREHOLDERS ARE TOLD
Rationale for Best Buy’s purchase of Musicland was to provide vehicle for growth by moving into “mall-based space” marked for its prevalence of female customers that it wasn’t previously addressing, Best Buy CEO Brad Anderson told annual shareholders meeting Tues. But Musicland acquisition was “certainly not a successful experience,” and in fact “was probably one of the most painful things in the history of the company and a place where we made a tremendous mistake,” Anderson said.
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At same time, Anderson said, Musicland debacle afforded Best Buy “one profound learning experience,” and from it has emerged corporate strategy plan based on 4 “pillars” with which chain will try to differentiate itself from competitors. Anderson said immediate goals include “getting closer to the specific customer we are trying to connect to” and “cleaning out the silos of bureaucracy” to help Best Buy keep in closer step with customers and vendors while also “bringing down the costs of operating the business.” He said longer term goals included capitalizing on expected boom in home networking and backing it up with round- the-clock service. He said key to thriving in arena of networked AV home was “to take the complexity off the back of the consumer.” Fourth goal, and most difficult to achieve, is “winning in entertainment,” Anderson said. “What we learned with Musicland is we don’t want to make one big major investment” in music delivery or entertainment software, he said, “but you'll typically see Best Buy continuing to put a lot of energy in this space, but doing it and experimenting in a variety of different places.”
COO Allen Lenzmeier said Best Buy faced competition on multitude of fronts in additional to “traditional” rivals such as Circuit City and regional CE specialty chains. Unprecedented “inroads” have been made in CE by discounters such as Wal-Mart and Target, whereas Dell Computer now has 35% market share in sales of PCs to consumers, and Amazon.com is Best Buy’s most formidable e-commerce competitor, Lenzmeier said. Strategy is to differentiate Best Buy from rivals by “migrating to a consumer- centric from a product-centric organization” rather than fighting them head to head, he said: “You're not going to out-Wal-Mart a Wal-Mart.”
Best Buy’s overall market share stands at about 15% in its core categories, although it enjoys shares as high as 30%-40% in some businesses and a high of 50% in notebook PCs, Lenzmeier said. Long-term goal is to boost overall share to 25%, he said. Company goal is to open 80 new superstores in N. America this fiscal year, he said, including 60-65 Best Buy stores in U.S., 12 Best Buy stores and 3 Future Shop stores in Canada, 4 Magnolia Hi-Fi stores in Cal. He said Best Buy had scouted some 100 U.S. locations for smaller “concept” stores measuring 20,000 sq. ft. (compared with 33,000-35,000 sq. ft. for average Best Buy store). Company is pleased with results of its dual-brand strategy in Canada to sponsor stores under both Best Buy and Future Shop banners, he said. All 8 Best Buy stores in Toronto market are performing well above expectations, he said, and success of Best Buy brand in Canada overall has resulted in less cannibalization of Future Shop sales than had been expected.
As for Magnolia, Lenzmeier said chain’s experience had shown that outlets located near Best Buy stores had achieved “a higher degree of success” than those that weren’t. He said when Best Buy was situated next door to Magnolia, “they feed off each other.” He said long-term goal was to build Magnolia into “a national chain” by leveraging Best Buy’s strengths in product procurement and other areas.
CFO Darren Jackson told shareholders that Best Buy was “approaching new highs” in customer awareness and satisfaction scales that positioned chain strongly for digital future. Jackson said BestBuy.com operations had been “key strategic driver” of same-store sales growth. Moreover, he said, digital CE products accounted for 22% of Best Buy’s mix at end of first quarter. He said chain faced “an enormous opportunity” particularly in DTV because household penetration stood at only 3% at present.