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reinventing_best_buy.pdf
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REV: MAY 4, 2018
JOHN R. WELLS
GABRIEL ELLSWORTH
Reinventing Best Buy
In November 2012 we introduced our transformation strategy called Renew Blue. … A little more than four
years later, we figured it is time to call Renew Blue officially over and enter the next phase of our journey. 1
— Chairman and CEO Hubert Joly, March 1, 2017, earnings call
On March 1, 2017, Best Buy Company, Inc., North America’s largest retailer of consumer electronics
and appliances, announced a third year of comparable-store sales increases and a 20.8% increase in
domestic comparable online sales. 2 These results were in marked contrast to four years of declining
comparable-store sales from 2010 through 2013. a The stock price rose 17% in March, and on April 20,
2017, it surpassed $50 for the first time since January 2008. (See Exhibit 1.) When CEO Hubert Joly took
over in September 2012, Best Buy was losing share to Amazon.com, which was encouraging consumers
to view products at Best Buy and other physical stores and then buy them for a lower price online, a
practice known as “showrooming.” 3 Undaunted, Joly had encouraged the practice, convinced that it
presented an opportunity to sell to customers as long as Best Buy’s prices were competitive. Joly had
committed the company to a multi-channel strategy in North America and exited struggling
international operations. Operating margins had increased as a result, but growth was still proving
elusive. (See Exhibit 2.) In early 2017, Joly announced that his “Renew Blue” turnaround effort was
complete and that he was now intent on creating the New Blue. Would the new strategy be enough to
stop Amazon’s advances?
History of Best Buy, 1966–2012 b
Best Buy’s origins dated back to 1966, when Dick Schulze co-opened a hi-fi store called Sound of
Music in St. Paul, Minnesota. By 1981, Schulze had expanded his retail concept to nine stores, but
competition had become cutthroat. A tornado came to the rescue, removing the roof of a Roseville,
Minnesota, store but leaving the stock undamaged. Schulze cut prices to accelerate sales and found
a Best Buy’s fiscal years ended in the winter after the closest calendar year. “Fiscal 2017,” for example, ended on January 28, 2017.
All years mentioned in this case are calendar years unless otherwise noted.
b For more information, please see John R. Wells and Travis Haglock, “Best Buy Co., Inc.: Competing on the Edge,” HBS No.
706-417 (Boston: Harvard Business School Publishing, 2007); John R. Wells and Galen Danskin, “Best Buy in Crisis,” HBS No.
713-403 (Boston: Harvard Business School Publishing, 2014).
Professor John R. Wells and Research Associate Gabriel Ellsworth prepared this case. It was reviewed and approved before publication by a
company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are
developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management.
Copyright © 2016, 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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Reinventing Best Buy
that discounts were a great way to make money. Over the years, he added a broader range of
merchandise, expanded store size to superstore proportions, and renamed his business “Best Buy.”
The company was listed on the NASDAQ stock exchange in 1985, raising money to fund growth. Best
Buy superstores were part-superstore, part-showroom, employing commissioned salespeople to
provide advice and warehouse personnel to pick items from stock and help load them into customers’
cars. This was a model similar to that of the industry leader, Circuit City Stores.
In 1987, Highland Superstores, the industry number-two, moved into Best Buy’s territory and
started discounting aggressively. In response, Best Buy reduced sales personnel, eliminated
commissions in favor of salaries, and converted storage space in its outlets to selling space. All stock
was now on display, and customers were expected to carry it themselves—a “grab-and-go” concept.
This approach cut costs, allowing Best Buy to match Highland’s prices and expand market share.
Circuit City continued with its old model, and by 1996, Best Buy became the market leader. 4
Not content to rest, in 1996 Schulze began to expand the product line to include music, software,
and DVDs to encourage more regular purchases, driving more sales and higher margins. Circuit City
was slow to respond to Best Buy’s moves, and its profits collapsed in 2001. Shortly thereafter, Circuit
City began copying Best Buy’s low-service model, but by 2002, Best Buy was changing its strategy
again, adding services (the Geek Squad), widening its product line with the first acquisitions in its
history (Musicland Stores and Magnolia Hi-Fi, both purchased in 2000), 5 focusing on driving more
sales from customers with its rewards program (“customer centricity”), and looking to international
markets for growth.
In late 2001, Best Buy acquired the 88-outlet Future Shop in Canada. Future Shop operated a service
model similar to Circuit City’s; Best Buy committed to retaining the model while adding Best Buy
stores, which it believed appealed to a different market segment. In 2006, Best Buy acquired a majority
stake in Jiangsu Five Star Appliance Company, China’s fourth-largest appliance and electronics retailer
with 134 outlets. Five Star’s model was quite different from Best Buy’s. It offered display space to
manufacturers, who selected merchandise and provided sales personnel. Best Buy also began opening
stores based on its own model in China. The same year, Best Buy entered into a joint venture with
British retailer Carphone Warehouse (CPW) to create Best Buy Mobile, which opened small standalone
mobile-phone stores in the United States and stores-within-stores in existing Best Buy outlets. 6 In its
home market, Best Buy acquired Pacific Sales Kitchen and Bath Centers. 7
In 2008, Best Buy acquired a 50% stake in CPW’s European operations for $2.1 billion. CPW operated
nearly 2,500 small mobile-phone outlets in the United Kingdom and mainland Europe. The goal was
to add 100 big-box Best Buy stores to CPW’s operations. Best Buy’s sales continued to grow rapidly,
while Circuit City’s stalled. c Finally, in late 2008, Circuit City filed for Chapter 11 bankruptcy
protection; in January 2009 it began the liquidation process. 8
Rising Competition
Meanwhile, all was not well at Best Buy. Despite Circuit City’s weakness, Best Buy faced significant
challenges. In the United States, broad-based discounters like Walmart were gaining ground by
offering deep discounts on a very narrow line; small phone shops were becoming a major competitive
threat for the latest gadgets (smartphones and tablets); and Amazon was growing share online, taking
advantage of the fact that it did not have to charge sales tax (which averaged 5.4% in 2008) in many
c For more information, please see John R. Wells and Galen Danskin, “The Rise of Circuit City Stores, Inc.” and “The Fall of
Circuit City Stores, Inc.,” HBS Nos. 713-401 and 713-402 (Boston: Harvard Business School Publishing, 2012).
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Reinventing Best Buy
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states, unlike local retail outlets. 9 Best Buy was also struggling in its international markets, where
operating losses were mounting. In April 2009, Best Buy announced that it would reorganize its staffing
structure. According to one investment house, the changes would reduce the pay of 8,000 sales
associates by 25% to 50% while eliminating 1,000 salaried jobs. 10
When Brian Dunn became CEO of Best Buy in June 2009, he cut capital spending by 50%. He also
began testing new product categories while continuing to add many standalone mobile stores to take
advantage of the rapid growth in sales of smartphones. Revenues for 2009 rose 10% to $49.7 billion,
and operating profits 14% to $2.29 billion. The next year, sales rose 1% to $50.3 billion, and operating
profits 2% to $2.34 billion.
In early 2011, Best Buy announced that it would close its Best Buy stores in China and focus on the
Five Star model. It also planned to close its big-box outlets in the United Kingdom. In November 2011,
Best Buy bought CPW’s share of Best Buy Mobile in the United States. The company also announced
that it expected to write down most of the $1.2 billion of goodwill associated with Best Buy Europe. 11
The year also saw important developments in e-commerce. In September, Best Buy announced the
launch of Marketplace, its online platform for third-party sellers. Marketplace would grow the product
mix available on Best Buy’s website by approximately one-third. Other major retailers such as Amazon,
Buy.com, Walmart, and Sears already had similar platforms. 12 Competition intensified in the holiday
shopping season as Amazon launched its Price Check app, allowing customers to compare Best Buy’s
in-store prices with Amazon’s. 13 Best Buy’s sales increased 1% in 2011 to $50.7 billion, but operating
profits fell 54% to $1.1 billion. The company recorded a net loss.
In March 2012, Dunn announced that he would close 50 big-box stores in the United States,
downsize the remainder by 10%, and cut $800 million in costs. 14 A month later, on April 10, 2012, Dunn
resigned amid accusations of improper conduct with a female employee. 15 Board member G. “Mike”
Mikan III took over as interim CEO. In June, Schulze stepped down as chairman after the board
concluded that he had “acted inappropriately” by not informing them of the allegations against Dunn
immediately after learning of them. 16
Schulze, who owned 20.1% of the equity, began exploring the possibility of gathering financing to
buy out the company. 17 On August 6, he announced an offer of $24 to $26 per share subject to suitable
financial backing. Schulze’s proposal valued the company at approximately $10 billion. Many were
skeptical of his ability to raise the funds, but he was given until mid-December to do so. 18
New CEO, Hubert Joly
On August 20, 2012, Best Buy’s board announced the appointment of Hubert Joly as CEO. At the
time, Joly was CEO of hotel, cruise ship, and restaurant company Carlson. He was the first outsider to
be appointed CEO of Best Buy. A French national, Joly had previously helped restructure Vivendi’s
video-games business and EDS’s computer-service operations in France. Immediately following the
announcement, Best Buy’s share price dropped more than 10%, finishing the day at $18.19. Wedbush
Securities analyst Michael Pachter criticized Joly’s lack of experience in retail, calling him “completely
unqualified” and adding, “It’s shocking to me.” 19 Brian Sozzi of NBG Productions commented, “I
wonder about the selection process and whether Best Buy was too eager to land a permanent person
to go alongside its new restructuring plan.” 20
Joly started work on September 4, 2012, and immediately set about diagnosing the problem and
reshaping his team. He hired Scott Durchslag, president of Expedia, to head e-commerce. Shawn Score,
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Reinventing Best Buy
a 27-year Best Buy veteran and leader of Best Buy Mobile in the United States, was promoted to head
of U.S. retail stores. 21
The most important addition to Joly’s team, in the view of some analysts, was Sharon McCollam.
The retired chief operating officer and CFO of retailer Williams-Sonoma, McCollam “had experience
closing bricks-and-mortar stores and building up online retail … [and] had some positive metrics
behind her.” 22 She was recruited to be Best Buy’s chief administrative and chief financial officer. 23
The “Renew Blue” Turnaround Plan
On November 13, 2012, 10 weeks into his leadership, Joly called together analysts to outline the
challenges facing Best Buy’s domestic business. He acknowledged that much of what he was to say
was not new, but what mattered was what the company was going to do about it. He was working
with management to improve “the say-do ratio … the ratio between what we say we’re going to do
and what we actually do,” to move it as close to one as possible. 24
Joly said that Best Buy’s aspiration was “to be the specialty retailer who is the preferred authority
and destination for technology products, services and solutions.” 25 He acknowledged that the
company had taken “our eye off the ball,” 26 but he argued that Best Buy had some key strengths: it was
market leader in North America and was maintaining or even gaining share in most key categories;
there was opportunity to gain more share, since the market for technology products, services, and
solutions was relatively fragmented and continued to grow; Best Buy served a large customer base,
including 40 million active and 75 million total members in the loyalty program; its service proposition
to these customers was “unique and compelling,” providing a wide range, unbiased advice,
competitive prices, multi-channel service, and Geek Squad support; and all this was achieved with a
highly productive model delivering high sales and operating profit per square foot. 27
Joly also recognized some significant problems: the overall decline in market share, driven by shifts
in channel and product mix; a failure to capture an adequate share of online sales; low customer
satisfaction scores; poor price perception, despite competitive prices in important categories (Best Buy
aimed to be competitive on core lines such as televisions, appliances, laptops, tablets, and phones but
charged higher prices for accessories); the error of continuing to open stores during the 2007–2009
recession; and poor international performance. These problems drove declines in comparable-store
sales and operating margins and a fall in the share price, but Joly commented, “Many of these problems
are the results of our own making, which is in itself good news, meaning there is nothing structurally
wrong with our markets.” 28
The Five-Point Plan
To solve the problems, Joly announced a five-point plan to “Renew Blue” (a reference to sales
associates’ blue shirts):
4
1.
“Reinvigorate and rejuvenate the customer experience”;
2.
Attract and grow “transformational leaders” and “energize our employees to deliver
extraordinary results”;
3.
Work with vendors “to innovate and drive value”;
4.
Increase the company’s return on invested capital by growing revenue and efficiency, which
included cutting “unproductive cost” such as administrative and non-product expenses;
Reinventing Best Buy
5.
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Make the world a better place through a recycling program and equipping teenagers with
technology. 29
Part of “reinvigorating the customer experience” involved operational improvements in stores.
Reassigning store space to growing categories was one area for progress, but another key step was
developing “a leading edge multi-channel shopping experience through our highly relevant and
contemporized hub-and-spoke network.” 30 In the process, the goal was to build stronger relationships
with customers. Joly commented, “We must deliver a rich set of solutions and services and develop a
rich, engaged, and rewarding relationship with our customers with unique benefits and exclusive
membership programs.” 31 To measure improvements in customer satisfaction, Best Buy began tracking
its Net Promoter d score. 32
Joly highlighted the online opportunity. In 2011, Best Buy was number-one in the total U.S.
consumer electronics and appliances market, with 16% share compared to Walmart’s 15% and
Amazon’s 4%, but its Internet share was only 7% ($2.3 billion in sales) compared to its bricks-andmortar share of 18%. 33 Joly saw the opportunity to close this gap online. He commented, “Online was
too much perceived as a threat in the zero-sum game and not enough as an opportunity. … There’s no
reason why our online business should have a lower share than our offline business.” 34
Stephen Gillett, president of digital and marketing, illustrated the important relationship between
the online and offline models: 70% of the 600 million consumers visiting Best Buy stores each year
began their purchasing process online at bestbuy.com; 40% of customers buying online preferred to
pick up their purchase from a local store, even if offered free delivery (70% of Americans lived within
10 minutes of a Best Buy store); and 15% of pick-up orders resulted in an additional purchase. 35
Of the 1 billion consumers visiting bestbuy.com every year, 9% intended to make a purchase but
did not, and only 1.3% actually made one. Gillett identified the principal reasons that the 9% did not
buy: lack of sufficient product information (2%), out-of-stocks (1%), uncompetitive price (1%), need to
evaluate the product in person (1%), unavailability for in-store pickup (1%), and slow shipping (1%).
A one-percentage-point improvement in conversion was worth $250 million in operating profit.
Similarly, only 40% of store visits resulted in a sale, and yet a further 19% of visitors had intended to
buy something. Out-of-stocks (4%), high prices (4%), poor selection (3%), need to conduct additional
research (2%), and poor service (2%) were the main reasons. Increasing the closing rate by one
percentage point could add $200 million in operating profit. 36
On the issue of showrooming, Joly quipped to the Wall Street Journal, “We love showrooming.” 37
He argued to the analysts that once customers entered a Best Buy store, “they are ours to lose.” 38 With
the right product lines, prices, and support, they could be converted to a sale in the store or directed to
Best Buy’s own website to make the purchase. Employees would be given permission to price-match
some online competitors over the 2012 holiday season.
Part of “embracing the showroom” focused on rolling out Best Buy’s own in-store concepts,
including Pacific Kitchen & Home (premium kitchen appliances) and Magnolia Design Center (home
theater). In addition, Gillett reiterated the company’s commitment to vendor showrooms. Best Buy had
incorporated Apple stores-within-stores since 2007; Samsung Experience Shops were to come in 2013,
d To calculate their Net Promoter score, companies asked customers, “On a zero-to-10 scale, how likely is it that you would
recommend this company … to a friend or colleague?” Those who responded 9 or 10 were deemed “promoters,” and those who
responded 0–6 “detractors.” The Net Promoter score equaled the percentage of promoters minus the percentage of detractors.
Rob Markey and Fred Reichheld, “Net Promoter System℠: Creating a reliable metric,” Bain & Company, February 14, 2012,
http://www.bain.com/publications/articles/creating-a-reliable-metric-loyalty-insights.aspx, accessed March 2016.
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Reinventing Best Buy
and Sony Retail Experience At Best Buy in 2014. Finally, Gillett announced a partnership with
RedLaser, the app that enabled showrooming in-store, to identify customers in Best Buy stores and
market to them. 39
Shawn Score, the new head of retail stores, outlined the opportunities for improving store
performance. He emphasized the importance of employee engagement, which drove a 7% difference
in comparable-store sales. To improve on this dimension, Score announced a new induction training
program, a more comprehensive set of performance metrics, a short-term incentive program for teams,
and a new reporting structure: in-store teams (e.g., home c …
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