see attachment

Best Buy Co., Inc.

By 2017, the value of Best Buy’s stock climbed over 200 percent1 since Hubert Joly was appointed CEO in 2012. Although lagging the returns of Amazon (300 percent), it exceeds the 75 percent return on the S&P 500 over the same time period2 (Exhibit 1 depicts a stock price comparison from August 20, 2012, the day that Hubert Joly was appointed as Best Buy CEO, to September 6, 2017).3 Best Buy’s performance reflects a stark difference for many retailers that have declared or are facing bankruptcy, such as RadioShack and Sears. Best Buy has used its physical presence to engage customers in “high touch” products that allow customers to interact with products combined with competitive prices, and then offering after-sales support such as in-home installation. Joly implemented a mix of “Expert Service. Unbeatable Prices” to provide a clear value proposition.4,5 The strategy’s success is reflected in Best Buy’s performance, and Hubert Joly being touted as the “retailer of the year” by Forbes for 2016.6 Still, Hubert Joly increasingly confronts questions about how to maintain the firm’s improved performance. Currently, Best Buy is focusing on in-home advisors with a brand-agnostic approach to unlock latent demand and drive sales. However, it is unclear whether it will work. It is either possible that Best Buy may provide a glimpse of what the future may look like, or these moves may simply prelude the firm’s demise.

Amazon remains a formidable competitor for Best Buy. For example, Amazon has begun offering in-home consultation with Alexa,7 and Best Buy does not have an offering in the growing area of digital assistants that may substitute for its trained sales staff. Amazon is also creating increased physical presence through the expansion of warehouses8 and through its purchase of Whole Foods. While the purchase of Whole Foods by Amazon has mainly driven grocery chain companies stock lower, 9 it also gives Amazon a physical presence where customers will be able to pick up purchases. Additionally, through a partnership with Sears, Amazon is rolling out the sale of Kenmore appliances nationwide.1 Appliances played a large part in Best Buy’s recent growth and recovery,11 and Best Buy cannot simply rest on its laurels as competition continues to evolve.

Competition in the consumer-electronics industry remains cut-throat. While Best Buy is no longer

considered doomed to follow other national consumer electronics retail superstores into extinction, it will be harder for Best Buy to meet increased expectations for continued performance. For example, analysts are skeptical that Best Buy’s recent performance is sustainable, and rate Best Buy’s stock as a hold.12 This likely reflects concerns Best Buy may simply have received a temporary boost from struggles at other traditional retailers.13 If insider stock sales are any indication, Best Buy’s manag-ers may agree, as over the last two years of its high-performance, Best Buy managers have been net

sellers of the company’s stock.14 Further, reflecting potential concerns with growing revenue, Best Buy has announced plans to cut costs by $600 million by 2021, after reaching a previous goal of reducing costs by $400 million.15 Meanwhile, Best Buy is looking for growth outside the U.S. by expanding in Canada and Mexico.16

A Brief History of Best Buy Together with his business partner, James Wheeler, Richard Schulze founded Sound of Music, an

audio specialty store, in Minnesota in 1966. The fledgling company ended its first fiscal year with gross sales of $173,000, and continued to grow rapidly over the next few years. By the time of its initial public offering in 1969, the home-town enterprise had acquired two of its local competitors 17 and it opened two new outlets near the University of Minnesota in downtown Minneapolis.

Schulze bought out Wheeler in 1971,18 shortly after Sound of Music hit the $1 million mark in

annual revenues.19 Subsequent years saw continued expansion through additional locations, new prod-uct lines, and novel promotional techniques. For example, in 1979 Sound of Music became the first supplier of video and laserdisc equipment from companies such as Panasonic, Magnavox, Sony, and Sharp. After a tornado hit the Roseville, Minnesota, store in June 1981, the company responded with a “Tornado Sale,” which became an annual event, storm or no storm. This strategy boosted Sound of Music’s average sales per square foot to $350, compared with an industry average of $150 to $200.20

ARRIVAL OF THE SUPERSTORE With ambitions to capture even larger market share, Sound of Music changed its name, in 1983,

to Best Buy Co., Inc. Shortly thereafter, it adopted its now-familiar superstore format, with an increas-ingly diversified product range. Boosted by an infusion of cash from a series of public offerings, Best Buy proceeded to grow from eight to 24 stores and saw its revenues increase from $29 million in 1984 to $290 million in 1987. 21 On July 20, 1987, Best Buy made its debut on the New York Stock Exchange (NYSE: BBY) with an initial offering of 8.3 million shares of common stock.

Best Buy changed its logo to the yellow tag in 1987, and in 1989 its stores adopted a new “grab-and-go” store format, called Concept II. Schulze’s revolutionary new approach to big-box retailing combined Walmart’s prices with Circuit City’s assortment, in a shopping warehouse with a 35,000-square-foot footprint.22 The new stores consisted of well-stocked showrooms with self-help information so that people could make their product selections independently and check out in a single stop. Answer Centers were still available for people who desired assistance, but salespeople no longer needed to attend to each individual customer or fetch merchandise from storage. This change reduced Best Buy’s employment costs by one-third, which compensated for the corresponding de-emphasis on service contracts. One analyst called Concept II “the most innovative thing to happen in this industry—ever.”23 However, Best Buy’s store format has continued to evolve and it currently operates Concept IV stores that provide an open floor format and cash registers throughout the store, and dedicated space to vendors.

GROWTH THROUGH ACQUISITIONS The year 2000 marked the launch of a new phase of inorganic growth through acquisitions. Best

Buy grew its revenues from $12.5 billion in 2000 to nearly $51 billion in 2012.25 The company first purchased Magnolia, a high-end consumer-electronics chain with 13 locations throughout Washington, California, and Oregon, for $88 million in 2000.26 The next year, Best Buy purchased Musicland for $425.1 million. The acquisition of the mall-based music and entertainment retailer gave Best Buy access to an additional 1,300 stores across the United States and Puerto Rico, including 650 Sam Goody and 400 Suncoast Motion Picture outlets. In 2002, the company acquired Geek Squad, a 24-hour computer-support task force. By 2004, Best Buy had opened Geek Squad precincts within all of its stores.27

In contrast to the rapid expansion of Geek Squad, Best Buy divested Musicland, in 2003, due to

declining sales, and increased competition from Walmart and Target in the CD segment, as well as iTunes in digital music. Sun Capital Partners Inc., a private equity firm, purchased the failing firm for only the assumption of Musicland’s debt and lease obligations. Brad Anderson, who succeeded Schulze as CEO in 2002, described the Musicland venture as “a very expensive but powerful learning experi-ence for Best Buy.”28

Best Buy then took a two-year hiatus from acquisitions before purchasing AudioVisions, a custom

integrator of electronic products such as flat-screen TVs and security solutions, in 2005.29 In December of that same year, Best Buy acquired Pacific Sales, a Los Angeles–headquartered company that special-ized in selling premium kitchen appliances, for $410 million. 30 In 2007, Best Buy announced plans to purchase Seattle-based Speakeasy Inc., a broadband and VoIP services provider, for $97 million.31 This transaction was followed by the 2008 announcement of Best Buy’s acquisition of Napster for $121 mil-lion in cash, in an effort to compete with Apple’s 70 percent share of the digital-music marketplace.32 In 2008, Best Buy also acquired Dealtree and it became the backbone of Best Buy’s customer return, trade-in, and liquidation programs.33 In 2011, Best Buy acquired Mineshaft in an attempt to move into managed IT services that it abandoned by 2014 through a divestment of Mindshift as a wholly owned subsidiary of Ricoh.34 Under CEO Joly’s tenure, Best Buy has not made an acquisition, but it did divest its operations outside North America.

INTERNATIONAL EXPANSION AND RETRENCHMENT Best Buy expanded internationally before refocusing on the North American market, and in 2016

only 8.4 percent of its sales were international.35 Its first cross-border expansion was the 2001 acqui-sition of Futureshop Ltd., a Canadian electronics chain, which added annual sales of $1.32 billion.36 Maintaining Futureshop as a wholly owned subsidiary, Best Buy later strengthened its Canadian pres-ence by opening 77 branded stores of its own.37 Best Buy established an active presence in the grow-ing Asian markets with its 2006 acquisition of a majority interest in the retail chain Jiangsu Five Star Appliance Co., Ltd., China’s fourth-largest appliance and consumer-electronics retailer, for $180 mil-lion.38 A year later on January 26, 2007, the first Best Buy store in China—touted as the largest Best Buy in existence—opened in Shanghai.39 Other regions quickly followed. By 2008, Best Buy had announced the opening of its first pilot stores in Mexico and Turkey, as well as multiple branded superstores in the United Kingdom and other European countries.

n response to the 2008–2009 recession and increasing competitive pressures, Best Buy started to

shift its expansion efforts away from traditional “big box” stores to focus on its new “Connected Store” format and “Best Buy Mobile” concept stores both at home and abroad. Then, in a stunning reversal, Best Buy closed all of its branded stores in China, Turkey, and the United Kingdom by the end of 2012. Instead, the company invested heavily in its Five Star subsidiary in China and its Carphone Warehouse and Phone House stores in Europe, opening 38 and 36 new locations in fiscal 2012, respectively.41

As the company’s financial struggles continued, Best Buy decided to refocus its efforts around

its higher performing units in North America (including Canada and Mexico) and to exit the Asian and European markets altogether. Best Buy completed the sale of its interest in Best Buy Europe to Carphone Warehouse Group in June 2013, and Best Buy divested its ownership of Five Star (China) in February 2015. In March 2015, the company also consolidated all of its Canadian Future Shop stores under the Best Buy brand.42

LEADERSHIP CHANGES After having just two CEOs in its first 43 years of operations (Richard Schulze and his successor

Brad Anderson), Best Buy went through three top leaders in a six-month period in 2012.43 Brian Dunn assumed the helm, in June 2009, and he had been trying to “right” Best Buy’s “ship” for three years. Dunn believed that the company’s physical stores were an asset: “There are still things in the physical world that are going to be important: expert advice and the ability to see and touch the latest tab-lets.”44 But to cut costs, he announced in 2011 that Best Buy would reduce its “big box” real estate by 10 percent over five years by closing some stores, renegotiating leases, and letting some leases expire.45 Thousands of workers, including some 600 highly trained Geek Squad staffers, were laid off.46 Moving forward, Dunn planned to open 600 to 800 new Best Buy Mobile stores, focusing on smartphones and other mobile devices.47 The goal was to increase the number of retail points of contact while decreas-ing square footage, thereby increasing the company’s flexibility as a multichannel retailer.48 He also increased Best Buy’s online offerings by more than 20,000 items to broaden its “virtual” footprint.49

Unfortunately, Wall Street was not satisfied, and the company’s stock price continued to decline.

Analysts felt Dunn had been slow to recognize the company’s problems, and he was not being aggres-sive enough in shutting down underperforming units.50 Thus, when Dunn announced his resignation in April 2012 after 28 years as a Best Buy employee, many assumed it was due to the company’s financial woes. In reality, he left in the midst of a board investigation into allegations of personal misconduct (a close relationship with a female employee).51 Ultimately, the independent investigators determined that there had been no misuse of company resources, but that Dunn’s poor judgment and lack of professionalism had contributed to a negative work environment.52

The fallout did not stop there. Richard Schulze, who was then serving as Chairman of the Board,

stepped down from his position at the June 2012 board meeting. The board “expanded his role” by granting him the honorary title of “Founder and Chairman Emeritus” and permitted him to finish out his term as director through 2013. The investigative report indicated that Schulze had learned about Dunn’s actions, confronted him, warned him that such behavior was contrary to company policy, but then dropped the issue when Dunn denied the allegations. To rectify this breach of ethics, the board named Hatim Tyabji, chair of the audit committee, as the new Chairman53 and hired an external con-sultant to run the search process for a new CEO. In the interim, George Mikan III, another director

agreed to take on the day-to-day responsibilities for running the company.54 The board also recom-mended that shareholders approve the declassification of the board, making each director subject to annual re-election.55

Hailing from Nancy, France, Hubert Joly was appointed Best Buy CEO on August 20, 2012.56 In prior

jobs, Joly had engineered successful turnaround strategies for Vivendi and Carlson Wagonlit Travel,57 and he saw no reason why Best Buy would be any different. Still, several investors were not happy with his appointment. Some saw Joly’s lack of retail experience as a significant limitation, while others wondered if the company had rushed the search just so it could proceed with its restructuring plan.58 It was not until 2015 that Joly began to win some respect for his turnaround efforts (see Exhibit 2 for Best Buy financial data).

The Consumer-Electronics Retail Industry

A BRIEF HISTORY The consumer-electronics retail industry grew rapidly in the second half of the 20th century due

to several converging trends. At the end of World War II, a significant portion of the U.S. population migrated from cities to suburbs, creating a need for suburban retail centers. At the same time, the cost of technology decreased, corresponding to an increase in demand for televisions and other consumer electronics. Many of these new customers were price-sensitive, first-time homeowners, who were willing to accept decreased customer service in return for lower prices, leading to a rapid growth in discount stores.59

As the children of the WWII generation—the baby boomers—reached adulthood in the 1970s,

demand for consumer electronics soared. Retailers shifted from carrying just one or two lines of equipment toward stocking a diverse set of product lines. Strong industry growth continued through the late 1980s, until the new VCR market became saturated and a recession slowed consumer sales. By 1991, 98 percent of all homes had at least one color TV and 77 percent of those that owned TVs also owned a VCR. The United States alone had at least 10,000 radio, television, and consumer-electronics stores that had sprung up to meet the surge in demand. With market saturation, however, growth in the 1990s was limited to the replacement and upgrading of existing devices. 60 As a result, competi-tion intensified and many companies, such as Highland Superstores Inc., left the electronics market. 61

Technology advancements and improved economic conditions in the mid-to late-1990s again led

to a period of growth that supported the rise of large superstores such as Best Buy and Circuit City. In 1998, sales at Best Buy and Circuit City increased by 21 percent and 48 percent, respectively. 62 It was around this time that the industry faced yet another great shakeup—the birth of online retailing.

In 1998, Amazon.com, a new competitor, entered the consumer-electronics market by offering

music CD sales online.63 Not willing to cede this potentially lucrative market, Circuit City, Tweeter Home Entertainment Group, and Outpost.com all opened online consumer-electronics sites of their own within the next year. Best Buy followed suit with Bestbuy.com in 2000, making it a relatively late mover in e-retailing.64 However, sales of CDs were decimated following the success of Apple’s iTunes that allowed consumers to buy only the songs they wanted and play them all on an iPod.

The ability to reach new consumers online, coupled with increased interest in digital cameras and

DVDs, led to yet another period of rapid expansion throughout the early 2000s. This time, however, growth occurred primarily through acquisitions and industry consolidation. From 1994 to 2007, the three largest consumer-electronics retailers (Circuit City, Best Buy, and Radio Shack) consolidated their combined market share from approximately 22 percent to 45 percent. Meanwhile, the total number of firms in electronics retailing with over 100 employees declined by four percent per annum from 1998 to 2004.65

From 2005 to 2007, the industry compound annual growth rate (CAGR) was approximately six

percent. With the onset of the global recession, growth fell to 3.4 percent in 2008 and –0.4 percent in 2009.66The industry started to recover in 2010 but growth remained relatively flat for the next several years.67 Since 2015, sales of consumer electronics in North America has grown, but that growth is projected to slow; see Exhibit 3. In 2017, the average revenue per U.S. customer purchasing consumer electronics was $439.09,68 and the most popular products included memory cards, Bluetooth speakers/ headphones, smart televisions, laptops, and USB drives.69 Exhibit 4 shows Best Buy’s revenue share in the U.S. (in percent) in different product and service segments.

GENERAL TRENDS The consumer-electronics retail industry is both cyclical and seasonal. Industry sales during the

holiday season in the fourth quarter typically exceed sales from the other three quarters combined. As most consumer-electronics items are considered discretionary purchases, sales are directly corre-lated with macroeconomic factors including consumer confidence, unemployment, the housing mar-ket, and the ability to obtain credit.70

Another distinctive trend in the consumer-electronics industry is that of ever-falling prices.

Declining prices place constant pressure on consumer-electronics manufacturers to improve func-tionality, portability, and style as a way of differentiating their products from competitors. As a result, the product life cycle has grown increasingly shorter as manufacturers cannibalize their own prod-ucts in an effort to maintain customer interest and loyalty. One way that Best Buy has adapted to lower prices is to develop private label products. For example, under its Insignia brand of televisions, Best Buy builds televisions based on the leftover parts from manufacturers for a prior year.71

Product and part cannibalization has led to the evolution of consumer electronics as a measure of

socioeconomic status in countries, such as the United States. Financial wealth buys access to the latest and greatest technology. As prices fall, the technology becomes affordable to a wider demographic, but the technological elite have already moved on to the next generation of devices. Cellular phones were once fantasy gadgets seen only in James Bond movies. In the 1980s, yuppies proudly displayed their cell phones on their belts as a status symbol. These days, nearly everyone has a cell phone whose design and functionality make early “dinosaur” phones laughable. Laptops, large-screen TVs, and smartphones have enjoyed a similar proliferation among the masses. Today’s must-have is tomorrow’s bargain commodity at Walmart, so retailers must strike while the product is hot. A product will, in its boom days, attract a very different clientele than in the later, less-exclusive phases of its shelf life. Additionally, Apple forward integrated into consumer electronics by developing Apple Stores in 2001, and it was a major player in electronic retail by 2010.72 Consequently, understanding and predicting consumer demand is an imperative in the modern consumer-electronics industry.

Past and Current Competitors The consumer-electronics retail industry has consolidated. Prior to the 2008 recession, the top

three consumer-electronics retailers (Circuit City, Best Buy, and Radio Shack) accounted for 42 percent of the U.S. market. In comparison, the top three firms in home improvement and office supply retail controlled 58 percent and 79 percent, respectively. However, by 2016, Best Buy had the largest with over 20 percent of the U.S. market followed by Amazon market who is nearing 20 percent market share and will likely overtake Best Buy as market leader.73. Amazon has already passed Walmart in consumer electronic sales, as well as the sales of consumer electronic companies, including Hewlett Packard, Dell, and Apple (Exhibit 5 shows consumer electronics market share in U.S. of top-three companies: Best Buy, Amazon, and Apple, 2010–2015).74 Online sales, however, are representing an increasing share of total consumer electronic sales with projections showing growth from 17 percent in 2017 to over 20 percent by 2021.75

CIRCUIT CITY The story of Best Buy is not complete without an account of the rise and fall of Circuit City, once

the company’s most formidable competitor. When Samuel Wurtzel, Circuit City’s founder, learned that the first commercial television station in the South was soon to hit the airwaves, he decided that a store selling TVs sounded lucrative.76 He opened the first Wards Company store in Richmond, Virginia, in 1949. Soon thereafter, Wurtzel and his partner diversified their product offerings to include a range of home appliances as well as television sets. As profits grew over the next decade, they opened three additional stores in the Richmond area.77 The company went public in 1961, selling 110,000 shares at a price of $5.375 through a Baltimore stockbroker.78

Wards expanded across the Southeast and Midwest through a series of acquisitions from 1965 to

1970, after which Samuel Wurtzel passed the torch on to his son, Alan Wurtzel.79 In 1974, Wards arguably suffered adverse effects due to its rapid expansion and diversification, losing $3 million on overall sales of $69 million. In response, Alan Wurtzel withdrew Wards from areas outside its core competencies, such as tire sales, and refocused the product line on consumer electronics. To showcase its new strategy, the company opened a 40,000-square-foot store called “The Wards Loading Dock.”80 This “big box” format had ample room to display Wards’ extensive selection of 2,000 products. Because of its novel store design, Wards increased its sales ten-fold to $246 million by 1983.81

In 1984, Wards changed its name to Circuit City Stores and listed on the New York Stock Exchange.

That same year, Richard Sharp succeeded Alan Wurtzel as CEO. Under Sharp, the company consoli-dated its operations in very large stores located in clusters throughout the Southeast. These “Circuit City Superstores” encompassed up to an acre of floor space.82 Circuit City’s approach of opening several large stores at once in the same region, accompanied by heavy advertising, represented a methodical determination to win the lion’s share of sales. By 1987, the company was reaping $1 billion in annual revenues and dominated the U.S. market.83

In 1992, Circuit City expanded its offerings to include personal computers and recorded music. In

1993, Circuit City stretched its boundaries even further and opened the first CarMax used-car lot. About that time, Circuit City also found itself in an intense price war with Best Buy that pitted the

companies’ sales forces against one another. Circuit City was known for its hard-sell tactics, with sales-people working for commission. In contrast, Best Buy employees enjoyed a more relaxed, self-service–oriented sales environment, in which they were paid a flat hourly rate.84 Best Buy’s “We’re here if you need us” approach was so popular that Circuit City was forced to adapt. Yet, despite dismissing 3,900 workers and implementing an hourly pay structure, Circuit City’s 600 stores posted an annual loss of $89.3 million by the end of 2003. The company continued to restructure in 2004, closing dozens of stores at less-desirable sites and opening some 70 new stores in more ideal locations.

Circuit City’s reaction to the flat-screen price war in the early 2000s likely helped to seal its fate. A

bubble in the U.S. housing market had led to a dramatic increase in demand for consumer electronics, which in turn created a flood of investment in new factories, resulting in excess supply and inventory for retailers. Then, in the fourth quarter of 2006, the housing market weakened, leading to a decline in consumer spending. To move inventory, discount retailers such as Walmart began slashing prices of flat-panel TVs, and Circuit City followed suit. By the end of 2006, flat-panel TV prices had declined between 40 and 50 percent. Prices fell so quickly during the holiday season that Circuit City’s weekly advertising circulars were often outdated by the time they reached customers.85

Circuit City was especially vulnerable to eroding margins caused by the price war since nearly

44 percent of its revenues came from TV sales. By November 2006, Circuit City realized a net loss of $16 million, down from a quarterly profit of $10.1 million in 2005. Its share price plummeted 80 per-cent by the end of that year.86 In an attempt to mollify investors, Circuit City CEO Schoonover fired some 3,400 of the firm’s most experienced employees and replaced them with less-costly personnel.87 Circuit City had hoped to save $110 million in fiscal 2007 and $140 million in 2008, but in reality, the mass layoff led to poor salesmanship and lower sales.88 Some analysts alleged that the laid-off Circuit City employees took their experience and their customers to Best Buy, bolstering the company’s main competitor.

On January 5, 2008, Herb Greenberg of The Wall Street Journal named Philip Schoonover as the

worst CEO of the year.89 A few months later, Schoonover resigned and was replaced by James Marcum, who served as Circuit City’s CEO and acting president until the firm’s demise. Circuit City filed for Section 11 bankruptcy in November 2008, closing 155 stores in an attempt to preserve a future for the rest.90 After failing to find a buyer, Circuit City began liquidation of the remainder of its assets in January 2009. The firm cited reduced consumer spending and an overall economic downturn as the reasons for its downfall. In May 2009, Systemax purchased the Circuit City brand and trademark for $6.5 million for use in online electronics retail.91

In 2010, following Circuit City’s closure, Best Buy reported a 5.5 percent increase in market share,

to approximately 22.9 percent of the $170 billion domestic market. 92, 93, 94 However, other retail-ers rapidly entered the fray and established significant footholds in the increasingly competitive consumer-electronics industry.

WALMART As the world’s largest retailer, Walmart serves nearly 260 million customers worldwide in over

11,500 stores supported by 158 distribution centers, and it employs two million associates worldwide with 1.5 million in the U.S. alone.95 Walmart was founded by Sam Walton, who opened his first store

in 1962 in Rogers, Arkansas. The young company expanded rapidly, reaching 24 stores and $12.7 mil-lion in sales within its first five years of operations. In 1969, it incorporated as Wal-Mart Stores, Inc., going public shortly thereafter in 1970 at a share price of $16.50.96

Since then, Walmart has leveraged its superior capabilities in logistics and supply chain manage-ment to provide consumers with a wide breadth of merchandise at low prices.97 Walmart stores carry products in areas such as family apparel, health and beauty aids, toys, home furnishings, housewares, hardware, lawn and garden supplies, and automotive products, in addition to consumer electronics. In 2000, the company launched Walmart.com to compete with online retailers such as Amazon.com, and by 2017, Walmart online purchases grew 60 percent.98 In 2016, Walmart’s purchase of Jet.com for over $3 billion,99 and the overall success of combining online sales with a physical presence led to increased sales in both online and physical store channels.100

Walmart moved aggressively into the consumer-electronics market in the wake of Circuit City’s collapse. In May 2010, the company announced that it was significantly expanding its offerings of Blu-ray players, HDTVs, home theater systems, DVDs and Blu-ray movies, and wireless products for home networks. At the same time, Walmart rolled out a dedicated area for pay-as-you-go mobile broadband products from well-respected vendors such as Verizon, Virgin, and AT&T, as well as a new pay-as-you-go program with Sprint for cellular users. The company also increased its smartphone offerings by close to 60 percent. Walmart’s senior vice president for Home Entertainment explained the company’s strategy as: “We...[provide] a well-defined shopping experience in entertainment that enables custom-ers to find what they need quickly, learn about new technology, compare prices among top brands, and every day find amazing value. Our commitment to the best price and surprising value is always a top priority.”101

While Walmart proved more recession-proof than many of its competitors, the anticipated increase

in consumer-electronics sales never materialized. By 2012, the company announced plans to reduce the amount of floor space dedicated to electronics in its stores, a striking reversal of its previous expansion efforts. Poor electronic sales were considered a primary factor in several successive quar-terly declines in U.S sales at stores open for one year or longer. According to one consultant, “You don’t need as much space in that area with products shrinking and purchases going online, and electronics has narrow profit margins. Floor space is a scarce commodity.”102

Since 2016, Walmart has trailed Amazon in the sales of consumer electronics.103 As the leading

discount retailer, Walmart is one of the few companies that stands to benefit from the commoditiza-tion of products such as HDTVs, Blu-ray players, computers, and smartphones.104 Accordingly, recent tactics have included beefing up its online offerings and slashing prices on poorly performing TVs, laptops, tablets, and cell phones. Such massive discounts (e.g., home theaters for $278) are intended to appeal to Walmart’s price-sensitive core customers and entice them into making electronics purchases they would not have previously considered.105

AMAZON.COM Founded in 1994 by Jeffrey Bezos as an online book retailer, and, since the company went public

in 1997, it has rapidly diversified into multiple product areas.106 In 1998, Amazon.com launched its online music and video store and began to sell toys as well as consumer electronics; it added clothing

in 2002, health and personal care items in 2003, and beauty products in 2004.107 Amazon opened its marketplace to third-party vendors through the launch of its “Fulfillment by Amazon” service in 2006. This move enabled small to medium-sized businesses to utilize Amazon’s order fulfillment and customer service infrastructure while further broadening Amazon’s own online presence.108 More recently, Amazon has extended its vast array of products and services beyond traditional retail bound-aries by offering Amazon Web Services. Its foray into cloud computing includes both infrastructure (e.g., data storage) and applications such as database services and workflow software.109

At the same time, Amazon has engaged in an aggressive string of acquisitions, purchasing or invest-ing in more than 70 companies since 1998. Some of these deals are aimed at increasing the breadth of products offered, such as Amazon’s acquisition of Zappos, the number-one online shoe retailer, for $890 million in 2009. Others, such as the 2012 purchase of Kiva Systems, a robotics company, are intended to enhance Amazon’s business operations.110 Importantly, the company has ample amounts of cash, as well as ready access to affordable debt, to continue its buying spree well into the future.111

Another prong of Amazon’s expansion strategy has been to enter the electronic device market

directly, through the manufacture and sale of its Amazon Kindle e-reader series, tablets, and the Amazon Echo and Dot featuring its Alexa digital assistant. As opposed to merely selling electronic books for customers to read on competitors’ technology (e.g., the iPad), Amazon now can influence the development of both the content and the underlying technology. The idea is to create an interlocking ecosystem that enhances sales in both categories, enabling it to compete more directly with Apple. While the theory seems sound, Amazon’s tablet and smartphone devices have struggled to gain a foothold in the market beyond tablets and Amazon’s initial lead in home speakers featuring a digital assistant is under attack by both Google and Apple.

Amazon’s competitive advantage comes from its breadth of selection, the convenience of online

shopping coupled with same-day delivery services, and its ability to undercut competitors on price.112 Until its 2017 purchase of Whole Foods,113 Amazon’s lack of physical stores avoided the costs of retail real estate, inventory displays, and an onsite sales force. The purchase followed Amazon collecting sales tax on purchases in all 50 states in 2017.114 Still, traditional retailers, such as Best Buy, are frus-trated to find that their stores are increasingly serving as showrooms for Amazon buyers. People come in to Best Buy to try out the merchandise and speak with the trained sales associates, but then utilize their smartphones to compare prices and purchase directly from Amazon if its prices are lower.115 Amazon’s strategy appears to be working, as it accounts for 43 percent of all online sales,116 and it only lags Best Buy in overall consumer electronic sales.117

APPLE By 2017 Apple has rolled out 497 of its own retail stores worldwide,118 creating direct competition

for Best Buy and other firms that carry Apple products. Apple stores have greater revenue per square foot than any other retail location,119 In addition to providing consumers with hands-on access to the latest iPods, iPads, iPhones, and Macs, Apple’s retail stores offer one-to-one tech support, as well as a variety of training workshops and youth programs. Apple places its stores in high-profile, high-traffic locations in quality shopping malls and districts, with the goal of attracting new customers and pro-viding a customized shopping experience. Management believes that direct customer contact is useful in demonstrating the superior quality of Apple’s products. All of this requires a significant investment in property (leaseholds), equipment, information systems, inventory, and personnel. Apple continues to provide solid returns, and, in August 2017, its shares hit a new all-time high due

to anticipation over the release of its 10th anniversary iPhone.120 However, the iPhone has begun to define Apple with almost 70 percent of 2016 revenue coming from iPhone sales.121 The company was more diversified under Steve Jobs with revenue coming from multiple products and international mar-kets. However, Apple has become more dependent on the North American market as it faces increased competition from China. The impact is best seen in Apple’s sales in China falling by one-third in 2016.122 Perhaps Apple’s greatest challenge involves investors and consumers having big expectations.

TARGET Target is the second-largest discount retailer in the United States, behind Walmart. Target was

founded in 1962, when Dayton’s, a Minneapolis department store, expanded into a shopping mall in Roseville, Minnesota. The store was named Target, to distinguish the discount retailer from Dayton’s higher-end stores. From 1970 to 1990, Target grew from 24 to 420 stores through organic and inor-ganic growth, becoming the leading brand in the Dayton Hudson Corporation portfolio in 1977. In 1998, Dayton Hudson increased the company’s Internet presence through the purchase of Rivertown Trading. In 2001, Target ended a partnership with Amazon started in 2006 that leveraged Amazon’s e-commerce technology to compete more effectively online.123 In 2017, Target’s online sales were only 4.3 percent of sales, but it was the only source of growth in sales.124

Following Circuit City’s collapse, Target likewise increased its consumer-electronics offer-ings, focusing on TVs, video games, and digital imaging. Changes included the installation of new TV-merchandising walls to make side-by-side comparisons easier for customers, as well as expanding store inventory to include larger and more technologically advanced TV sets. At the same time, Target enlarged its video game section by a third and added demo stations for players to try out new releases. Target was also the first physical retailer to carry Amazon’s Kindle e-book reader.127 The company added a TV delivery and installation service in January 2010,128 and in 2011 unveiled three new con-sumer-electronics services nationwide to further enhance consumers’ shopping experience.129However, Target has prioritized other categories over consumer electronics, and, while Target has more tech savvy customers, Target customers are just as likely to buy from other retailers.130

Analysts like Target’s focus on phones because of the limited footprint required,131 and generally

believe that there is room for Target’s approach in the intensely competitive consumer-electronics market. While Walmart dominates in terms of brand recognition, breadth of selection, and low-cost pricing, Target caters to more of a middle-and upper-class clientele that is likely to appreciate its enhanced service offerings.132 As a general merchandiser, Target also sees much higher foot traffic than Best Buy, and can capitalize on spur-of-the-moment purchases and customers’ desire for a one-stop shopping experience.133

Best Buy’s Comeback After taking over Best Buy, CEO Joly labelled his turnaround strategy “Renew Blue” that focused

a value proposition through providing “advice, service and convenience at competitive prices.”133 Further, Joly emphasized five pillars directed toward Best Buy’s five main stakeholder groups: custom-ers, employees, supply chain partners, investors, and the broader community.

“REINVIGORATE AND REJUVENATE THE CUSTOMER EXPERIENCE” Best Buy’s strategy had long been characterized by a commitment to customer-centricity attained

through in-depth data analysis and systematic customer segmentation. The term customer-centricity indicates a business orientation that caters to specific customer needs and behaviors. Compared to traditional product-centered marketing, customer-centricity looks at a business from the “outside in,” asking what problems its customers are facing, and then providing solutions.135 The firm then custom-izes sales strategies to appeal to the more lucrative customer segments (“angels”) and to discourage the “devils” who actually cost the store money (i.e., buying returned merchandise, loading up on loss leaders, and so on).136

Through market research, Best Buy identified four overarching segments that accounted for 90 per-cent of its customer base: Urban Trendsetters, Upscale Suburban, Empty Nesters, and Middle America. Each was associated with a male and a female persona that encompassed all of the associated customer characteristics.137 For example, “Jill” was an “Upscale Suburban” mom who appreciates personal shop-ping assistants who can help her find the right products for her family quickly. She usually purchased items with accessories and required help with installation.138 Stores were specifically configured to serve the needs of the predominant customer segment(s) in a given region.139 Despite renovation expenses that approach $1 million per store, former CEO and Vice Chairman Brad Anderson claimed that stores that were configured toward local demographics doubled their growth rate compared with other company stores.

The problem was that all of these data regarding in-store customers did not necessarily transfer

to the online setting, which was an increasingly important part of Best Buy’s revenue stream. Instead, Joly recognized the need to create a “leading edge, multichannel shopping experience,” where custom-ers could move fluidly between “bricks” and “clicks.”140 One of the first changes he instituted was to improve Best Buy’s price competitiveness, effectively removing price from customer’s purchase delib-erations. At the same time, he put the “pedal to the metal in digital” by improving search capabilities and online navigation, providing better product information, decreasing delivery times, and instituting a chain-wide ship-from-store program. In 2017, Best Buy also reduced the cost of its same-day shipping from $14.99 to only $5.99 to better compete with Amazon.142 Ultimately, Joly’s goal was to increase both in-store and online conversion rates, so that each customer contact was more likely to lead to a sale. With these changes, online sales increased from seven to 9.8 percent of domestic revenue in a two-year period.142 Over 20 percent of online purchases are now picked up by shoppers in Best Buy stores, significantly increasing traffic and opportunities for ancillary sales.143

“ATTRACT AND INSPIRE LEADERS AND EMPLOYEES” Top management team. One of Joly’s first objectives was to create a top management team with

the necessary expertise and passion for leading Best Buy’s transformation. As a result of both planned and unplanned departures, he now shared leadership responsibilities with an almost entirely new cast of characters (only General Counsel Keith Nelson remained from the prior administration). Sharon McCollam joined Best Buy, in December 2012, as the company’s new Chief Administrative and Chief Financial Officer, with responsibility for all global financial activities. Sharon was regarded highly for her skills as a cross-functional leader and her track record of producing strong financial results.144 Sharon was later replaced in 2017 as CFO by Corie Barry, a 16-year-Best Buy veteran, under an inter-nal succession.145 Matt Furman, Chief Communications and Public Affairs Officer also came on staff

in 2012. He previously served as the vice president of corporate affairs at Mars Chocolate, with prior communications experience at Google, CNN, and in two high profile political administrations.146 In 2014, Greg Revelle joined Best Buy as its Chief Marketing Officer, and Mary Lou Kelley was named President of E-Commerce. However, by 2017, both had left Best Buy under a reorganization.147 Greg left to become the Chief Marketing Officer at Kohls, 148 another struggling retailer. Meanwhile, Best Buy combined marketing with merchandizing, under Mike Mohan, as Best Buy’s vendors helped cover its marketing costs.149 Additionally, Shari Ballard became President of U.S. Retail and Chief Human Resources Officer in 2013, and she continues to hold that position.150

Employees. To create a truly unique, multichannel customer experience, Joly knew he would need

a nimble, educated, and motivated sales force. The “Blue Shirts” had played a key role in the battle for market share against Circuit City and Joly believed they were equally essential to Best Buy’s future. When Joly assumed his role as CEO, employee morale was at an all-time low after three years of poor sales, store closings, and lay-offs, not to mention the analysts’ continued predictions of Best Buy’s demise.151 Joly made the controversial decision to end the company’s Results Oriented Work Environment at its Minneapolis headquarters out of the firm belief that “all hands were needed on deck” at times of crisis, but nevertheless worried about the potential negative effects on employee motivation and performance.152

One of the first things Joly noted during a week spent on the sales floor was the wide variance in

the quality of salespeople; clearly, more (and better) training was needed. Instead of having general sales personnel who knew a little about many products, he envisioned a cadre of highly trained spe-cialists who could answer questions related to a specific product category more quickly and more effectively than searching on the Internet.153 He therefore invested heavily in product training for personnel and committed to putting more customer-facing labor on the floor.154 Best Buy’s “Pathway to Excellence,” was cited in 2013 by trainingmag.com as one of its outstanding training initiatives. The program tied employee learning to their career progression. Employees achieve a new level of distinc-tion upon preparing for a new role, as they deepen their knowledge, and as they take on increasing leadership responsibilities. Stores with the highest number of platinum-and gold-level employees out-sell stores populated by primarily bronze-and silver-level staff members by a factor of three-to-one.155 Having highly trained employees has continued to benefit Best Buy,156 and Best Buy, in 2017, is rolling out sending Best Buy employees to customers’ homes for free to make product recommendations.157

“WORK WITH VENDOR PARTNERS TO INNOVATE AND DRIVE VALUE” Joly saw vendor partnerships as the key to reinvigorating the in-store experience and actively

sought to establish relationships with leading technology companies such as Canon, Google, Intel, Microsoft, Nikon, Samsung, and Sony, much like its longstanding arrangement with Apple. With its physical presence, Best Buy can offer customers the chance to try these vendors’ products out in real-life, facilitating purchase decisions.158 In addition, highly trained salespeople provide a level of product support that is generally not available through online channels.159 Beyond the terms of any revenue sharing agreements, Best Buy benefits from increased store traffic and the positive buzz sur-rounding much anticipated new products. In 2015, Best Buy worked with vendors to create stores within a store that allocated floor space to a single vendor.160 Having such exclusives not only protects against showrooming, but also helps the company compete more effectively against competitors with their own branded products.161 In an interesting twist on that idea, Best Buy announced a deal to place its own licensed stores inside Macy’s locations, as part of its effort to enter consumer electronics. “INCREASE OUR RETURN ON INVESTED CAPITAL FOR INVESTORS” At the same time, Joly saw Best Buy’s portfolio of private-label brands (Insignia, Dynex, Init,

Rocketfish, Geek Squad, and others) as an increasingly important part of Best Buy’s defense against online competitors.163 Insignia focused on electronic equipment, including televisions, monitors, car stereos, home-theater systems, and portable video and audio players. Dynes produced a wide variety of economically priced computer and entertainment accessories such as storage media, data and power cables, webcams, and office supplies, with recent forays into electronics such as high-definition LCD televisions. Init offered storage solutions for many of the products made by both Insignia and Dynex, including media storage, equipment bags, totes, and furniture for home theaters. Rocketfish’s high-end cables were predominantly used in home-theater installation and setup as well as on computer acces-sories, providing another complementary product line. The Geek Squad was the most well-known of all of Best Buy’s private brands, and provided both computer repair and installation services as well as high-end computer accessories and cables.

“CONTINUE OUR LEADERSHIP ROLE IN POSITIVELY IMPACTING OUR WORLD” Under Joly’s leadership, Best Buy renewed its commitment to environmental sustainability and

corporate social responsibility. The company’s electronics recycling program kept more than one billion pounds of equipment out of landfills. Best Buy also worked at reducing its carbon footprint by 20 percent compared to a 2009 baseline. Initially, its recycling program turned a profit, but lower commodity prices lowered revenues and higher costs led it to charge $25 to recycle televisions and computer monitors in 2016 so the recycling program could break even.164 One reason is that drop-ping off out-of-date electronics still brings customers to Best Buy’s stores.

Decision Time Collectively, improvements across Best Buy’s stakeholders had a positive impact for several years.

In 2017, after several years of cost reductions and flat growth, Best Buy announced plans to invest in shipping, compensation and online operations, and its share price fell.165 At least in part, this is due to recognition that Best Buy continues to face competitive pressures even though its stock has performed well.166 While Best Buy’s online sales grew faster than Amazon’s in 2016, it had a smaller base and it is dependent on holiday sales in the fourth quarter.167 Still, Best Buy is still a predominantly bricks-and-motor store with online sales representing only 17 percent of total revenue.168 Overall, now that Best Buy’s performance has improved and expectations are higher, the really hard work of remain-ing competitive is required, and it is a delicate balancing act. Under Joly, Best Buy is trying to “be all things to all shoppers” and its value proposition of providing differentiated service with trained staff at competitive prices involves a delicate balancing act. How can that balance be maintained going forward and should it?