SYNOPSIS BEST BUY CO., INC

Transcription

1 GROUP CASE SYNOPSIS BEST BUY CO., INC BUS 478 // GROUP 3 JENNY LAM SHIYU LIU ALVIN MUI RICHARD YUAN CONGCONG ZHAO

2 HISTORY/BACKGROUND Best Buy Co., Inc. is a US based specialty retailer of consumer electronics. Headquartered in Richfield, Minnesota, it also operates in Canada, China, Puerto Rico, and Mexico. In 1966, Richard Schulze, along with his business partner Gary Smoliak, opened Sound of Music in St. Paul, Minnesota. The name "Best Buy" was first introduced in 1981 when a tornado hit Minnesota on June 14. In response to the tornado, Sound of Music introduced the "Tornado Sale" also known as a "Best Buy" which later became an annual event. By 1983, Sound of Music was rebranded as Best Buy Co., Inc., with the establishment of a flagship store in Burnsville, Minnesota. In 1993, Best Buy became the second-largest consumer electronics retailer in the US. Later in 1999, a partnership was established between Best Buy and Microsoft. The following year, Bestbuy.com was launched which marked Best Buy's entrance into the online-retailing business. In 2001, Best Buy took its first step into the international market by acquiring Future Shop, Canada's own consumer electronics chain. After acquiring Geek Squad, the 24/7 computer-support force was introduced in every Best Buy in Continuing on its international presence, in 2006, Best Buy spent $180 million towards the acquisition of Jiangsu Five Star Appliance in China. This gave Best Buy the majority share of 136 stores across eight provinces within China. Later on in 2007, Best Buy opened its first retail store in China. Four years later, announcements were made regarding the closure of all nine Best Buy stores in China. Executives at Best Buy decided to focus their resources towards expanding the Jiangsu Five Star Appliances business. In May of 2008, a 50% share of The Carphone Warehouse in the UK was taken over by Best Buy for approximately 1.1 billion Euros. This purchase officially launched the Best Buy Europe joint venture. This joint venture led to the opening of many Best Buy superstores in the UK. Unfortunately, the eleven stores opened in the UK had to close down two years later due to poor sales and income. // 1

3 ENVIRONMENT General Environment Currently, North America, Asia Pacific, and Europe are the major retail markets of consumer electronics. The global economic recession in 2009 had a great impact on the industry in terms of both retail value sales and volume. However, with the GDP growth of 2% in the third quarter of 2012 and unemployment rate declining to 7.9% in October 2012, the US economy is slowly recovering. The ongoing Eurozone crisis has pushed the unemployment rate higher and caused a GDP decline of 0.7% in Q2 of Although Europe's weakness is no longer a regional crisis, it has already spread to other entrants of the global economy. Chinese exports to the Eurozone has decreased sharply in 2012, contributing to the country's GDP growth slowdown. Moreover, Japan's GDP has shrunk an annualized 3.5% in Q3 of 2012, which is the largest decrease since the March 2011 earthquake and tsunami. The US federal government started the 2013 budget year with a $120 billion deficit, which is the nation s fifth straight $1 trillion-plus annual deficit. In order to re-balance the books during times of budget deficits, the government has announced an increase in levels of taxation and decrease in the level of public spending. The foreseeable downtrend in consumers' disposable incomes will likely lead to a sales decline for consumer electronics retailers. On the other hand, the People's Bank of China has been cutting interest rates this year to soften the economic slowdown. In 2011, China has replaced the US in retail value sales of consumer electronic products to become the world s largest and most promising market. As we can see from the chart below, the increasing purchasing capability of Chinese customers bring large potential revenue for the retailers. // 2

4 CHART 1. CONSUMER ELECTRONICS RETAIL SALES As a technology based industry, the consumer electronics retailers have to adopt the latest products in order to maintain their market share. The ability to keep their display fresh and up-to-date is critical to the retailers since the lifecycle of some of the new technologies are getting shorter and shorter. The rapid growth of the Internet, smartphone, and tablet technology is encouraging Internet retail sales in every possible way. In order to attract the young and tech-savvy consumers, retailers have been working to develop Internet retailing as a part of their multi-channel distribution strategy. Internet based retailing has increased significantly in all of the major markets from 2006 to 2012 and the trend is expected to continue in the future. With more and more females entering the job market and gaining financial independence, consumer behavior is expected to shift. Designs and sizes of products need to be improved in order to meet female consumers needs. A global trend of aging population can be foreseen as a result of decreasing birth rates and progressing medical technologies which rises the importance of silver dollar (elderly), especially in the developed countries. Elder people have distinct needs from other age groups, requiring the manufacturers to develop more easy-to-use products. Retailers need to adjust their product collection in order to attract the elders. // 3

5 Industrial Environment THREAT OF NEW ENTRANTS The threat of new entrants is relatively low in the consumer electronics retail industry. The capital requirement to enter the market is affordable compared to other industries. However, it is hard for new entrants to expand their business scales considering the brand reputations established by the existing retailers. Consumers prefer to shop at large chainretailers believing that they can provide the latest products at comparably low prices with excellent customer service. Moreover, it is even harder for the startup retailers to attract customers by offering lower prices, since they have not yet established their relationships with the suppliers. BARGAINING POWER OF SUPPLIERS The bargaining power of suppliers in the consumer electronics retail industry is high. In order to attract customers, electronics retailers have to keep their inventory fresh with up-todate products. Currently, there are only limited number of suppliers. Examples of large suppliers include Apple, HP, Sony, Samsung, LG, and Panasonic. Suppliers can choose to distribute their products in several different stores which gives these suppliers a substantial control over the prices of their products. BARGAINING POWER OF BUYERS The bargaining power of buyers is relatively low within the industry. Since the purchasing volume of an individual or a family consumer is very low, the buyers do not have much influence on the prices. However, due to the low switching cost, retailers have to maintain their competitive advantages by offering lower prices and better services. THREAT OF SUBSTITUTE PRODUCTS The threat of substitutes is low in consumer electronics retail industry. Today, people are relying heavily on modern technologies and electronics. As a result, there are only few substitutes towards electronics, such as books and magazines. However, retailers are more // 4

6 worried about other substitute products, counterfeits. Counterfeit products have similar looks and functions as the original one but can be purchased at a much lower price. This situation is more critical in some developing countries with lower disposable income levels such as China. INTENSITY OF RIVALRY AMONG COMPETITORS The consumer electronics retail industry is highly competitive. According to Yahoo Finance (2012), major retailers within the industry includes Best Buy, Wal-Mart, Dell, RadioShack, Target, and Costco. Competition is fierce among rivals primarily because switching costs are very low. Consumers can choose to shop at any electronic store since the products are not differentiated: similar products are offered at almost all of the different electronic stores. As a result, companies are striving to maintain their market share by competing on prices and non-tangibles, such as customer service and goodwill. COMPETITOR ANALYSIS For many years, Best Buy s most direct competition comes from Circuit City, the second largest consumer electronics retailer. After Circuit City filed for bankruptcy protection in November 2008, Best Buy was able to capture 40% of its market share, making itself the largest specialty consumer electronics retailer in the world. However, Best Buy still has a significant number of competitors: 1. Unspecialized discount retailers such as Walmart and Costco. 2. Online retailers such as Amazon, ebay, and Dell. 3. Consumer electronics producer such as Apple and HP Below is the table containing key financial information of Best Buy s top three direct competitors: Amazon, Apple, and Walmart. // 5

7 TABLE 1. DIRECT COMPETITORS COMPARISON Best Buy Amazon Apple Walmart Industry Market Cap 4.63B B B B M Employees ,200, K Qtrly Rev Growth (yoy) Revenue (ttm) 50.70B 57.26B B B 4.35B Gross Margin (ttm) EBITDA(ttm) 3.30B 2.09B 58.52B 35.99B 95.82M Operation Margin (ttm) Net Income(ttm) -1.06B 40.00M 41.73B 16.59B N/A EPS(ttm) P/E(ttm) N/A PEG(ttm) P/S(ttm) Walmart is a US based corporation that runs discount departments and warehouse stores in fifteen countries. Unlike Best Buy, a pure consumer electronics retailer, Walmart offers various products in different categories including apparel, appliances, automotive parts, electronics, furniture, and groceries. As a result, Walmart has a much larger market capital of $ billion compared to Best Buy s $4.63 billion. Amazon.com, Inc. is an American multinational electronic commerce company and also the largest online retailer in the world. Amazon not only sells consumer electronics online but also produces and sells its own consumer electronics Amazon Kindle e-book reader and the Kindle Fire tablet computer. As online shopping is becoming a popular lifestyle these days, Best Buy is facing a worrisome situation of losing market share to its online competitors. Apple Inc. is a US multinational corporation that sells its own designed products including consumer electronics, computer software, personal computers, MP3 players, and tablets. Apple is acting as both the supplier and competitor to Best Buy today. The company wants to reach a wider customer base by cooperating with different retailers and telecommunication companies. // 6

8 CURRENT SITUATION Financial Performance With new management in place, Best Buy aims to achieve an operating margin of 5-6 percent and invested capital of percent over time. However, Best Buy is going through some rough times as the third quarter financial performance released in August shows negative results for the company. As of November 16, Best Buy s share price dropped by 9.84% to $13.75, which is the lowest price since Many factors could have led to this poor performance. Best Buy has difficulties competing with online retailers such as ebay and Amazon. Online sales for Best Buy only rose by 18% as compared to Amazon s growth of 48%. This decline in sale growth had resulted in a $1.2 billion loss in the previous year, which is a significant change from the $1.4 billion profit four years ago. Retailers like Best Buy have long been affected by competition from online retailers because of the showroom trend, where customers would visit retailers to see the physical object, but buy the actual product from an online retailer that usually offers cheaper prices. With benefits like lower online prices and subscription services such as Netflix, the need for physical retailers such as Best Buy is diminishing. With the poor results in financial performance and the new management in place, many employees have begun making necessary preparations to protect their future by searching for employment elsewhere. Therefore, expenses have been on the rise as Best Buy has to train new employees. The increase in employee training costs is also part of the new CEO Joly s plan, Renew Blue, which aims to provide expertise that customers cannot find online. Retail Shrinkage Best Buy has been experiencing pressures from their online and offline operations. As a result, the company has suffered major decline in profits, market value and major retreat from their initial global expansion efforts. After pulling all eleven stores from the European market, the US division has announced the closing of fifty big box superstores across the nation. This was not simply a cost-reduction solution, but part of the proposed strategy to // 7

9 transform the business model and improve operating performance. By eliminating the large-scale retail outlets, Best Buy plans to concentrate on smaller, more targeted stores with a strong emphasis on mobile electronics. In addition, retail operations will heavily shift into their online store. Major Operations and Management Restructure Best Buy recently suffered from a scandal that caused a significant shift in the company s top management. Under the new leadership of Hubert Joly, major upper-level organizational changes were in place to accommodate the new CEO s strategy. A significant layer of senior management was dismissed causing a huge shift in top management. The organizational structure will become more centralized with more support in departments such as Human Resources, Finance, Legal and Marketing. Moreover, more resources are planned to be invested in Information Technology departments to plan and execute online and new communication approaches. Based on the Joly s planned tactics, the top priority is enhancing the customer experience and ultimately converting both online and offline shoppers from browsers to buyers. Some immediate actions implemented include improve employee training procedures and customer-orientated incentives such as flexible price matching (using flyers, websites or in-store from local competitors). Potential Buyout A potential buyout offer from founder and former CEO Richard Schulze is currently underway. New proposal will soon be released to the board of directors, and Schulze is hoping to finalize the offer sometime next month. However, due to the recent third quarter data, the chance of a buyout is diminishing as the company s prospects do not look very attractive to investors. Many investors have not been too hopeful of Schulze s buyout plan because the share price has not closed above $18 for a long time and Schulze s proposal offered to buy from $24 to $26 per share. Schulze's proposal offers to buy at an estimated amount of 8 billion dollars. // 8

10 STRATEGIC CHALLENGES Best Buy is currently faced with several strategic challenges. Some of these challenges Best Buy is currently faced with several strategic challenges. Some of these challenges affect Best Buy in the short run while others have a lasting effect on the company in terms of sales and growth. In both the short and long term, here are the challenges Best Buy is facing: 1. With the increasing popularity of digital copies and pirating, media sales at Best Buy has drastically fallen over the recent years and the trend is still continuing. A large portion of the market has transitioned to web-based programs such as Netflix and I-Tunes for their movie and music needs. These web-based programs allow customers to purchase the media they wish within minutes, at a lower cost, and all within the comfort of their own home. 2. Constant technological improvement has lowered the sales in areas where Best Buy was once famous for. For example, as recent as a decade ago, digital imaging was very popular as Best Buy. Everyone would come to the "Big-Box" store as their one-stop shop for all their camera and camcorder needs. With the technology of today's smartphones, a 5.0 mega-pixel camera with full HD recording has become the industry standard. The average person no longer needs a digital camera or camcorder as it's more hassle than anything to carry an extra electronic around. 3. The sales of popular brand items are being redirected elsewhere. For example, the opening of the Apple store has taken a large portion of Apple brand sales from Best Buy. Customers would rather visit a specialized store to purchase, inquire or repair an item, especially if the store is owned by the manufacturer itself. These manufacturer owned stores are not only taking away sales but setting price standards as well. Using the same example, Best Buy cannot increase their profit margins by raising the prices of their Apple products since the nearby Apple store stocks the same item at a specific price. 4. An enormous challenge Best Buy currently faces is the growth and popularity of online retailers such as Amazon. A large majority of consumers have a tendency to go to Amazon // 9

11 or similar retailers to purchase their electronics. Best Buy has just become a mere showroom for these retailers. Customers are coming into Best Buy to inquire and test out the products they're in the market for. After they had the opportunity to try out the product and their questions answered, they can simply log on to Amazon and have the same product shipped to their doorstep within days. Not only do these products arrive at their house, they are also significantly lower in cost compared to their local Best Buy. This leaves Best Buy at a permanent cost disadvantage because it is almost impossible for them to compete with said online retailers in terms of price. Not only is Best Buy's cost of goods sold significantly higher, they also lack the variety and selection competing online retailers offer. REFERENCES Bustillo, M. (2011, April 15). Best Buy to Shrink 'Big-Box' Store Strategy. Wall Street Journal - Eastern Edition. p. B7 Felix Lowe. (2008). Best buy: Company history and facts. Retrieved from Katsenelson, V. (2012). Thinking outside the best buy box. Institutional Investor-International Edition, 37(5), 31. Passport. (2011, Dec 05). Consumer Electronics Global Overview: Growth Trends and Analysis. Retrieved from Passport GMID: Passport. (2012, April). Best Buy Co Inc In Retailing (World). Retrieved from Passport GMID: Passport. (2012, July 18). Economic Impact: Examining the Effect of Fiscal and Monetary Policy in Retailing. Retrieved from Passport GMID: Yahoo! Canada Finance. (2012). BBY Competitors. Retrieved from Yahoo! Canada Finance: // 10