Detailed Analysis

Best Buy Co., Inc.

Table of Content

I. Mission Statement & Company Overview

II. Internal Analysis & Marketing Strategy

III. Financial Performance

IV. External Environment

V. SWOT Analysis

VI. Value Chain Analysis

VII. Issues faced by Best Buy

VIII. Financial & Statistical Analysis

Mission Statement

Best Buy does not have an official mission statement, but through their actions, it is evident that they want to provide expert service to their customers at a reasonable price.

Company Overview

James Wheeler and Richard Schulze were the founding member of Best Buy, which started under the name of Sound of Music, in Minnesota in 1996. The company has since transformed into a behemoth of an electronic retail giant from a successful audio specialty store. Best Buy Co., Inc. went through rapid phases of growth after the arrival of the superstore, acquisitions of other brands, and international expansion. The goal of Best Buy was to be a one stop shop for all the consumer electronic needs, and provide a relaxed shopping experience. It laid claim to be the largest electronic retailer in the United States with the sales of $50 billion dollars compared to Walmart’s $30 billion dollars and $14 billion dollars of Amazon. The volatile consumer-electronic retail industry

Internal Analysis

Best Buy was a dominant force in consumer-electronic retail industry, with both large footprints in suburban area, as well as hefty share of the market. The core competency of Best Buy lied in their business operation model, which provided a relaxed shopping experience to the customers with sufficient information and services as required. They did not have sales representatives in their stores, which not only aided in their aim to provide a smooth experience, but also helped to reduce their operating costs. Best Buy had elaborate chain of information system which was valuable to their business operation and was one of the company’s core competency.

Best Buy had established itself was one of the largest consumer electronic retailer in the United States, with numerous big-box retail stores throughout the nation which were meant to compete with Walmart’s price and Circuit City’s assortment. Best Buy recognized that most customers preferred lower prices and were willing to for-go some customer service. It prompted Best Buy to implement a low-cost strategy throughout their stores.

Marketing

Best Buy focused their marketing strategy to modify stores based on the predominant customer base of the region; Urban trendsetters, Upscale suburban, Empty Nesters and Middle America. The clear division of their customer base helped to improve inventory management and efficient operation. The Best Buy management were able to modify and restructure their physical stores to meet the demands of their predominant customer base, however the implementation of the same principle in web platform failed due to clear lack of boundaries. The newly appointed CEO, Hubert Joly wanted to focus on the core competency of the company, and create a system where customers could move between “Brick” & “Click”.

Best Buy’s Marketing Mix

Product

Best Buy carried a wide range on consumer-electronic assortment from televisions, home appliances, computers, mobile devices, and various other electronic products. Best Buy does not have an official mission statement, but it is clear that their goal is to be the industry leader for consumer-electronic products.

Price

Hubert Joly (CEO) was convinced that the company’s mix of “Expert service. Unbeatable Price” provided the best value proposition. It is clear from the statement that, Best Buy wanted to provide excellent product and services to the customer at a competitive price. Joly’s “Renew Blue” strategy emphasized the company’s objective to make the price of the product obsolete in customer’s decision-making process.

Promotion

The co-relation of Best Buy with consumer electronics highlights their success to promote themselves as a consumer electronic retailer. Best Buy positions itself as an electronic retailer and the image of Best Buy is quite clear among the public.

Place

Best Buy has a gigantic footprint in the form of physical stores with a mixture of big-box retail stores and mobile stores around the world. Under the new supervision of CEO, Hubert Joly, the company has been increasing their efforts to have an increased share of the e-commerce market.

Financial Performance

CEO Hubert Joly inherited a business that was a major force in the consumer-electronic market, but faced uphill challenges to stop the sliding financial performance. The company had seen a decline in operating income as well as earnings per share for a period of four years which started in 2011, and the initiatives implemented by Joly were successful to reverse the trends of the recent financial performance. The results of the new strategy were pretty evident as the company increased its cash, cash equivalent, and short-term investments at the end of 2014.

When Joly took charge of Best Buy from his predecessor, Best Buy despite dominating the sales of consumer electronic products compared to its closest rivals, Walmart and Amazon, had recorded a sharp drop in stock price from $45 to $15 per share. The same store sales were also in decline for each quarter compared to same quarters of previous years. Mr. Joly had a strong belief that the core values and competency of Best Buy would be sufficient to reverse the current financial trends, if his strategies were implemented to restructure the company.

External Environment

In this day and age, the rate of innovation and the wide range of electronic manufacturer made it extremely difficult for one firm to dominate the consumer-electronic retail market. Best Buy needs to pay extreme attention to external environment because they have immense its operation and its future performance.

Operating Environment

The market for consumer-electronic retail is fragmented and liable to adverse effects from various external factors such as buying power, competitors, creditors, labor force, and suppliers. Best Buy nor its competitors have been able to establish a complete dominance in this sector. It is important to realize that in an economic downturn, consumer-electronic market faces greater risk compared to commodity market because consumer view electronic devices as discretionary expenses. Economic downturn is especially tricky for specialty store as they offer products which are viewed as discretionary by most consumers.

Competitors

Circuit City was one of its largest competitor at one time but they could not adapt to changing market, and made key strategic errors which led to their downturn. The crucial error in their strategic planning came in the form of lay off of their highly skilled sales person to reduce operating costs. This decision was the final nail in Circuit City’s coffin as they lost experienced sales person which directly impacted their sales, and the ex-employees took their experience and knowledge to their direct rivals such as Best-Buy. The collapse of Circuit City lead to the direct increase in market share for Best Buy, but it could not sweep in to fill in the void left by Circuit City, as many other e-commerce giants and retailers jumped in to take advantage of the opportunity. Walmart, the largest retailer in the world has the financial and operational resources to challenge Best Buy to capture the consumer-electronic market shares. Walmart has a vast network of suppliers and physical presence around the world, and they can use that advantage to be a giant electronic retailer. Amazon, an e-commerce giant founded by Jeffrey Bezos, is one of the fastest growing company in the world, and provides a large assortment of consumer goods. Amazon provides platform for manufacturers around the globe, and is also involved with direct manufacturing of electronic products such as Fire phone, Kindles, and other electronic devices. The major advantage that competitors like Walmart and Amazon has over Best Buy is the wide assortment of products other than electronic devices. In periods of economic downturn, the competitors are likely to fare better because they can either shift their losses to other product or the sales of other products can offset their losses from electronic devices.

Consumers

The rapid advancement in technology has made consumer electronic good rather affordable, and even led to commoditization of these goods. Mobile devices, computers, cell phones, and TVs are common in every household. Consumers have lot more option not only in-terms of manufacturer, but also retailers. It is critical for manufacturer as well as retailer to carter towards the needs of customer base in a specific region. There have been many failures by manufacturer to recognize the wants of consumers which has led to lackluster devices and sales. A prime example of a device not living up to the standard of the consumers would be Amazon Fire phone, which are poorly received by the consumers. It led to huge losses for Amazon, and large unsold inventory.

Labor

In a global market, companies are free to move their manufacturing plants around the world to take advantage of certain tax laws or cheaper labor force. Most electronic companies have their manufacturing plants in countries that provide them with certain tax benefit and cheaper labor force. The availability of cheaper labor force was one of the contributing factor for such drastic price drop in consumer electronic products.

Suppliers

The constant desire of the supplier such as Apple, Samsung, L.G. to release better product with additional feature each year makes it complicated for retailer to sell the existing products. The retailers need to be aware of the actions of the manufacturer to manage the existing inventory, because electronic devices have a very short life span in terms of relevancy.

Industry Environment

The technological sector is one of the most competitive industry, because of low entry of barrier as well as vast technological advancement around the globe. The consumer-electronics retailers are directly influenced by the industry environment of electronic manufacturer. Suppliers such as Samsung and Apple that introduce new version of their products every year makes the older product obsolete, and retailers need to carefully analyze their current inventory. The consumers are also powerful stakeholders for any consumer-electronics retailers, and their purchasing power are directly related to the performance of retailers. The vast availability of different products and manufacturer creates complication for retailers to analyze the needs of their customer base. It is one of the contributing factor for such a fragmented retail sector, as it is impossible to carry products from all the vendors.

SWOT Analysis

Strengths

CEO Hubert Joly’s “Renew Blue” turnaround plan was able to build in the strengths of Best Buy and further restructure their business to reinvigorate the company for future challenges. Best Buy is still synonymous with consumer-electronic products, and they can further build on their image. They maintained a large physical footprint around the world and significant presence as an e-commerce retailer. They have a proven track record to retain customers and build significant customer loyalty. “Best Buy states that 70% of the U.S. population lives within 15 minutes of one of its stores, and half of all online orders are now picked up or shipped from a store”. This statement highlights the effectiveness of CEO Joly’s strategy to implement fluid shopping experience for the customers between their physical and E-stores. The relation with Apple, one of the most lucrative brand in the world, positions Best Buy to hold of any imminent threat from its rivals. The relation between many vendors gives them unique edge amongst the competitors, and is one of the major focus of their brand-new strategy. Best Buy has also seen a tremendous growth in their E-commerce business, it grew about 24 % in the first quarter of 2016 as compared to 5% of growth in Q1 2015.

“In September 2015, Verizon announced it would provide an expanded Verizon Experience within 250 Best Buy store across the United States.” Best Buy has recognized the value of smartphones and devices in the modern consumer segment, and has aggressively building relation with Verizon and AT&T, two of the largest network provider in United States. Best Buy’s greatest strength lies in its ability to utilize the prime locations of its store to serve the different vendors and create a better customer shopping experience. Best Buy also has Geek Squad in its disposal, a 24-hour computer-task force, which it acquired in 2002. Geek Squad adds considerable value to customer experience and provides a distinction from other competitors.

Weakness

Best Buy still depends largely on sales from their physical store, which means they are in direct disadvantage compared to Amazon in terms of operating costs. The company lags behind Amazon on e-commerce transaction, which appears to be the direction of majority of consumer-electronic retail. The exclusivity of being an electronic stone is also one of its glaring weakness, because it is confined by the industry boundaries. The technological advancement and the changing consumer behavior has changes the perception of some electronic devices such as smartphones, computers, and TVs as a commodity, but in an economic downturn, people view these items as discretionary.

Opportunities

The ever-changing consumer-electronics sector provides a unique opportunity for Best Buy to take advantage of the next big thing. There have been past examples of how a single device can change the face of the industry and propel the company to dominate the market. Apple IPhone is a prime example of a device that established a standard of new smartphone era, and helped Apple dominate the smartphone industry. Best Buy needs to be aggressive with their approach, and be directly involved with a product. Amazon has introduced products such as Fire phone, Amazon Kindle, Kindle Tablets, Alexis, and Echo, with mixed reception by the consumers, but they recognize the opportunity in mobile devices. Best Buy can enter into Asian market, which is one of the fastest growing market. The improvement of living standard and economic condition in Asian country, specifically in China and India, represents a vast opportunity to create a dominance in those market with their experience and resources. They can improve their online presence, and slowly move to an online retailing business with physical presence in strategical areas.

Threats

The changing consumer behavior is one of the biggest threat in-front of Best Buy, as there is a growing trend of consumers preferring online medium for purchases especially for consumer-electronic goods. Best Buy has been successful to create beneficial relation with manufacturer such as Apple and Samsung, but they each have their own physical stores and online store, directly competing with Best Buy. Big box retailers such as Walmart and Target can undercut Best Buy’s prices, because they can shift costs to other items. Consumers are not loyal enough to Best Buy, to purchase devices at a higher price. The rapid pace of technological advancement and introduction of new products every few months makes Best Buy’s inventory prone to significant price drop, which will affect their bottom-line.

Value Chain Analysis

Best Buy can appease to both value seeking as well as technology savvy customer base, if they can distinguish their product and services from their competitors. Best Buy finds itself in a precarious situation because it is directly competing with its supplier, therefore, it might be impossible to take the low-cost approach. They can differentiate themselves from their competitors from adding value proposition to the services they provide with addition to the products. Geek Squad adds a significant value to the customer, and helps Best Buy differentiate their services from competitors. As a retail store, it is extremely important to recognize few steps where they can add value to the whole shopping experience, as they have no control over the product manufacturing process. Best Buy’s vision of “Brick & Click” can help it distinguish from e-commerce giant Amazon, because they can have their products picked up in their physical stores after online order is placed. They can update their website interface to make it sleek and easier to navigate. Customers can apply for Best Buy credit card through Citi Bank which are filled with cashback perks, or finance their purchase through the card.

Issues faced by Best Buy

Best Buy’s inability to adapt to the changing global consumer-electronic market was one of the reasons why it could not establish a dominance, even when they had the sales and experience to pull ahead of the competitors. The rise of e-commerce and the short sightedness strategic planning left them behind to capitalize on their vast resource and knowledge of their market. The uber competitive nature of consumer-electronic retail and manufacturing industry has created a fragmented industry. The fragmentation of the market creates difficulties for Best Buy because it needs to evaluate its many competition before implementing any initiatives. Best Buy is completely dependent on suppliers for their products, which would not have been a major issue, if suppliers like Samsung and Apple were not directly competing against their business. The strengths of Best Buy lie in its physical presence around the globe, but it might not necessarily be the competitive advantage to push them past their competitors. Best Buy should aggressively invest in their e-commerce business. According to the financial reports, Best Buy does not have a lot of free cash flow to invest aggressively in their efforts to move their business in the e-commerce sector. The issues that faces Best Buy can be tackled by implementation of turnaround strategy as recommended by CEO Joly, because their operating environment and their internal struggles makes it difficult them to tackle these issues aggressively.

Financial & Statistical Analysis

The recognition of the change in consumer behavior, and the rapid growth of e-commerce business has made Best Buy aware of the importance of the strategically located physical store. The growth of Best Buy mobile stand-alone store signify the shift in the strategy of Best Buy.

Inventory Turnover Ratio

The comparison of the inventory turnover ratio indicates an efficient management of inventories by Best Buy, even though Walmart has a higher inventory turnover ratio, this might be attributed to the products sold by Walmart.

Net Income Comparison

The income comparison between Best Buy and two of its major competitor Walmart and Amazon reveals, the huge advantage of Walmart in terms of income is pretty evident. The vast difference in the income, can be attributed to the vast assortment of merchandise of Walmart, and the financial troubles of Best Buy during 2012 and 2013.

Cash Flow Comparison

The cash flow of Best Buy is significantly lower compared to its competitors, and it also represents the net decrease of cash flow from previous years. There is a slight increase in cash flow after CEO Hubert Joly, implemented his new turnaround strategy. The restructuring of the company around 2012, also contributed to overall decrease in cash flow in 2013.

Stock Price Comparison

Return on Assets

Reference

Vena, D. (2017, June 22). Did Apple Just Make Best Buy a Better Buy? Retrieved October 10, 2017, from https://www.fool.com/investing/2017/06/22/did-apple-just-make-best-buy-a-better-buy.aspx

Intelligence, B. (2016, May 25). Best Buy's e-commerce business is surging. Retrieved October 10, 2017, from http://www.businessinsider.com/best-buys-e-commerce-business-is-surging-2016-5

2017 Regular Meeting of Shareholders. (n.d.). Retrieved October 10, 2017, from http://investors.bestbuy.com/investor-relations/financial-info/annual-reports-and-proxy-statements/default.aspx

Related Links. (n.d.). Retrieved October 10, 2017, from http://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx

(n.d.). Retrieved October 10, 2017, from http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

Blodget, H. (2012, January 22). This Article Explains Why Apple Makes iPhones In China And Why The US Is Screwed. Retrieved October 10, 2017, from http://www.businessinsider.com/you-simply-must-read-this-article-that-explains-why-apple-makes-iphones-in-china-and-why-the-us-is-screwed-2012-1

Return on Assets

Amazon 2011.0 2012.0 2013.0 2014.0 2015.0 0.0286330119115145 -0.00134871094357893 0.0075363753885084 -0.0050916927237387 0.00993755679497119 Best Buy 2011.0 2012.0 2013.0 2014.0 2015.0 0.0348868976068189 -0.0344837245784077 -0.0137769447047798 0.0158455948055043 0.0439948619139371 Walmart 2011.0 2012.0 2013.0 2014.0 2015.0 0.091 0.088 0.09 0.081 0.082

Big Box vs Mobile Stand Alone

2010 2011 2012 2013 2014 2015 0.0 1069.0 1099.0 1103.0 1056.0 1055.0 1050.0 2010 2011 2012 2013 2014 2015 0.0 74.0 177.0 305.0 409.0 406.0 367.0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Inventory Turnover Ratio

Best Buy 2011.0 2012.0 2013.0 2014.0 2015.0 6.60827549855047 6.555383556931539 5.59827670297513 5.22507742529505 5.9321327014218 Walmart 2011.0 2012.0 2013.0 2014.0 2015.0 9.134649650157168 8.734999739352542 8.647226958793862 8.59361903316562 8.1131123679152

Net Income Comparison

2011 Best Buy Walmart Amazon 1277.0 15340.0 631.0 2012 Best Buy Walmart Amazon -1231.0 15724.0 -39.0 2013 Best Buy Walmart Amazon -441.0 16963.0 274.0 2014 Best Buy Walmart Amazon 532.0 15918.0 -241.0 2015 Best Buy Walmart Amazon 1233.0 16182.0 596.0

Cash FLow

Best Buy 2011.0 2012.0 2013.0 2014.0 2015.0 1103.0 1401.0 1199.0 1826.0 2678.0 Walmart 2011.0 2012.0 2013.0 2014.0 2015.0 7395.0 6550.0 7781.0 7281.0 9135.0 Amazon 2011.0 2012.0 2013.0 2014.0 2015.0 5269.0 8084.0 8658.0 14557.0 15890.0

Stock Price Comparison

Best Buy 2011.0 2012.0 2013.0 2014.0 2015.0 48.83 33.22 27.95 44.66 40.03 Walmart 2011.0 2012.0 2013.0 2014.0 2015.0 57.9 62.0 75.16 79.5 79.99 Amazon 2011.0 2012.0 2013.0 2014.0 2015.0 246.71 263.11 405.63 341.26 696.4400000000001

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