Best Buy: Adaptation in a World of Changing Opportunities Prepared for: Deborah Hodges Prepared by: Ben Smith December 3, 2013 Marketing Case Workshop
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Company Overview Best Buy Co., Inc. (Best Buy) is a global retailer and developer of technology products and services. The company's products include consumer electronics, mobile products, televisions, digital cameras, e-readers, appliances and others. Its services include installation and delivery of appliances, computer and gaming setup, furniture assembly and repair services. Best Buy operates in the US, Europe, Canada, Mexico and China. The company is headquartered in Richfield, the US. The company's strategy has been to develop and supply a wide range of branded products and services to its customers through its innovative technologies[1].
Company History Best Buy was founded by Richard M. Schulze and a partner in Saint Paul Minnesota in 1966 under the name Sound of Music, Inc. In 1983, with the permission of the board of directors, Sound of Music, Inc was renamed to Best Buy Co., Inc. and they expanded their product inventory lines to include a more expansive collection of consumer electronics. In 1989, Best Buy introduced the “grab-and-go” store format allowing shoppers a quick and easy way to purchase electronics. Best Buy expanded its reach to Canada with the 2001 acquisition of Canada-based electronics chain Future Shop Ltd. In 2002 Best Buy acquired the 24-hour computer-support task force Geek Squad expanding their capabilities to surround the entire electronics ownership experience. In 2003 Best Buy opened their first global-sourcing office in Shanghai, China, and in 2006 they acquired a majority interest in Jiangsu Five Start Appliance Co., LTD., China’s fourth-largest appliance chain[2]. In January of 2007, Best Buy opened their first retail store in China. Best Buy has continued to acquire new technologies and expand to over 1,000 retail locations in the US, Puerto Rico, Mexico, Canada, and China. Major competitors in the brick and mortar retail space still include Radioshack, Fry’s Electronics, hhgregg, Target, and Wal-Mart.
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SWOT Analysis BEST BUY CO, INC., SWOT ANALYSIS Strengths
Weaknesses
Stable Revenue Growth
Strong Brand Recognition
Wide Product Portfolio
Declining Liquidity
High Dependence on Vendors
Opportunities
Threats
Growing Opportunities in e-Retailing
Strategic Key Initiatives
Acquisition of New Technologies
Emergence of New Markets
Increase in Labor Wages
Counterfeit Products
Fierce Competition
Source: GlobalData
Strengths Best Buy has shown stable revenue growth and solid financial performance year over year which increases investor and consumer confidence and strengthens the Best Buy brand. The company’s compound annual growth rate for revenue was 8.76% from 2007-2011. This consistent performance enhances Best Buy’s market position as a powerful electronics retailer. With a market share of approximately 40%, consumers see the strength in the Best Buy brand, which is demonstrated in the continual growth and opening of new stores worldwide. By offering a wide product portfolio, Best Buy seeks to offer affordable, appealing products to meet all the needs of today’s diverse consumers demands.
Weaknesses Best Buy has shown some declining liquidity in its assets, as their cash and short-term investments have decreased, indicating a slightly weaker financial position. They also depend highly on vendors for their incoming product supply. Pricing and availability are dictated largely by these companies and it puts Best Buy in a state of dependence and limits their ability to control profit margins. There are only a few key suppliers that make up a majority of Best Buy’s merchandise and any shortage or raise in cost of these items could be very harmful to Best Buy’s profitability. !3
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Opportunities With online retail sales in the US expected to reach $229 billion in 2013, Best Buy has an opportunity to take away a large share of that growing total. According to Global Data’s Best Buy Co, Inc. Financial and Strategic Analysis Review, in 2010 “the top 25 online retailers accounted for 68.4% of e-retail purchases in the fourth quarter.” As shoppers become mrs comfortable with the security and ease of online shopping, Best Buy has a huge opportunity to capitalize on the growing trends of e-retail. By continuing to acquire new technologies and find partnerships in new markets, specifically China, Best Buy has the opportunity to increase their market share over competitors. According to the Ministry of Commerce (MOFCOM), China is the world’s second largest retail market behind the United States, but it is growing fast. Total retail sales of consumer goods in China has doubled from 2008 to 2012 (Exhibit 1).
Exhibit 1: Total retail sales of consumer goods in China, 2008-2012
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Furthermore, China has demonstrated particular growth in the sales of home appliances and video equipment, categories which directly align with Best Buy’s core competencies (Exhibit 2) [3].
Exhibit 2: China’s nominal retail sales growth of enterprises above a designated size, by commodity, FY12-1H13
Threats Best Buy has a large labor force of over 18,000 employees and due to the rising costs of labor in the US, their expenses will continue to rise as wages go up. Best Buy must continue to raise its revenue per employee in order to remain on a path of financial growth. There is also the threat of the strong competitors in the retail industry with growing powerful companies such as Amazon and eBay becoming threatening in the e-commerce platforms they specialize in. Online retailers pose serious concern to Best Buy as they don’t need to budget for the rising costs of !5
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brick and mortar locations, and the rising costs of retail employees, since their labor force is substantially smaller. With smaller operating costs, and a rising trend in online shopping, Best Buy needs to adapt to the threats of these competitors.
Recommendations It is with the consideration of the aforementioned research that Best Buy has decided to focus on expanding its presence in China’s growing retail market, with a secondary emphasis on gaining market share in the US online retail space by optimizing e-commerce platforms. According to market intelligence firm International Data Corporation, global e-commerce sales for physical goods such as consumer electronics will grow at a rate of 18% annually from 2012 to 2017, while in the US, that growth rate will be 7%. Forrester Research, Inc. offers a slightly more optimistic forecast for US online retail sales, showing a CAGR from 2012 to 2017 of 9% (Figure 3). Exhibit 3: US online retail sales, 2012 to 2017
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Exhibit 4 shows the stagnation of US retail revenue growth projected through 2016, while Exhibit 5 compares the US vs China’s growth of e-commerce sales. It is demonstrable through this research that emerging as a strong competitor in the Chinese retail market is a viable option for increasing Best Buy’s revenue and brand equity.
Exhibit 4: US total retail revenues 2012 to 2016
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Exhibit 5: Retail e-commerce sales and growth 2008 to 2016
While China is reaching a point of maturity in growth, there is still a forecasted period of prosperity and economic growth in China’s retail space. Major cities in China offer opportunity for Best Buy to place retail locations as retail sales values in the seven major city centers all displayed year-on-year growth over 8.8% (Exhibit 6). By increasing brand presence in the growing large Chinese metropolitan markets, Best Buy will increase brand awareness and brand value on a global scale. Offering premium consumer electronic brands such as Samsung, Apple, and Sony to the growing number of status-hungry Chinese consumers creates a valuable association with the already reputable and successful brand images of these companies as seen through the eyes of the Chinese urban middle and upper classes. 
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Exhibit 6: Retail sales values in 1H 2013 in major Chinese cities
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REFERENCES
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1. Best Buy Co, Inc. Financial and Strategic Analysis Review. Web. 27 Nov. 2013. 2. "Best Buy to Acquire Majority Interest in Jiangsu Five Star". TheFreeLibrary.com. Web. 28 Nov. 2013. 3. Retail Market in China. Rep. Fung Group, n.d. Web. 28 Nov. 2013.
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