Strategic Analysis Taposh Dutta-Roy (Word count : 4255)
2. Best Buy Strategic Analysis Submitted by: Taposh D. Introduction Best Buy Co., Inc. (NYSE: BBY)is the global leader in consumerelectronics and appliances retail. It hasmore than 1,400 large and small-formatlocations, more than 160,000 employees,$50B in annual revenue and is the 11thlargest retail website in the UnitedStates. Best Buy maintains it has the largest share of the electronic and appliances segment at16%1. Best Buy is a big box store in the electronics retailing industry. Other firms competingwith Best Buy in this industry include Fry’s Electronics and HH Gregg. The industry previouslyincluded CompUSA and Curcuit City. These companies went out of business in 2008 and 2009respectively. Figure 1 (next page) maps the industry. The big box electronic retail industry isdifferentiated from other industries that sell electronics based on the physical size of the store(s),plotted on the x-axis, and variety of electronic inventory, plotted on the y-axis. Firms with smallor zero store square footage but sell a moderate-to-high variety of electronic inventory are withinthe electronics e-commerce retail industry. And, firms with very large store square footage andsell a moderate variety of electronic inventory are big box general merchandise retailers. 2
3. Best Buy Strategic Analysis Submitted by: Taposh D. Figure 1 Despite holding the leading share in the big box electronic retail industry, Best Buy iscurrently a company in decline. The company is facing increasingly strong forces in its industrythat have had a negative impact on its business since 2008. This paper explores industry forces affecting Best Buy, that have resulted in its businessdecline. The following industry dynamics seem to be strengthening buyer power, supplier powerand substitution forces in Best Buy’s industry: • Showrooming - shopping brick and mortar retail locations to determine purchase preference, then buying online for a lower price 3
4. Best Buy Strategic Analysis Submitted by: Taposh D. • More perfect consumer information - e.g. online and mobile price comparison tools • Price matching programs - driving down margins • Shifts in consumer electronic spend - away from computers to mobile products • Substitution - CDs and DVDs replaced by digital music and streaming servicesBackground Best Buy started in 1966 as an audio component systems retailer named Sound of Music.In 1983, the company changed its name to Best Buy. As part of the change the company beganusing mass market merchandising techniques and operating consumer electronic stores in the bigbox superstore format. The company has followed a differentiation strategy to create value fortheir customers. Best Buy operates retail stores throughout the United States, China, Canada, Europe, andMexico. The company sells products in a variety of categories including: consumer electronics,appliances, video games, music, movies, and musical instruments. Elements of theirdifferentiation strategy include: broad selection of products, home delivery, repair andwarranty services, in-home technical services, and financing. The company has also madeacquisitions and joint ventures to further differentiate and diversify its products and services. 4
5. Best Buy Strategic Analysis Submitted by: Taposh D. Store Development and Format Strategy Best Buy’s store development program includes testing stores in new markets; addingstores within existing markets; and relocating, remodeling and expanding existing stores in orderto offer new products and services to customers. The company rolls out new stores following adeliberate process that starts with a detailed market analysis of a target metro area. Onceestablished in a metro area, the company expands into suburban areas and small-markets. Table 1 shows the total number of US Best Buy stores, number of stores opened andclosed, for last five years2. Table 1 2012 2011 2010 2009 2008 U.S. Best Buy stores 1103 1099 1069 1023 923 Stores opened 7 31 46 100 101 Stores closed 3 1 0 0 0Product MixBest Buy carries a large inventory of products ranging from consumer electronics, computers andmobile phones, entertainment products (DVDs, Video Games, CDs), and appliances. Table 2shows share of revenue for each product category. 5
6. Best Buy Strategic Analysis Submitted by: Taposh D. Table 2Physical electronic and entertainment goods make up the bulk of Best Buy’s revenues.Best Buy’s Troubles To understand how much of Best Buy’s performance troubles are due to the industry itinhabits we have used Porter’s Five Forces model. Each of the five forces is analyzed below.Threat of New Entrants Opening a big box electronic store is capital intensive. According to Best Buys FY2012financial statements, the firm spent $766 million in capital expenditures on 300 new stores,remodeling projects to existing stores, and upgrading its information technology infrastrucure.The average big box store is over 20,000 square feet and employs over 75 people. Firms in thisindustry spend millions of dollars on property, plant and equipment to penetrate national andglobal markets to capture market share. HH Gregg and Best Buy also spent $2.2 million and $2.4million, respectively in SG&A per store, and $7.8 million and $8.8 million, respectively, in cost 6
7. Best Buy Strategic Analysis Submitted by: Taposh D. of goods sold per store in FY2012. The amount of initial investment to open a big box electronicretailer is well over $15 million - significant enough to deter new entrants. Additionally, incumbents have advantages because of multiple establishments, brandvalue and relationship with channels. This creates a considerable barrier for new entry. Multipleestablishments in a local region makes it easy for customers to purchase a product. If one chainlocation happens to be out of stock of a particular item, the retailer can easily redirect fromanother chain location’s inventory. Leaders in this industry have an international presence andhave reached economies of scale. The threat of new entrants in the big box electronics retailingindustry is low.Bargaining Power of Suppliers The industrys revenue relies heavily on the major suppliers. For example, the largest 20suppliers account for 60% of merchandise purchased from Best Buy, the dominant firm in theindustry. The industrys suppliers, Dell, Apple, Samsung, Vizio, LG, Sony, and Yamaha amongothers, provide electronics and appliances to the firms stores and warehouses. Suppliers in this industry are subject to influence by large volume buyers. For instance,Best Buy leverages its position as a share leader for electronics with its suppliers. Best Buy’sproduct teams can influence product development and design3. Best Buy and other leaders in theindustry also carry exclusive items in special arrangements with suppliers. Bargaining power ofsuppliers is moderate for this industry. 7
8. Best Buy Strategic Analysis Submitted by: Taposh D. Bargaining Power of Buyers The industry’s customers are individuals and small businesses who use electronics forentertainment, leisure, or business. In the past, customers had been extremely fragmented whichlimited their ability to organize and influence the price of goods and services that firms offer. Inrecent years, the industrys customers power has been increasing. The majority of items sold by big box electronics retailers are undifferentiated and areavailable in other retail stores or online. As a result, buyers are inclined to go for price shoppingand play one vendor against another. Online tools provide customers with near perfectinformation about price availability from competing retail outlets. When shopping forelectronics, 81% of consumers go to a company’s website for information versus 61% ofconsumers going to the brick and mortar store4. The availability of online information andpricing perpetuates the behavior known in the industry as showrooming. To fend offshowrooming the industry has been implementing price-matching policies for online or retailstores4. The bargaining power of buyers in the industry is high.Availability of Substitutes Substitutes to big box electronic retailers include electronic e-commerce retailers (e.g.Amazon, eBay, Overstock.com), big box general merchandise retailers (e.g. Wal-Mart, Target,and Costco) and digital content distributors. (e.g. Netflix, iTunes, X-box Live). E-commerceelectronic retailers are considered substitutes because the companies in this industry are able toprovide similar products while offering the convenience of shopping at home or at work. 8
9. Best Buy Strategic Analysis Submitted by: Taposh D. Electronic commerce firms provide an alternative experience to the big box electronicretailers’ showroom experience. A key differentiating benefit of e-commerce retail is the ease ofpresentation of relavant information for consumer decisionmaking, such as like-productrecommendations and customer reviews. It is possible for e-commerce retailers to conductbusiness under a very different cost structure than Best Buy. Without physical store locations andstaff to support each sale, these firms are often able to offer goods at lower price points than thebig box electronic retailers. Big box general merchandise retailers can serve as a substitute to big box electronicsretailers because these firms offer customers with economies of scope. General merchandiseretailers allow customers to purchase a variety of household goods, including electronics, in onestore. A key differentiator between big box electronic retailers and big box general merchandiseretailers is that the diversity of inventory. Another substitute threat to the big box electronics retail industry is the emergence ofdigital content. More customers are consuming content via online services. These services, suchas Netflix, iTunes and X-box Live, are replacing the DVDs, CDs and video games th