How Best Buy Made a Stunning Turnaround
Best Buy is coming off a year where it saw sales soar by 9.7% amidst a global pandemic to reach $47 billion. While Best Buy’s performance is the envy of many retailers there was a time when many thought Best Buy wouldn’t make it. A decade ago Amazon was heating up the competition and rivals like Circuit City were going out of business. Things were so bad for Best Buy that for the quarter ended March 3, 2012 Best Buy lost $1.7 billion.
In desperate need of a turnaround, Best Buy appointed a new CEO, Hubert Joly, who joined Best Buy in September of 2012 and ran Best Buy until 2019. “We didn’t need a long-term strategy. We needed a plan to stop the bleeding and to quickly and tangibly improve our operational performance.” “The company had only two problems: revenues were down, and margins were down. Only two problems? How hard could it be to solve just two problems,” said Joly as he reflected on what was necessary to turn the retailer around. Once Joly identified the core issues in play he went about fixing Best Buy in five areas.
1. Pricing and cost management. About a decade ago if you asked the CEO of an electronics retailer what was keeping him up at night he would say showrooming. Showrooming happens when a consumer goes into a store like Best Buy, and they test out their favourite products. After deciding what they want to buy instead of making the purchase at Best Buy they buy it online at a cheaper price usually from a retailer like Amazon.
As Amazon grew and gained more dominance in categories like electronics showrooming was having a negative impact on many retailers including Best Buy. Within Joly’s first five months on the job at Best Buy he decided to confront the problem head on by matching the prices at Amazon and several other retailers, both in store and online. By doing this if a customer walked into a Best Buy store and saw something they liked they didn’t have to leave the store and buy the product somewhere else, Best Buy could capture those sales itself.
“Some analysts had been clamoring for the blood sport—counseling Best Buy to shut down stores and slash head count. Cut, cut, cut. But closing down stores wholesale wasn’t the answer. Instead, we decided to take the Amazon bull by the horns,” says Joly. “In October 2012, ahead of the crucial holiday season, we announced that we would match online retailers’ prices—including, of course, Amazon’s. We would turn the same foot traffic into more sales.” “We had quietly tested the idea in our Chicago stores, analyzed the results and concluded it was worth the gamble: the boost in sales would compensate for the cost of matching prices.”
Making this move also allowed Best Buy to compete in areas Amazon cannot, and one of those areas is service. While it may be easy for some to a spend hours online looking at all of the specs for five different TVs and then make an informed decision most people are not technologically savvy. They need to speak to a sales associate to tell them what they are looking for and have the sales associate provide an expert opinion.
Killing showrooming did not come without a cost. Between 2010 and 2014 Best Buy’s margins declined from 25.1% to 22.4%. To make up for the margin Best Buy was losing on each sale it embarked on a cost cutting program. It tried to preserve as much of its customer facing staff as possible while cutting in other areas. “Instead of slashing head count, we attacked non-salary costs with intensity. Televisions are a good example. Flat screens break easily, and about 2% of our TVs end up damaged, costing us some $180 million a year. Reducing even a fraction of that breakage would save significant costs,” said Joly.
“We worked with manufacturers to find ways to design more damage-proof TVs and printed clear instructions on the package showing how to store them—standing, not flat. We trained our warehouse and sales staff to store them low to the ground, reducing the chance they would fall. We even offered to deliver TVs to customers free.”
“No cost saving was too small,” added Joly. “We turned to double-sided black and white printing instead of color. Executive trips on private planes were also nixed. In January 2013, I happily walked to seat 36B in economy class to fly to the Consumer Electronics Show. This sent a clear message.”
The plan worked, Best Buy, since 2012 has cut more than $2 billion in costs. Approximately $1.3 billion of those costs have come from non-salary expenses.
2. Employee engagement and training. Your people are your greatest asset. How many times have we heard those words? They are often said but few companies do a great job in this area. After Joly joined Best Buy one of his first courses of action was to work in a Best Buy retail store. He showed Best Buy employees he was on their side by getting a firsthand view of their challenges and soliciting feedback from the people closest to Best Buy’s customers. Joly also reinstated an employee discount program that was a point of contention when it was removed since one of the reasons why people work at Best Buy is because of their passion for consumer electronics and not being able to get those items at a greater discount became an issue.
Joly also increased the quantity and quality of Best Buy’s store labour and trained employees in new categories such as virtual reality and smart home appliances to provide better service. Not only did the training make employees more engaged but it enhanced Best Buy’s customer service, a key asset in Best Buy’s fight against Amazon.
3. The customer experience in stores. In the age of Amazon many retailers have lost their way. Because of Amazon’s outsized success they often forget about one of their most important assets, their stores. Even with eCommerce the majority of retail sales still come from stores, underscoring their importance. Despite a fierce battle with Amazon for customers and ultimately relevancy Best Buy realized how important stores were and still is to its success.
One of Best Buy’s strategic moves was to elevate the customer experience in its stores by allowing key suppliers to set up store within a store concepts. One of the first suppliers it partnered with was Apple. In 2013 Apple started to set up store in store selling areas within Best Buy locations becoming one of the first retailers Apple partnered with. After that Samsung, Sony and Microsoft followed.
These shops are often designed and staffed by employees from the supplier allowing them to provide the customer experience as they see fit. Another benefit of these shops is that helps mitigate the cost of running Best Buy’s retail stores since the space is rented out to the supplier.
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4. eCommerce. Although Best Buy sells technology solutions its own technology was not meeting customer expectations a decade ago. The search function on Best Buy’s website often spit out results unrelated to what the customer was looking for. We all know how frustrating that can be especially when we are in a hurry. Best Buy’s website was also plagued by other issues including little product information, no customer reviews and an inefficient checkout process. These issues were reflected in Best Buy’s low website conversion rates. While Best Buy had 1 billion website visits in 2013 that traffic only generated $2.3 billion in sales.
Best Buy was also running its online business fairly separately from its offline business. It would not be uncommon for a customer to try to order a product online, find that it was out of stock while there was more than enough stock in a store. Each time these out of stock issues arose Best Buy took a hit if the customer didn’t bother to travel to a store to see if the store had inventory. It’s not the customer’s job to fulfill an order, its Best Buy’s and it had to fix its internal systems so this would stop occurring. To combat this issue Best Buy turned its stores into mini warehouses which it used to fulfill online orders. This not only allowed Best Buy to manage its inventory better but it also reduced the time it took for customers to receive their online orders.
5. Services. Best Buy realized that with the fast pace of technological change consumers needed help determining what products to buy. In recognition of this in September of 2017 Best Buy expanded its In-Home Advisor program to all major markets in the United States. Customers using this service can get advice for free on which technology products to buy and how they should be installed. By the end of 2018 these advisors provided more than 175,000 consultations. The revenue generated per order for Best Buy from these interactions is much higher than from online or in-store.
Finally, Best Buy launched a subscription service nationwide in April of 2018 called Total Tech Support. The service costs $199.99 per year and allows customers to receive unlimited Geek Squad support across several touch points including online, in-store, over the phone and through Best Buy’s app. Service is available 24/7. Through this service Best Buy also provides support for all of the tech within a customer’s home even if the product was purchased outside of Best Buy. One million customers signed up for the service by the end of 2018 and now the program has over two million subscribers.