Career, Marketing

A Strategic Recommendation for Best Buy

Below is the final case write up from the story I told last week. It was written in October 2012. Hope you enjoy it.

Executive Summary

The evolution of the Internet and where it stands today is most important for analyzing this situation. The Internet made way to ecommerce, which has made shopping for products more simple. Consumers prefer simple. As a result, the number of online purchases has grown and is eroding the revenue growth of big box retailers, like Best Buy. Customers can walk into a Best Buy store, receive help from a sales representative, then walk out to purchase either online from Amazon or next store at the Wal-Mart for a cheaper price. Since consumers can access price information with ease, Best Buy has entered an unavoidable price war with these competitors Specifically, Amazon with online and Wal-Mart with in store.

Before I announce my strategic recommendation, you must know that I fully exercised a handful of possible options so that my recommendation yielded the highest probability of getting Best Buy out of crisis and back into success. I focus my strategic recommendation on price transparency in order to get revenue back to improved growth levels. Embracing the low prices offered by Amazon and Wal-Mart, Best Buy must offer a “Match or Beat” pricing model. Each Best Buy store will guarantee to match any prices that the two competitors offer in order to encourage customers to buy in store at that moment. Furthermore, Best Buy sales representatives will carry tablet devices in order to easily get complete access on competitor prices for products.

Lastly, I would like to address the sales tax issue. I am confident that legislation will come out with a policy in the foreseeable future that will add sales tax to Internet transactions, minimizing the consumers’ incentive to buy from a site like Amazon. However, part of my recommendation tackles this problem immediately without waiting for policy makers. Utilizing the new tablets given to the Best Buy sales force, consumers are given the option to buy online—while in store—from the employee’s tablet. I see this being a distinct advantage for Best Buy. This case provides a thorough analysis of the Best Buy crisis along with a complete strategic recommendation for the coming years.

The Core Problem is Price

There are a few important takeaways from analyzing the industry. The Internet created the rise of ecommerce sites like Amazon. At the inception of ecommerce, companies like Amazon were a substitute method for purchasing consumer products. Today, they have evolved into Best Buy’s direct competition. Full ecommerce sites have minuscule salary and overhead costs compared to a retail store, providing for better margins and the opportunity to offer lower prices. Also, the evolution of the Internet has given more power to buyers. They can research where to find the best price as well as product information—all from their computers. With Amazon’s ability to provide low prices coupled with consumers’ power to easily locate low prices, the profound problem for Best Buy and other big box retailers is prices. If prices are higher, consumers will continue to use retail stores as showrooms. The opportunity lies in embracing the price war both online and in-store to compete with Amazon and others.

Attack Amazon and Wal-Mart To Grow Revenue

This goal focuses primarily on the biggest problem area—consumer electronics. The current market share for Best Buy’s consumer electronics products is 28.2% with a decrease in market share 1.5% from 2010 to 2011, while Amazon and Wal-Mart saw market share growth for 2010 to 2011 at 51.5% and 4.9% respectively. We must slow their growth by competing directly with Amazon for online sales and directly with Wal-Mart for in-store sales. I projected the revenue growth of the consumer electronics industry using numbers from 2011 and 2010 (Please see attached Excel File, Workbook titled INDUSTRY PROJECTIONS). The growth was 5%. I anticipated that this industry would continue to grow by 5% over the next 5 years. Therefore, the entire revenue for the industry five years from now will be $168 billion, up from $132 billion. The desired market share by 2016 is 32.4%, which will get consumer electronic revenue for Best Buy to $54.6 billion. Here is where we establish our goal: grow revenue for Best Buy by 8% a year for the next 5 years.

In attaining this goal, there are a few objectives. First, Best Buy consumers must perceive the brand as a brick and mortar store as well as an online store; brand perception can no longer be more tailored to its physical stores. Furthermore, we will directly compete with Amazon and Wal-Mart and reach the revenue growth goal by price transparency both online and in stores. Lastly, we must remain the hub for technology products.

Some Options Considered

In deciding on a strategy, I thoroughly considered a few different options. First, I thought closing 15% of the 4,300 Best Buy stores, which would end up at 645 less stores. Specifically, the stores that are lower producing or incurring loses. It will free up resources and allow redirecting cash toward other options. However, this seriously erodes the Best Buy brand. The consumers in those areas are negatively affected. Also, the likelihood is high that the publicity attached to this option will reach other consumers outside these geographical areas creating an even deeper negative perception.

The second option is to make competitor prices available both online and in store, and guarantee to match or beat any prices. Arm frontline employees with tablets to ensure the consumer find the right product at the best price. They’d have the ability to view prices of Amazon and Wal-Mart right in front of the customer then match or beat those prices. A tablet provides frontline employees with information as well as eliminates any barriers of buying. Matching or beating competitor prices, the customer now has an incentive to buy from Best Buy rather than walking out of a store to buy online for less. This also aligns with the objective of price transparency. By doing it through both channels—online and in store—price transparency will have a multiplier effect. There are a few downfalls to this. We are entering a price war with Amazon and Wal-Mart. However, the price war is here to stay. Through matching or beating competitor prices, we take on the risk that margins may erode more than we project.

A third option is to optimize floor space by changing the store layout. Add a help center that focuses on consumer electronics, similar to Apple’s Genius Bar. This makes for a dedicated space to support the objective of price transparency. I envision a banner above the help center in big letters indicating “We Can Match or Beat”, and a central place for it makes the objective clear to consumers. This will enable customers to work with experts and find what they want faster. It also follows the trend in consumer retail that Apple created. There will be a significant cost of rearranging and adding this feature, though. Furthermore, this doesn’t lend itself to where customers ultimate want to go which is the product they are seeking. For example, if a customer desired a TV and met a sales rep at this new bar, he or she would then have to move around the store to see the TV. They would really want to be in front of the TVs rather than at a Genius Bar.
This fourth option addresses the sales tax issue. Customers have two choices. They can pay the sales tax at the cash register as they do now. Or assuming the sales team is armed with tablets, customers can buy their desired product online while in store through the employee’s tablet. They will have to wait 48 hours for the delivery, but are freed from the burden of paying sales tax. Here, we are competing directly with Amazon who currently does not face a sales tax issue. There is a potential legal barrier to this option with respect to allowing for the online purchase in the Best Buy store. However, I checked with a Certified Public Accountant who ensured this is a possible option. Additional legal research might have to be done.

Price transparency and how to go about it

My recommendation is to pursue price transparency by matching or beating Amazon and Wal-Mart prices, arming employees with tablet devices so that they can access competitor prices, and offering customers the option of buying online in store to eliminate sales tax. These three tactics will help meet the goal of increasing revenue in the consumer electronics category by 8% each year as consumers will be incentivized to purchase products in the match or beat model. Best Buy will compete directly with Amazon and Wal-Mart for sales by guaranteeing the best price. Furthermore, it strongly adds an online perception to the brick and mortar Best Buy brand. In honing in on consumer electronics and mobile devices, it will ensure that Best Buy remains the hub for technology products.
What price transparency will cost?

There will be three upfront technology costs. The first is the immediate purchase of tablet devices to provide frontline employees. I estimate this to be a cost of $8.6 million. I considered Best Buy’s 4,300 stores and decided ten tablets per store is reasonable. The tablets will cost $200 per unit. Again, the reasons for the tablets are they tackle price competition and help consumers fray the cost sales of tax by buying online while in store. The second cost is the immediate building of a browser-based tool allowing employees to review Amazon and Wal-Mart prices with customers. Below is a visual concept. This is a screenshot of a webpage from PriceGrabber.com. You can filter through certain products where it provides the viewer with the different sellers of the product and the price they are selling it.

The one-time cost to create this web based sales tool is estimated at $100,000. The third technology cost is electronically accepting credit cards on in-store Internet purchase transactions as well as in-store “carry out” purchase transactions. Streamlining the payment process using credit card enabled devices that are used with the tablets will result in an efficient buying process for customers. The cost of 43,000 devices (one for each tablet) is $50 per device and requires $2 million.
In order to make it clear to consumers that Best Buy will provide them with the best price, part of the implementation is a “We Can Match or Beat” campaign. One component of this is to begin making a TV commercial. Over the next month, create a TV ad that ensures consumers that Best Buy will “Match or Beat” the prices of Amazon and Wal-Mart. Air it a month from now as Black Friday and the holiday season approach. In order to air this ad on TV, I estimated an additional $2 million to Best Buy’s advertising costs. Lastly, there is a cost for in-store signage to make very clear to customers our match or beat pricing model. For the current 4,300 Best Buy stores, I estimated that each one gets $1,000 worth of in-store signage, putting the total cost at about $4.3 million. Arguably there is a cost incurred by matching the prices of Amazon and Wal-Mart. This cost is offset by the “Match or Beat” campaign that will increase consumer confidence, resulting in what I see as only a slight drop in profit margin.

Results and Conclusion

At the onset of this analysis, we established the goal of 8% revenue increases in consumer electronics and computing & mobile revenue. The implementation of these three tactics will cause an increase in sales for consumer electronics and computing and mobile devices. The causal effect of price transparency, Internet buying in store, and customer engagement with tablets results in additional revenue for these categories to $43,391; $46,863; $50,612; $54,661 in years 2013, 2014, 2015 and 2016 respectively (Please see attached Excel file, workbook titled BEST BUY PROJECTIONS). The above results combined with a modest 2% growth in entertainment, appliances, and other categories results in the growth of total revenues worldwide $54,252; $57,941; $61,911; and $66,186 in years 2013, 2014, 2015 and 2016 respectively. An increase in SG&A as a percentage of sales in 2013 increases to 22% from the previous year of 20.2% as a result of the investments in technology and marketing, but we anticipate these costs be covered by an increase in sales conversions. After an infusion in 2013, we expect a slight decline after the significant investments incurred the year before. The operating profit will increase from the 2012 percentage of 2.1% to 3.5%, 4.0%, 4.5%, and 5.0% in 2013, 2014, 2015, and 2016 respectively. See the graph below for a physical representation. The proper execution of this plan results in an operating profit of $3.3 billion in 2016. That would be the highest the operating profit ever achieved by Best Buy.

In conclusion, I truly enjoyed the analysis of Best Buy and the entire industry. The relevance of this business issue made the work exciting. I look forward to hearing the strategy you move forward with in the future. Please do not hesitate to contact me with further questions.

Best,
Brendan Cottam