How Does Best Buy Plan to Turn Around?
Best Buy -- up 226% since January -- is one of the best-performing stocks for this year, despite the fact that only two years ago most investors were bearish about it. In 2012, Forbes contributor Larry Downes predicted the bankruptcy of the company and criticized management's focus on improving short-term metrics. According to TheStreet.com, the company's average rating by then was only a B minus.
To save its business from bankruptcy, the company announced a massive turnaround plan, called 'Renew Blue,' which included an expansive product assortment, cost-reduction measures, and a customer-centric store space redesign, in order to differentiate the chain from other players that compete largely on price, such as online retailer Amazon.com , or every-day-low-price retail giant Wal-Mart . But, how does Best Buy plan to return to growth, and at the same time remain profitable? Will Best Buy be able to regain market share?
Source: Best Buy Investor Relations
The end of Best Buy supremacy
With almost 2,000 stores in the U.S., Canada, China, and Mexico, and a retail website with more than 1 billion annual visits, Best Buy is the world's largest retailer of consumer electronics and appliances. For many years, the company enjoyed outstanding top-line performance and healthy margins. It had pricing power due to its scale of operations. It earned a strong reputation because it trained employees to be knowledgeable on tech products, and to give impartial advice.
However, as customers got more comfortable buying on the Internet, Best Buy started losing clients to other online retailers such as Amazon.com. Furthermore, Best Buy's high prices exacerbated showrooming, in which consumers use a Best Buy store to peruse products, then later purchase them from a lower-priced online retailer like Amazon.com.
As a result, Amazon grew sales volume by 28% in 2009, 41% in 2010, and 40% in 2011, while Best Buy's fiscal year sales were 10%, 0%, and 2%, respectively. By 2012, Amazon surpassed Best Buy, executing $51.7 billion in sales.
The turnaround plan
To fight Amazon and other competitors, Best Buy CEO and McKinsey alumni Hubert Joly identified six cornerstones: improving the multichannel customer experience, accelerating online sales growth, supply chain efficiencies, optimizing store square footage, optimizing the U.S. real estate portfolio, and cutting unnecessary costs. On top of this multistrategy approach, the company delivers competitive prices via its low-price guarantee: if customers find a lower price from an online retailer, Best Buy matches the pre-tax price for qualified products.
It's all about balance
An aggressive pricing strategy would have hurt Best Buy's margins. To balance potential top-line improvement with profitability, the company decided to implement an integral turnaround plan, where cost reforms are also crucial. In light of this, Morningstar expects operating margins to improve between 4%-5% over the next several years.
Leveraging store space
As Times contributor Christopher Matthews notes, the company is finding new ways to leverage store space and generate an economic moat against online retailers. For example, together with Samsung and Microsoft, it creates "stores within stores" across the country. Other tech companies rent space within Best Buy to feature their most popular products.
The company is also transforming its 1,000+ locations in the U.S. to create a more efficient distribution network, by shipping merchandise to online customers. This strategy is also being used by Wal-Mart, which experienced $7.7 billion in web sales last year.
Like Best Buy, Wal-Mart also had a tough time competing against online retailers. Wal-Mart's latest e-commerce strategy involves combining its 4,100 stores, existing distribution centers, and new facilities into a "next generation fulfillment network," a state-of-the-art logistics system that minimizes transportation costs and shipping time.
Final Foolish takeaway
Best Buy's turnaround plan shows consistency, long-term focus, and balance between profit-driven strategies and a focus on top-line performance. Early results confirm the plan's power to transform Best Buy's business is real. In the latest quarter, the company reported a 1.7% increase in domestic comparable sales, and an impressive 15% increase in online comparable sales. Furthermore, management estimates it has now reduced cost structure by $505 million.
Turning around a business is not an easy move. Best Buy's management has demonstrated commitment to deliver long-term value by implementing new strategies, without forgetting the company's most important asset: its strong reputation as a trusted technology partner.
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The article How Does Best Buy Plan to Turn Around? originally appeared on Fool.com.Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.