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Archive for Sunday, May 23, 2004

Best Buy tunes into customers

Electronics retailer tests new marketing strategy

May 23, 2004

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— Best Buy is making a pre-emptive strike: It's giving itself a makeover before any problems have a chance to develop.

The nation's largest electronics retailer is changing its marketing strategy and spending $50 million to redo its stores, trying to ensure that it will continue to hold off its competitors -- not longtime rivals like Circuit City, but a raft of newer players in the electronics market: Wal-Mart, Dell Inc. and eBay.

Company president Al Lenzmeier said that in the past the retailer's big changes came when it was struggling; this time it's anticipating, not reacting to, a changing marketplace. This time, he said, the competition is "much more formidable."

Consultant George Whalin said it made sense for Best Buy to worry more about Wal-Mart, which is getting more involved in electronics retailing, and less about Circuit City.

"The competitors are a diverse lot today, and for them to continue to grow they're going to have to get much better at everything they do, and define themselves in clear ways," said Whalin, of Retail Management Consultants. "And I'm sure that's what this is all about."

Focusing on customers

Best Buy's plan is to revamp its stores according to the types of customers they serve, a strategy it calls customer centricity. The company came up with five prototypical customers, all of whom have been given names: "Jill," a busy suburban mom; "Buzz," a focused, active younger male; "Ray," a family man who likes his technology practical; "BB4B" (short for Best Buy for Business), a small employer; and "Barry," an affluent professional male who's likely to drop tens of thousands of dollars on a home theater system.

During the next few years, each of Best Buy's 608 stores will focus on one or two of the five segments, with 110 stores scheduled to make the switch by February. Best Buy began testing the new strategy about a year and a half ago, eventually trying it at 32 stores.

Best Buy showed off one of the new stores in the Los Angeles suburb of Westminster earlier this month. While much of the store looked like any other Best Buy, its home theater and computer sections were tailored toward the two types of customers this store focuses on -- "Barry" and "BB4B."

The store converted its old speaker display room to several model living rooms. In one, a laptop computer balanced on the arm of an overstuffed leather couch, which faced a plasma screen TV and a surround-sound system. Home theater manager Ryan Markell told of one "Barry" customer who walked in and said, "I'll take it." The man paid around $28,000 for all the equipment in the room, plus $2,000 for at-home installation, Markell said.

Best Buy stores that focus on the "Jill" segment have play areas for children. Instead of a booming bass beat, the soundtrack at "Jill" stores is instrumental, or children's music.

Employees get voice

Another part of the customer centricity project transforms the usual roles for employees -- they're now required to help analyze sales, overtime and other figures and suggest ways to improve them.

Employees begin their day by reviewing the previous day's figures, which are written on a dry-erase board and compared to the previous month. At a Westminster store meeting open to the media, Chris Smith, an operating supervisor, pointed out that the store had $550 in overtime costs the previous day, and asked employees to suggest ways to reduce it.

Another manager noted that the proportion of customers making a purchase dropped during the lunch hour, probably because more Best Buy staffers were taking lunch breaks. An employee suggested staggering lunch breaks.

"We invented this to keep controllables down, and so far it has worked," Smith said of the process.

During the busy fourth quarter, which includes Christmas, same-store sales at the 32 test stores were an average of 7 percentage points higher than other Best Buy stores. The number of customers who bought merchandise rose 6 points. Selling expenses also were higher at those stores, but the company said it expected to fix that as the concept moves to more stores.

Several analysts said the new approach, if it works out in the long term, would help Best Buy lock in a lead over competitors. The company had $24.55 billion in sales in its last fiscal year, more than twice those sales of its closest competitor, Circuit City.

"There's nobody in the category that's doing this," said Steven Roorda, an analyst with American Express.

Roorda said he didn't know of any other retailer that had put as much decision-making power in the hands of its employees as Best Buy is proposing to do.

"It just flips the whole organizational structure upside-down," he said.

Still, Goldman Sachs analyst Matt Fassler said Best Buy faced a challenge in transferring its employee enthusiasm, and getting detailed business analyses done, for all its more than 600 stores.

Best Buy has tested stores in Los Angeles, Chicago, and Washington D.C. Additional tests are planned for Arizona, California, Nevada, Oregon, and Washington.

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