Now comes the difficult part for Best Buy CEO
When Hubert Joly joined Best Buy as CEO in 2012, one thought immediately came to mind: Why in the world would Joly — or anyone else for that matter — even want the job?
Not only was the world’s largest consumer electronics retailer in the midst of a nasty fight with founder Richard Schulze for control of the company, but Best Buy was also losing sales to Walmart and Amazon. Judging by its plunging stock price, people expected the company to follow Circuit City into bankruptcy.
To Joly’s credit, he remained calm — as if he knew something others didn’t.
At the time, Best Buy didn’t need to reinvent itself so much as it needed to correct some painfully obvious problems. Or as Joly has said, go after “the low-hanging fruit.” The website lacked a competent search engine, and Best Buy was using different supply chains to stock its ecommerce business and its stores, even though they sold the same products.
Five years later, Best Buy has largely stabilized. The company has managed the difficult feat of cutting costs without having to close large numbers of stores. It has boosted profit margins even as it matched Amazon prices. The retailer has even at times generated some surprisingly solid sales growth.
Since hitting a low point in December 2012, Best Buy stock has more than quadrupled to Friday’s close of $45.72.
“They did it when no one thought they could,” said Brian Kelly, a retail consultant in Chicago and a former top executive at Sears. “Everyone wrote them off.”
But for all of his success, Joly still hasn’t answered an existential question: Where does Best Buy fit in a world where prices for the latest wide-screen TVs or mobile devices quickly drop soon after Samsung or Sony starts manufacturing them? Stabilizing the retailer is one thing, but finding a new sense of purpose in a rapidly changing industry is quite another feat.
A company spokesman said Joly was traveling and unavailable to comment.
“Management deserves a lot of credit,” said R.J. Hottovy, an analyst with Morningstar Inc. But where does the company go from here?
“It’s really difficult to create growth momentum, especially when you have
Amazon there all of the time,” he said. “That still puts Best Buy in a difficult position. They are still not out of the woods.”
What often gets lost in Best Buy’s story is how much Silicon Valley depends on it. The company operates about 1,000 big-box stores and 300 mobile stores, which carry cell phones and accessories, in the United States. It is one of the world’s largest sellers of Apple products: It sells far more Apple merchandise than Apple itself.
Best Buy is also a major distributor of computers and mobile devices equipped with Microsoft Windows, Google’s Android operating systems and Intel Pentium chips. The retailer also sells Oculus Rift virtual reality headsets.
Apple and HP are among Best Buy’s top five suppliers, a group that accounts for 51 percent of all the retailer’s merchandise, according to documents filed with the Securities and Exchange Commission.
These companies have every reason to want Best Buy to survive. Given the bankruptcies of chains like RadioShack and Circuit City, the number of major consumer electronics retailers has shrunk to a few major outlets, most notably Amazon. The online giant’s growing share of the market gives it considerable pricing power over its vendors.
But Best Buy needs to move beyond its suppliers. As part of his new strategy, Joly wants the company to sell advice and services directly to homes and businesses.
“Our customer value proposition is to be the leading technology expert, who makes it easy for them to learn about and confidently enjoy the best technology,” Joly told analysts during an earnings call this month. “We believe we can and should go beyond selling products to customers.
“We want to focus on their underlying needs, which is entertainment, communications, security, energy management, and health,” he said, adding that it will result in a “stronger relationship” with customers.
The retailer is already testing the concept in four markets — San Antonio and Austin, Texas, Orlando and Atlanta — where people can get a free in-home “technology consultation” on things like boosting Wi-Fi signals, designing home entertainment spaces and installing smart cameras and doorbells.
Joly’s plan seems logical. From drones and wearables to virtual reality and Internet of Things devices, Best Buy appears well-positioned to explain and advise its customers on this plethora of technology. The advice is supposed to be neutral, but practically speaking, I’d be surprised if they steered people away from Best Buy products.
Charging fees for these services offers Best Buy a potentially more reliable source of revenue than hoping that someone buys a television set. The company already has a well-known brand in Geek Squad, which pioneered the model of providing tech support directly to homes and businesses.
“They will have a competitive advantage no one else has,” said Burt Flickinger, managing director of Strategic Resources Group consulting firm in New York.
But what looks good on paper doesn’t always pan out. For all of Joly’s successes, he hasn’t quite figured out what to do with Geek Squad. Revenue from the company’s domestic services business totaled $1.82 billion last year, down 15 percent from 2014.
“While we are energized by the potential of this opportunity, the work necessary to capture it takes time,” the company said of its Geek Squad and general services business, in a recent filing.
Part of the problem is that Geek Squad is still primarily known as a support unit. Its technicians are good at repairing things, but whether they have the skill to offer the kind of consultations and services that Joly envisions is an open question. It’s telling that advisers from Best Buy, not Geek Squad agents, are staffing the in-home adviser pilot program.
And Best Buy may be running out of time. In 2015, Amazon created its Amazon Home Services, which offers many of the things Best Buy wants to do.
But Best Buy has no choice but to branch out. The company can’t continue to bet its future solely on its suppliers, whose record of creating innovative, quality products has been uneven at best.
Best Buy has forged particularly strong ties to Samsung: The two companies have created special store-within-a-store concepts called the Samsung Experience shops.
But last year, Samsung’s woes cost Best Buy. Samsung was forced to recall its Galaxy Note7 smartphones in the United States because the lithium-ion batteries that powered the devices could overheat, causing some to explode. In the recent earnings call, Joly estimated that the Samsung recall cost Best Buy about $200 million in sales. He also said that supply problems from other vendors, which he did not name, wiped away close to another $200 million in sales.
For Best Buy to generate growth, Joly rightfully realizes that the company needs to do more than simply sell other people’s stuff.