Best Buy Looking to Cut Costs
By George Anderson
Best Buy is looking to cut expenses to the tune of $300 million by the end of this fiscal year marking what a Minneapolis Star Tribune article refers to as “a fundamental shift” in the way the company conducts its business.
The consumer electronics chain has seen costs rise over the past two years as it has shifted to its “customer centricity” formats that tailor locations to meet targeted demographics on a store-by-store basis. Currently, Best Buy has converted 292 of its 741 stores in the U.S. to its various customer centric formats including “Jill” (emphasis on serving so-called soccer moms), “Buzz” (young techies and gamers) and “Barry” (affluent professional males),
Joseph Beaulieu, a retail analyst with Morningstar, said, “It’s going to be interesting to see how they cut back costs without impairing the customer centricity efforts.”
Expectations are that the company will first look for savings by not filling jobs where there is turnover and by adjusting scheduling in the stores to reduce staffing during non-peak hours.
“Best Buy has a lot of low-hanging fruit it could cut without customers really noticing,” said Daryl Boehringer, an analyst with FTN Midwest Research.
“A lot of what came out of customer centricity was good,” he added. “It helped employees learn how to up-sell, but one part that wasn’t good is that it created a lot of bureaucracy and middle management that clouded the bottom line.”
Others, such as Morningstar’s Beaulieu, appear concerned that Best Buy may not be seeing the forest for the trees with its plans to cut costs. “Their stores are well-staffed. But that’s part of the whole strategy, to intercept people and help them find what they want. It’s a strategy that’s made good money for them so far.”
Moderator’s Comment: What is your reaction to Best Buy’s cost cutting program in light of it being in the relatively
early stages of shifting into its customer centricity strategy? –
George Anderson – Moderator
This is not necessarily inappropriate. BBY is at the stage of its existence where a concurrent commitment to efficient operations could easily be supported as strategically viable.
Certainly it is vital that they retain the customer centric commitment, as well as the management processes and culture which have allowed this to flourish.
Generally, “testing,” “learning” and adaptive front end merchandising and operational tactics are difficult to sustain in a cost focused environment. These particular costs seldom have immediate paybacks, and often have no specific ROI which can be attributed…at least not using the metrics of cost reduction.
It will be a challenge for the corporate suite to sustain the core competencies, cultural distinctions and adaptive processes which have generated the current market share, while simultaneously seeking to leverage that market share by becoming ruthlessly efficient.
Excellence demands that BBY be able to do both. Unfortunately, the retail landscape is not littered with clear cut examples of such excellence.
I don’t believe that Best Buy ever had an exclusive product line or owned any particular customer base. They aren’t running a Starbucks type of operation that has an aura of any type. For my money, they are the evolution of a concept begun by Sears over 100 years ago. Unlike Sears, they have never invented anything (no product lines, no credit cards) and this is OK. They do, however, exist in a very competitive market filled with commodity products. Their business base must therefore be convenience and/or price. First, to market in this day and age only provides a two week window of opportunity and usually results in overstocks at store level. Getting closer to the customer is the key. Providing a standing “special” like Circuit City does with new release DVDs and CDs on Tuesdays is the kind of marketing that could work. Best Buy frequency rewards could also be of benefit and build loyalty. However, the thought of cultivating minimum wage (or close to it) staff to build relations and study products enough to sell their benefits is a bit of a pipe dream. Does it really matter to the staff? Does it matter to the customer? To me, it would mean more if they would adopt the Wal-Mart model – stack it high, sell it low!
Ed, just for the record, BB does have a new CD/DVD program. Many — but not all — new titles are featured at significant discounts the Tuesday they are released (say (9.99 for a $13.99 CD).
Cutting costs and providing great service are not necessarily mutually exclusive tactics but I think it is natural to be concerned about the impact on service when large companies get into “cost cutting” modes. Truly great service requires a long term commitment from an entire company, top to bottom, in the way that The Container Store, Stew Leonard’s, The Ritz Hotels, and Nordstrom do it. Best Buy got some PR from their shotgun approach to improvement but it felt from the beginning like, for them, it was a fun little experiment and not the complete immersion necessary to make a difference in the long haul.
So how is Best Buy calculating “fat” and what evaluation have they done about ROI in each of their stores? If the concept has been implemented long enough to have a good understanding of both of those numbers, then making a change now is fine. If they don’t know both of those numbers and are making changes to cut cost, then they would have been better off not experimenting.
BB needs to identify a more standardized store format, rather than trying to be all things to all people. This will better manage costs, create a more identifiable brand, and focus consumers on their stores, regardless of location. This will also alllow BB to create a more standardized mix of products, thus lowering costs, rather than a highly fragmented product mix, with lower volumes for the chain.
If there is fat to be cut at Best Buy even as it is switching to it customer centric strategy, how did that “fat” get there? Was it built into the Best Buy plan or just evolve unplanned?
Whenever strategic plans don’t work quickly or as effectively as projected, or when a firm gets squeezed by Wall Street or whomever, the first call is to cut costs that had been deemed appropriate the day before.
As Ryan says, conditions and models change. Are the top kicks at Best Buy now questioning whether today’s program is as sound as projected at its outset?
Last week I was speaking out in Southern California and visited five different CE type stores. The service at two of the higher-end regional chains was abominable. One sales associate asked me if I had any questions and then stood next to me for over 5 minutes without saying a word. Another store had a ton of employees on the floor and not a single one spoke to me. The only store that had engaging associates who were focused on my needs was, you got it, Best Buy. There was plenty of help on the floor and they were focused on helping customers.
I like the profile work that Best Buy has done. No, I don’t believe a customer will shop at a certain Best Buy because it fits their profile but I do believe it helped Best Buy employees to focus more on meeting the customer’s needs and less about the stuff they sell. I also believe it got the staff much more engaged with the business.
So with all that being said, I agree that there is “fat to be cut”. Unfortunately for us, that often means not using us consultants. (Disclaimer: I have not done any work with Best Buy but I personally could cut some fat off me.) There is a lot of waste that can be cut in all companies. I just hope that they don’t cut too much staff. As my recent shop trip showed, right now they are one of the few CE retailers who get that in this low margin business it is the staff that is truly the point of differentiation.
Obesity affects business too. Cutting costs can increase efficiency and customer service. To the point above, having more people does not equate exponentially to more service. I walk into the store and see more of their employees shopping and testing product than selling. They will cut jobs and outsource more of the work. Consider their PL options.
They will have more performance measures and exercises in productivity. One piece they can’t overlook is product expertise. Educate their employees about their products and teach them to suggestive sell high margin items. It is time to reevaluate their position in the market place. Better now than in bankruptcy court. Be lean or be gone.
Call me jaded BUT I’m on record from the start saying this would be a tough act for Best Buy to pull off. Having a lot of bodies around is not the same thing as offering effective customer service. I’m also not convinced that the segmentation models were correct in the first place or that the idea made much sense at all. Most people go to the big box store that’s closest to them without thinking about whether a store 10 miles away might be better suited to their psychographic profile. And, when the store doesn’t “work” for them they go someplace else. Sorry to see them having trouble but this was pretty predictable.
Not certain that “just because” there is a cutback or reduction in costs that it suggests that there will be a drop off in customer service or impact the customer centric initiative. While recognizing that as a possible scenario, there is the contrary point of view that would state as a result of being more targeted and focused, you do not need as much “slow moving” inventory on hand (and you now can better identify which moves and which does not based on the customer specific insights derived), and the cost of carrying that product can be reduced if not eliminated – there are savings to be had there and indirectly…customer service goes UP…because they carry more of the products desired, and less of the ones that are seen as “clutter” or “distraction” to the targeted consumer. In my opinion…the jury is still out.
Will the company cut waste? If they cut waste, customer service won’t suffer. “Cutting costs” often means ruining customer service, but not always. Purchasing merchandise is the number one cost, but to many retailers, “cutting costs” means firing people. The real profit problem: Best Buy’s industry has low margins because there are few unique proprietary products so the price competition is murder. Geek Squad, if it’s run right, has great margin potential. Extended warrantees and private label credit card financing both have great margin potential. Recorded entertainment and electronic products have lousy margins. Even worse: the former has high shrink and the latter involves high customer service expectations.
The CD venue customer is in need of increased service. The customer centricity model is strong but, despite the targeted demographics, the one major flaw is that of alienating customers. Also, because the new format is based on customer service, it seems a little puzzling to me that employee turnover will not be replaced. Targeting specific customers is at the core of this initiative. The danger here for BB is the temptation to significantly reduce staff to cost-cut.