November 24, 2012

Old pilot aims to right Best Buy boat

The company's founder took a failing chain to a dominant position and he thinks he can do it again.


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A shopper looks at televisions at a Best Buy store in Franklin, Tenn., after the store opened at midnight, kicking off Black Friday. Former executives are attempting to buy the troubled chain to take it private.

The Associated Press

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Children take a break Thursday from waiting in line at Best Buy in Carbondale, Ill. Richard Schulze, a former executive, is expected to offer as much as $8 billion to buy the company. His message is simple: His team created Best Buy – and only they can save it.

The Associated Press

"It was anything goes if it works," Anderson said. "We believed in people, and there were numbers that they were supposed to hit, and they had enormous freedom to do it."

For example, three years after the tornado sale, Best Buy went public, hoping to raise money to fund its expansion and new superstore "big box" format. But the company ran into stiff competition, especially Highland, a Milwaukee-based electronics retailer, that was undercutting Best Buy's prices.

"We were running into bigger, more powerful people, and we actually had to outmaneuver them in order to survive," said Anderson, who spoke to the Star Tribune not long before he joined Schulze in his effort to reclaim the company.

But industry observers at the time speculated Best Buy's price wars with competitors like Highland had drained the company of cash. Schulze ultimately tried to sell Best Buy in 1988 to Circuit City for $30 million in stock and cash, sources say. The company rejected the overture because it would have allowed Schulze to become the largest investor in Circuit City, said Wurtzel, who was chairman at the time.

Best Buy, though, was not afraid to copy its competitors, including Circuit City's strategy of selling extended warranties.

For Best Buy, a warranty that cost $99 to $149 usually netted a profit of a $25 to $40, or a hefty profit margin of 25 percent. The return was intoxicating. Best Buy demanded that warranties make up 7 percent of gross VCR sales, and store employees, lured by high commissions, were only too happy to oblige.

"It was gold," said a former advertising executive, who was promoted from the store ranks. "Sell it, and you were a rock star."

And no one sold more warranties than Brian Dunn, who would rise to CEO. At the Minnetonka, Minn., store during the mid-'80s, Anderson and Dunn formed a formidable duo.

Anderson, the assistant store manager, was the strategy man, the guy who set the sales target. Dunn, who oversaw the video department, was the brash motivator who made sure employees hit those targets.

In the end, Circuit City should have bought Best Buy, said Wurtzel, who wrote a book on his time at Circuit City called "Good to Great to Gone." Best Buy not only survived, but thrived because it was able to adapt more quickly to changes sweeping the industry during the 1980s and 1990s, he said.

To capture young customers, Best Buy stocked its stores with low-priced merchandise like CDs and games. Sales soared as the company quickly expanded its big-box format.

By the turn of the century, Schulze was ready to call it quits as Best Buy's only CEO. Schulze had just remarried and wanted to spend more time with his family, sources said.

When Anderson was chosen to take over in 2002, he stunned the company when he immediately decided to go to Yale University for two months. The leader of the grow-at-all-costs retailer was going to do something different -- think.

"Most leaders only get one shot at transformational change, and that is right when they start," Anderson said. "So I had better get this right, or I would fail as a CEO."

From his time at Yale, Anderson developed a strategy called "Customer Centricity," whereby the company would use its vast consumer data to predict what customers would need and then bundle the right mix of merchandise and service for them.

Best Buy would focus on four types of consumers: Buzz, the young tech enthusiast; Jill, the suburban soccer mom; Barry, the wealthy professional guy, and Ray, the family man.

Despite his ambitions, Anderson's approach had its weaknesses, experts and former executives say. For example, Best Buy didn't develop advertising campaigns tailored to each customer group, said George Lopuch, a former Best Buy executive vice president of strategy, now a partner at Retail Masters consulting firm.

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