In 1996 Best Buy faced a dilemma. The retailer had tripled in size over a three-year period to $8 billion in sales (2002 sales totaled $19.6 billion), but Best Buy had done so in spite of operational deficiencies. The company’s inability to evolve its business processes as it grew was causing problems.
Within a year, sales and profits fell below expectations, and its stock price plummeted from approximately $10 a share to less than $2 a share. Best Buy determined to take quick and decisive action to restore profitability and improve its credibility in the marketplace. Accenture proved to be the perfect fit for this recovery due to its strong track record of retail experience and its ability to guide a business transformation from conception to completion.
How Accenture Helped Best Buy teamed with Accenture in April 1997 in a unique and innovative risk/reward sharing arrangement designed to increase shareholder value and drive profits. Accenture and Best Buy embarked on a bold two-year Scientific Retailing program to bring the retailer’s processes and capabilities up to speed with its accelerated growth and its aggressive plans for future expansion.
“The partnership (Accenture and Best Buy) was essential in us pulling ourselves up by the bootstraps and really getting through a dark period in our history. . . And we're working again with Accenture, scoping out which of the processes we should be addressing, rebuilding our SOPs, training our staff and instituting the metrics, discipline, and accountability so those processes will be sustainable going forward.” —Rob Bergh, Vice President, Process Development, Best Buy The business transformation began with Scientific Retailing’s demand side, where Accenture and Best Buy launched an Optimized Space and Assortment program. This led to the development of a new dynamic assortment capability which allowed Best Buy to maximize the profitability of an item through its life cycle.
In the area of Promotion Effectiveness, Accenture implemented new analytical tools. The tools allow Best Buy to effectively allocate expenditures for future promotions based on optimal traffic and profit mixes that have returned the greatest profit while driving the highest level of traffic to the store. Since its inception, this program has helped fuel Best Buy’s industry-leading comparative store increases as well as associated profit improvements and market share.
Rounding out the demand side efforts, Accenture applied Precision Pricing principles to create an aggressive pricing strategy that would enhance Best Buy’s price perception as “best-in-market” and improve its profitability. Accenture helped Best Buy identify the items that needed to be priced lower for it to be perceived as a low price retailer while pricing the less price-sensitive items more moderately.
Scientific Retailing’s supply side offered further opportunities to create value. To increase efficiency along the retailer’s supply chain and strengthen its relationships with suppliers, Accenture and Best Buy initiated a Strategic Sourcing and Vendor Relations program.
Fact-based analyses gave vendors discussion documents outlining Best Buy’s new approach for managing its assortments as well as detailed metrics required for item profitability. From then on, suppliers were provided with compliance data and measurements of each item’s financial performance against the required targets. These analyses also helped Best Buy identify its best-performing suppliers and items and allowed vendors to profit from increased volume from a reduced selection of items.
Also on the supply side, Accenture collaborated with Best Buy to overhaul its inventory management capacity. The companies undertook an Integrated Planning and Visibility effort aimed at creating optimal levels of inventory to support sales demand. This would prevent higher volume stores from running out of key sale items while also ensuring that lower sales stores wouldn’t be burdened with excess inventory that could only be moved at closeout prices.
Its success in achieving these amazing results on both the demand and supply sides of the business fuelled Best Buy’s desire for more. Next, Best Buy identified an opportunity for improvement inside its stores. The retailer teamed with Accenture on an In-Store Optimization program to create a new store layout, selling strategy, and operating model geared to its most profitable customer group.
A Customer Insight program helped Best Buy identify the characteristics of its most profitable customer group. The program also helped the company trace the group’s buying patterns as well as the lifestyle traits that motivate its spending on certain items. Thus, Best Buy was able to shift from a product-centered strategy to one focused around customer needs and desires.
As a result, the retailer realized it could reduce its wide assortments, since what the customer really wanted was fewer select items with more knowledgeable sales support and more solution-type offerings, especially for more complex items.
The insights driven by this program were the catalyst for Best Buy to change its store layout. Best Buy has moved emerging technology, DVD software and wireless communication to the front of the store. It also has created “transaction centers” where customers can sit down and review service plans, delivery information, warranties, etc. for complex purchases. The customer-driven format has won wide praise from industry analysts and will be the standard for all new Best Buy stores beginning in fiscal year 2003.
Value Delivered The comprehensive Scientific Retailing program that drove Best Buy’s transformation produced spectacular results that were measurable in every key area of its business, including:
Optimized Space and Assortment
20 percent increase in key category revenue $25 million profit improvement
Promotion Effectiveness
25 percent increase in holiday comparative store sales in 1997 7 percent increase in annual comparative store sales in 1997 $80 million profit improvement
Precision Pricing
21 percent increase in revenues in key categories 36 percent increase in gross margin in key categories $50 million profit improvement 18 percent increase in consumer price perception
Strategic Sourcing/Vendor Relations and Integrated Planning/Visibility
$600 million decrease in inventory levels
The combined results of Best Buy’s Scientific Retailing efforts were just as incredible. Over a two-year period from 1997 to 1999:
Market capitalization grew from $403 million to $11.4 billion. Stock price increased from under $2 per share to over $57 per share (on a post-split basis). Net earnings increased 138 percent to a record $224.4 million. Inventory turns increased from 4.6 to 6.6. Comparative store sales grew from –5 percent to 13.5 percent.
With the ground it has gained, Best Buy stands ready to go forward with aggressive plans for acquisition and expansion.
