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Best Buy Rethinks The Big-Box Model

Mar 30, 2012
Originally published on March 30, 2012 12:30 pm

Best Buy is trying to wriggle out of the big box. The electronics retailer has a lot of real estate in its giant blue stores, but it isn't profitable space: In its most recent quarter, the company reported a $1.7 billion loss. So it's shedding stores and workers — and rethinking its big-box concept.

Best Buy's sprawling showrooms full of TVs, digital cameras and video-game consoles once drew people in. But demand for those products has dropped off, and on top of that, the company is up against rivals like Amazon, whose bargain prices and low overhead costs are hard to compete with.

So Best Buy is shifting its strategy.

"We're clearly going to have more doors and less square footage," said CEO Brian Dunn. On a conference call with investors Thursday, he explained how the company is angling for a smaller footprint and a wider range of store sizes.

Best Buy plans to close 50 stores. Dunn said the closures are part of an overall strategy aimed at cutting $800 million in costs and 400 workers.

At the same time, Best Buy is going to expand its portfolio of small stores that sell mobile products. Dunn said it will add 100 new mobile stores into the existing mix.

"These locations have the highest customer-satisfaction scores and are on the path to generate strong financial returns," Dunn said.

He said Best Buy is also going to pilot another store model similar to the big box — but on a diet. It's being tested in two markets — San Antonio, Texas, and Minnesota's Twin Cities.

'Connected' Stores With 'Central Knowledge'

A Best Buy outside Minneapolis, near the company's headquarters, is one of the pilot stores. It will be remodeled and the footprint will shrink. What's inside will change, too.

Best Buy is calling these trimmed-down big boxes "connected" stores. They'll focus more on portable electronics, like e-readers and tablets. And they'll feature a "central knowledge desk" where customers can get stuff like wireless plans for mobile phones. Those kinds of services, along with warranties, are big moneymakers for the retailer.

Frank Tsuchiya, a loyal customer, is optimistic that these strategies will pay off for Best Buy.

"I hope so — just to keep them solvent and good and profitable," he said. "If the product I need isn't here, I'll go somewhere else, but I think it will be here."

But some analysts worry that the changes Best Buy is implementing are coming too late. That's a concern for Morningstar analyst R. J. Hottovy.

"The big question is whether this is going to be enough to offset the competitive pressures the company is facing in the form of a large online player in Amazon, who has a compelling value proposition, and a key vendor in Apple, who continues to build out its own retail stores," Hottovy said.

He said it's good that Best Buy plans to compete more aggressively on price with those foes. But ultimately, he thinks more cost-cutting measures will be necessary to keep the retailer afloat, including additional store closings.

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RENEE MONTAGNE, HOST:

Big box retailer Best Buy just keeps losing money. The company said yesterday it suffered a loss last quarter of $1.7 billion. That's prompting Best Buy to shed stores and workers - and to rethink its big box concept.

Annie Baxter has the story.

ANNIE BAXTER, BYLINE: Best Buy is trying to wriggle out of the big box it's been stuck in. The company's got a lot of real estate in its giant blue stores. But it's not profitable space. Demand has dropped off for the TVs, digital cameras and video game consoles that once drew people to its sprawling showrooms.

On top of that, Best Buy's having a tough time up against foes like Amazon, whose bargain prices and low overhead costs are hard to compete with. So Best Buy is shifting its strategy.

BRIAN DUNN: We're clearly going to have more doors and less square footage.

BAXTER: That's chief executive Brian Dunn. On a conference call with investors Thursday, he explained how the company is angling for a smaller footprint and a wider range of store sizes.

Best Buy plans to close 50 of its stores. Dunn says the closures are part of an overall strategy aimed to cut $800 million in costs - and 400 workers.

At the same time, Best Buy is going to expand its portfolio of small stores that sell mobile products. Dunn says they'll add 100 new mobile stores into the existing mix.

DUNN: These locations have the highest customer satisfaction scores and are on the path to generate strong financial returns.

BAXTER: And, Dunn says, Best Buy is also going to pilot another store model that's kind of like the big box - but on a diet. They're testing these new stores in two markets - San Antonio and the Twin Cities.

(SOUNDBITE OF TRAFFIC)

BAXTER: This Best Buy outside Minneapolis, near the company's headquarters, is one of the pilot stores. It will be remodeled and the footprint will shrink. What's inside will change too. Best Buy's calling these trimmed down big boxes connected stores. They'll focus more on portable electronics, like e-readers and tablets. And they'll feature a central knowledge desk, where customers can get stuff like wireless plans for mobile phones. Those kinds of services, along with warranties, are big moneymakers for the retailer.

Frank Tsuchiya, a loyal customer, is optimistic that these strategies will pay off for Best Buy.

FRANK TSUCHIYA: I hope so. Just to keep them solvent and good and profitable. I mean if the product that I need is not here, I'll go somewhere else, but I think it will be here.

BAXTER: But some analysts worry that the changes Best Buy's implementing are coming too late. That's a concern for R. J. Hottovy with Morningstar.

R.J. HOTTOVY: The big question is whether this is going to be enough to offset the competitive pressures the company is facing in the form of, you know, a large online player in Amazon, who has a compelling value proposition, and a key vendor in Apple, who continues to build out its own retail stores(ph) .

BAXTER: Hottovy says it's good that Best Buy plans to compete more aggressively on price with those foes. But ultimately, he thinks that more cost-cutting measures will be necessary to keep the retailer afloat, including additional store closings.

For NPR News, I'm Annie Baxter in St. Paul. Transcript provided by NPR, Copyright NPR.