Best Buy vs' Circuit City

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Best Buy vs. Circuit City
By Shannon Smith, Anthony Ciccarone, Pete
Stupak, and Vasee Sivasegaran
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Industry Overview

• Definition - Retail - Consumer Electronics
• Sub-categories
• Electronics and Appliances
• Mass Merchant
• Electronics Only
• Home Office
• Computer Store

3
Demographics

• Slow population growth in US - Highest growth in
  South West e.g. Arizona and Nevada Major
  Cosmopolitan Areas had experienced little growth
  or even decline
• Age group of 19-65 had remained constant -
  Retailers cannot rely on increasing population
  size to maintain sales
• Number of individuals with higher education is
  increasing more with Bachelor or Graduate
  Degrees
• The population is becoming more affluent - These
  customers tend to be the main segment of the
  Innovators and Early Adopters They are familiar
  with high end technology and electronics

4
Social Conditions

• More women and minorities at work larger number
  exposed to technology and high end electronics
• Increased customer base and demand for
  electronics
• Collaboration by many technology firms to create
  Internet Lifestyle more aspects of life are
  becoming technology based
• Most have positive attitude towards technology
  and high end electronics

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Political and Legal Factors

• This industry is very sensitive to trade
  restrictions due to the large number of
  electronic items and parts that are imported from
  Asian countries - Biggest chip manufacturers
  include Taiwan, China, and Singapore However,
  ratio of openness had increased in the past 50
  years imports are less affected by Tariffs and
  NTBs
• Shelf-sharing restrictions have decreased
  tremendously retailers can display higher
  variety of products
• Wages have increased in the last decade, leading
  to higher disposable income. (slight dip in 2002)
• Recent weaker dollar would be beneficial for
  exports but would negatively affect imports

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Economic Factors

• GDP has grown to 10.2 Trillion - Retail Industry
  is 3.2 Trillion or 31 of GDP Non-Durable goods
  are 1.9Trillion Industry revenues roughly 89
  Billion
• National Income per capita has increased to
  34,870 increase of 17 since 1997 More buying
  power
• Economy is climbing out of a recessionary phase
• Interest rates are at the lowest in decades
  cost of capital is low
• Inflation has remained constant for past decade
  no affect in consumer buying power
• Consumer confidence is low
• Unemployment rate remains high

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Technological Conditions

• Rate of Innovation is high technology doubles
  every 18 months favors Innovators and Early
  Adopters
• More than 580 computers per 1000 individuals
• More than 50 of households have computers
• Internet users have more than doubled to 95.4
  million
• People are not intimidated by technology
  noticeable increase in use

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Industry Environment

• Retail as a whole is a mature industry
• Consumer Electronics segment is still in the
  growth phase
• - Sales Trends
• 1997 62 Billion
• 2001 89 Billion
• - Forecast
• Continued revenue growth with economic recovery
  and further innovative products
• - Anticipate 10-12 growth for 2003

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Consumer Electronics Revenue Trend
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Market Share Trends by Category
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Market Share Trends - Top 10 Retailers
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Industry Overview - Top 3 Market Share
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Porters Five Forces

• Rivalry within industry is high
• - 3 main competitors
• Threat of new entrants is low
• - Barriers to entry high
• Highly trained sales force
• Large amount of capital required
• Threat of substitutes is high
• - Switching costs are low
• Internet sales and local electronic boutiques

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Five Forces Contd

• Buyers bargaining power is moderate to high
• - Price sensitivity
• - Demand high degree of service
• Suppliers bargaining power is low
• - Low pricing power
• - Low threat of forward integration

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Industry Key Success Factors

• Merchandising Mix
• Product Selection
• Service
• Product Cycle and Innovation Pipeline
• Identify Trends
• - Flexibility
• Adapt stores to demand

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Threats to Industry

• Weak economy
• - Downward trend in consumer spending
• - Less discretionary income

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Consumer Spending
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Circuit City
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Mission/Vision
Were With You

• Provide the best possible shopping experience for
  consumer electronics including
• - Exceptional levels of product information
• - Fast customer service
• - A broad good/better/best merchandising
  assortment
• - Competitive prices
• - An engaging store environment

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Overview

• 625 stores in 44 states (Mainly Superstores)
• Avg. Sq. Ft 34,000
• Products video equipment, personal computer and
  entertainment software, DVD players, video
  cassette recorders, camcorders, cameras, audio
  equipment, car audio and security systems, home
  office products, personal computers, printers,
  peripherals, facsimile machines, video games, DVD
  movies and music, wireless phones, corded and
  cordless phones, and accessories.

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Competitive Position

• 2 in the Market
• Broad Product Line
• Multiple Price Points
• Effective Distribution
• Superior Advertising Budget
• Balance Sheet Strength
• High Brand Recognition

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Customer Profile

• Capture ALL users of Consumer Retail Electronics
  with a broad selection and multiple price points

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Core Competencies

• Customer Service Experience Were With You
• Employee Training/Knowledgeable Sales Force
• Information Systems
• Distribution and Supply-Chain Management

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Resource Based View

• Tangible - Superstores, Training, Inventory
  Management, Distribution Capability, Supply-Chain
  Management, Information Systems/POS Link, Balance
  Sheet
• Intangible - Brand Recognition,
  Marketing/Advertising Campaigns, Reputation with
  Suppliers
• Organizational - Combination of Training, POS
  link, and Customer Feedback to Deliver Superior
  Service

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SWOT

• Strengths - Customer Service Focus, Employee
  Training, Established Brand, IT and Customer
  Service Information Systems, Economies of Scale
• Weaknesses Strategic Focus, Merchandising Mix,
  Outdated Stores, Conservative Management,
  Deteriorating Financial Position
• Opportunities - Consumer Retail Recovery,
  Innovation Pipeline
• Threats - Lack of Consumer Retail Recovery, Mass
  Merchandisers, Shortage of Innovative Products in
  the Pipeline

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Critical Success Factors

• Execute Differentiation Strategy/Update Stores
• - Provide an Innovative Experience to the
  Customer
• Strategic Merchandising Mix
• Highly Trained Sales Force
• Service and Convenience
• - Very knowledgeable employees, fast checkout,
  home delivery, generous return policy, repair
  options

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Generic Strategy

• Differentiation Strategy
• - Good/Better/Best
• - Good Value/Price to Drive More Traffic
• - Better Variety
• - Best Innovation/High Margin

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Grand Strategy

• Turnaround Strategy Under Way
• - Major Cost Cutting Effort
• Increased Innovation
• - Aggressive Store Remodeling
• - Rebalancing Merchandising Mix

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Best Buy
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Mission/Vision

• Making Life Fun and Easy
• Innovation
• Have fun while being the best
• Learn from challenge and change
• Act with respect, humility, and integrity
• Unleash power of people

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Overview

• 546 Stores in 48 states
• Avg. Sq. Ft 35,000
• Other businesses
• - Future Shop, Magnolia Hi-Fi, Media Play, On
  Cue/Sam Goody, Suncoast, Musicland, Best Buy.com

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Competitive Position

• 1 in the Market
• Broad Product line
• Customer relationships
• Customer services
• Supplier partnership/Supply chain mgmt
• Effective Advertising Partnerships
• Management strength/Capital investment

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• Customer Profile
• Innovators/Early Adopters
• First 15-20 of users of product
• Venturesome, socially integrated, cosmopolitan,
  social mobility, privileged

• Core Competencies
• Innovation
• - supporting new products
• - supply chain management
• - demand forecasting systems
• - knowledge mgmt systems
• Meeting Customers Needs
• - identifying best product for customer
• - after-purchase services

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Resource Based View

• Tangible - Capital, Diversification of products,
  and locations, Store layouts
• Intangible - Brand recognition, effective
  advertising, social/community involvement,
  customer-friendly service
• Organizational - Employee compensation program,
  structure to support quicker product
  integration,customer relationship management,
  supplier relationships/partnerships

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SWOT

• Strengths - Customer services, market presence,
  store-layouts, high margin products, customer
  relationships, partnerships with suppliers,
  cutting-edge products, product mix
• Weaknesses - Capital needed for new outlets,
  Musicland, Corporate overhead, labor expenses
• Opportunities - build B2B, innovative technology
  for products and organizational efficiency,
  develop private label products
• Threats - Mass Merchandisers, boutique shops,
  high cost structure

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Critical Success Factors

• Innovation
• - development of own products
• - increased efficiency to current business
  systems
• Service and Product Selection
• - sales force
• - after-purchase services
• - broad selection of manufacturers and models

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Generic Strategy

• Differentiation
• - Innovative products
• - Product variety
• - Sales associate knowledge
• - Customer services

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Grand Strategy

• Innovation
• - Creating systems to increase efficiency
• - Consortium bringing technology to daily life
• Product development
• - BB creating own products (PC)
• Caution to Best Buy . . .

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Income Statement
CAGR 32
CAGR 13
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Income Statement Contd
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Income Statement Contd
CAGR 13
CAGR 6
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Balance Sheet - 2002
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Stock Price 1993-2002
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Conclusion

• Best Buy is better positioned for the future.
• - Proactive management
• - Flexibility with inventory, merchandising, and
  distribution
• - Clear strategy
• - Diversification of businesses and products
• - Customer service

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Questions?
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Best Buy vs. Circuit City
Shannon Smith, Anthony Ciccarone, Pete Stupak,
and Vasee Sivasegaran