Wednesday, September 9, 2009

At Best Buy, Marketing Goes Micro

Returning military? Polish speakers? No niche is too small for local stores to identify and target

Best Buy (BBY) store No. 952 is in Baytown, Tex., set amid the cul-de-sac subdivisions and big-box strip malls of Houston's metropolitan sprawl. In Best Buy's nomenclature, Baytown is a "Middle America" location, tailoring its pitch to value-conscious family folks.

Lately, however, the employees at this store have noticed a different stripe of shopper: Eastern European workers from cargo ships or oil tankers, temporarily docked at Baytown's busy port, are spending their precious shore hours scouring the store's aisles. They take a 15-minute cab or shuttle ride to stock up on iPods and Apple (AAPL) laptops priced cheaper than back home. To speed their shopping, the Baytown Best Buy has moved the iPods from the back corner of the store to the front, paired them with overseas power converters, and simplified the signage. Since the changes were made over the holidays, cash register receipts for the boat workers have ballooned by 67%.

As the economy slows, Best Buy is encouraging its outlets to go off script. Sure, European boat workers are a microscopic niche. But when multiplied by Best Buy's more than 900 stores, the retailer believes such bottom-up insights could have an outsize impact on sales growth. In a sense, the national chain is trying to go hyperlocal, asking on-the-ground employees to spot fresh customer groups—North Carolina retiree clubs, newly returned soldiers in Georgia—that would otherwise pass far below the radar at Best Buy's headquarters in Minneapolis.

The move is the latest step in Best Buy's four-year-old "customer centricity" strategy, which assigned each store to one or more categories such as home theater geeks, soccer moms, and average-Joe electronics shoppers. Each store was asked to woo these often overly broad groups with tailored product mixes and services. "In some cases, we were right," says Shari Ballard, the executive vice-president in charge of U.S. stores, "and in others we were totally wrong."
Local ingenuity and insight is contributing to a relatively rosy forecast from Best Buy, considering so many consumers are on the ropes. At a time when a full tank of gas costs more than some DVD players, executives still project a growth rate of 1% to 3% at stores that have been open at least 14 months. Many local managers, they say, predict even greater growth.

Wall Street has been raining on this picture. "Welcome to Sunny Minneapolis," wrote one dubious analyst. "An Outlook that Would Make Mao Proud," wrote another, harking back to the over-optimistic steel production targets in Mao Zedong-era China. Several question how much faith should be put in forecasts from store managers who are also being prodded by executives to achieve better numbers. Retail analysts generally applaud Best Buy's "centricity" strategy, which has helped separate it from rival Circuit City (CC), currently an acquisition target of Blockbuster (BBI). Yet some doubt the local efforts will go far enough. Big worries about consumer spending, says Morgan Stanley (MS) analyst Gregory Melich, aren't going to be offset by putting more Polish-music CDs in a particular store—as one Chicago Best Buy recently did—"because you find out 25% of the people there are native Polish speakers."


Analysts also worry about the outlook for new must-have gadgets. With the exception of video games, most of this year's new devices are "evolutionary and not revolutionary," says David Schick, an analyst at brokerage Stifel Nicolaus. Of particular concern are big-screen TVs. Melich believes TV sales and related warranty and equipment purchases, which he estimates made up 40% of Best Buy's $2.2 billion operating profits last year, could drop for the first time in seven years. Best Buy declined to comment.

Taking much of the heat from Wall Street is Ballard, who has run Best Buy's U.S. stores since September. She's trying to give local managers more leeway to set sales strategies, inventory levels, and product mixes. That may sound like Retailing 101: Give customers what they want. But it demands complex math from a big-box retail chain built on standard operating procedures, negotiated shelf-space deals, and headquarters-generated "planagrams," or floor plans. Big companies "make strategy creation this elitist space," says Ballard, 41, who started with Best Buy as an assistant manager in a Flint (Mich.) store.

The latest moves are just starting to upend Best Buy's rigid, top-down planning. Early this year, Savannah (Ga.) store manager Richard Gamble learned that more than 10,000 soldiers from two nearby Army bases were due to return home by September. He quickly assigned a team of employees with armed-forces family members to plan for the troops' arrival; the group selected seven product categories, such as Nintendo (NTDOY) Wiis and flat-screen TVs, that had either launched or fallen in price since the soldiers deployed. Gamble asked Minneapolis to increase his inventories of those goods by 40%. It complied, and he is expecting a sales lift from the bigger stock.

Local store managers are even influencing Best Buy's merchandising tactics. After getting numerous requests from troops set to redeploy, Gamble's military team placed an order for Panasonic (MC) Toughbooks, rugged laptops not usually carried at Best Buy stores. While he couldn't stock them for sale, he persuaded HQ to send him a few for display so soldiers could try them before ordering online from Best Buy. Such a request would have been "virtually impossible" two years ago, says Gamble. Even with a new store opening nearby, he expects the military push to help raise his sales this year by 7%.

The chain's shift in mindset requires a delicate balance: Adjustments spurred by local insight can boost sales, but they also can add risk and expense to operations. Of course, Minneapolis continues to roll out its national plans, but to fortify local insights the retailer is handing out financial modeling software so store managers can try "what-if" scenarios. Still, some changes have flopped. Relocating GPS devices to a different spot in a New York store did nothing to boost the products' sales. And local changes to "endcaps"—the display at one end of an aisle—have risked angering suppliers that paid for specific shelf space.

Some local novelties entail a lot less pressure. After the chairman of a local retiree club called the Golden Boys bought a high-def TV at the Mooresville (N.C.) Best Buy, store manager Walt Goney invited the club's members to come by at 8 a.m., two hours before opening time. Eighty-five members showed up for a hand-holding session on switching to digital television. They bought $350,000 worth of TVs and equipment that morning. The cost to Goney? Just $99 in labor, plus coffee and doughnuts.

While innovation is company's competitive edge, agility is the must-have survival skill in hyper-competitive market. Best-Buy shows an example how a giant can also act agile by empowering the stores to tap local opportunities not easily spotted from the head office.

Most of the time headquarters wouldn't be able to sniff the growing consumer trend, competitor activities as fast to tap the opportunities or mitigate the emerging threat, therefore local teams play important role to give feedback and act rigorously while regional/global business unit is guarding diciplined strategy deployment and consistency across markets,