Best Buy finds new life in strategic partnerships

In 2001, Apple founder and CEO Steve Jobs wanted to move Apple beyond personal computers. He still envisioned the PC as a "digital hub" where consumers could manage photos, videos and music they acquired or generated through mobile devices.

Music seemed especially fertile ground. At the time, there was no good way for consumers to buy, share and listen to digital music. Illegal downloads, courtesy of sharing sites like Napster and Kazaa, wreaked havoc on the recording industry.

So with the consent of major record labels, Jobs created the iTunes online music store where consumers could purchase music for 99 cents per song.

While iTunes is now the largest music retailer in the world, it was seen as a huge risk back in 2001. Would consumers, who could easily download music from the Internet for free, accept a legal service that charged for the music?

Because iTunes was so fundamentally new, Apple needed a way to instantly legitimize the service to millions of customers across the country at the same time. So Jobs approached Best Buy, its biggest supplier, with an intriguing offer: Apple would give the iTunes store to Best Buy for free (though Apple would still control its content), and the two sides would split the revenue evenly.

"He rang us up and said, 'I need distribution. I have got this thing called iTunes and I only want some cut of it,' " said a former top Best Buy executive. " 'I don't want all of it, I'll give it to you, you can have iTunes.' We could use it in the stores. He would give us 50 percent of the revenue of each song and we did not have to pay for anything."

Best Buy declined the offer.

"They didn't understand it," the former executive said. "Some of the things that we said no to, you will be shocked. It's a cultural issue in that we don't know what we don't know."

In fact, Best Buy tended to see suppliers, even powerful ones like Apple, as opportunities to lower costs rather than true strategic partners. That's why Apple decided to launch its own retail stores, the former executive said.

"No doubt about it," the former executive said. "They couldn't get what they wanted from us. You can't blame them. Apple has always been open to some people. They opened more to us because we had a bigger relationship with them. But in the end, our relationship with them would be terrible."

Over the next decade, as online retailers like Amazon and Apple siphoned sales from brick-and-mortar chains, Best Buy would come to realize that it needed to redefine its relationship with vendors. Instead of viewing manufacturers as profit centers they could pressure for the lowest price, the company under CEO Hubert Joly decided to build strategic alliances with its suppliers that focused on innovation and differentiation.

One thing that surprised Joly when he joined the retailer in September 2012 was the symbiotic relationship between Best Buy and its manufacturers like Microsoft, Sony and Toshiba. Each desperately needed each other to survive, though that mutual need tended to get lost in the daily haggle over price and credit terms. For many companies, Best Buy accounts anywhere from 30 to 70 percent of their overall sales.

Throughout its history, Best Buy succeeded in putting much of its competition out of business. If Best Buy, which controls 15 percent of the consumer electronics market, were to go belly up, how would these companies distribute their products? Sure, they could sell over the Internet or open their own stores, like Apple. But selling things is an entirely different business from making things. From picking the right locations to designing an optimal store, it could take manufacturers several years to build a national chain of brick-and-mortar locations that would justify the cost.

During his first week on the job, Joly told the Star Tribune that Best Buy must work with its suppliers to give customers prone to Internet shopping a compelling reason to visit its stores.

He cited how Ralph Lauren, where he serves as a board director, worked with Macy's to create attractive Lauren displays throughout the department store.

"That's something I want to explore," Joly told the Star Tribune. "As a major retailer, we are very important to our suppliers. There's got to be things that we can do for their benefit and for our benefit. There are partnership opportunities, exclusive products or other things. I look forward to meeting with these guys."

Meanwhile in Seoul, South Korea, J.K. Shin, co-chief executive of Samsung Electronics who also heads its mobile business, took note of Joly's remarks. Thanks to its well-received Android-based Galaxy line of tablets and smartphones, Samsung had emerged as a formidable competitor to Apple and its iPhones and iPads.

The company had considered launching its own stores in the United States but decided against it. Building the stores could take three to five years, and Samsung needed to capitalize on its momentum.

Shin had an idea: Why not open mini-Samsung stores within the Best Buy box? Such a store-within-a-store concept, popular in Asia, could help Samsung sell more products in America without the time and expense of building its own stores.

In early December 2012, Shin flew from Russia to the Twin Cities and pitched his idea to Joly over dinner at Best Buy headquarters in Richfield.

"I'll focus on the products and the innovation," Joly recalled Shin telling him, "and you do the retail. We will not open stores. We will concentrate only on products."

"And we will not launch our own phone," Joly replied.

To Joly, the emerging deal was a windfall. For one thing, the concept, called the Samsung Experience, would be exclusive to Best Buy, adding a jolt of excitement to a chain that really needed it. Best Buy would hitch its ride to one of the hottest technology brands in the world.

"It was very clear that they needed us and that we thought that from a customer standpoint it would be great," Joly said during an interview in 2013. "They thought the economics were great for them and of course we thought the economics were great for us."

Samsung would essentially rent space from Best Buy and provide staffing and marketing support. Best Buy would benefit from customers drawn to the Samsung Experience, who would then presumably shop the rest of the store.

"The store-within-a-store idea is a creative strategy," said Keith Anderson, a consultant with RetailNet Advisory Group in Boston. "If you're having a tough time getting paid by consumers, who else may have money for you? In this case, it's big brands that don't like the way their brands are presented on the Web. They also know that people want to see the product and talk to somebody before buying."

In one swift move, Best Buy, which was struggling to make productive use of its enormous space, found a strategic partner willing to pay the retailer for something Best Buy already had.

"The thing made so much sense," Joly said. "In retail, you normally want to test an idea first. But sometimes you come from a pretty bleak situation, you're a little bit bolder. In fact, the name of the project was Project Bold."

By the end of the dinner, Joly and Shin shook hands on a deal. Eight months later, nearly all of Best Buy's stores in America boasted a Samsung Experience shop.

"The companies decided to move forward extremely quickly because that's part of the Korean culture," Joly said. "It's really impressive how fast they are moving."