Best Buy struggles with global ambitions

  • Article by: THOMAS LEE , Star Tribune
  • Updated: October 5, 2011 - 8:31 AM

CEO defends long-term international strategy but says businesses are constantly reviewed.

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A Best Buy store in the United Kingdom.

Best Buy Co. Inc. CEO Brian Dunn has long cast his gaze overseas, especially as the U.S. economy has grown so meekly. But lately, the international picture has appeared murky for the company.

As the retailer's comparable-store sales in the U.S. decline, the Richfield-based retailer has been trying to restructure its international operations. In the past year, Best Buy has shut down its stores in Turkey and is reportedly considering pulling the plug on its 10 big boxes in Britain. At the same time, the company said it might reopen some Best Buy-branded stores in China, just months after it closed all of them.

Some critics and analysts say Dunn should focus on domestic growth rather than expend valuable resources across the oceans. To such suggestions, Dunn's reply is simple:

"We have always built this company for the long haul."

In an interview with the Star Tribune, Dunn offered a broad defense of his international strategy. Best Buy, he said, is seeking growth, not just from its traditional U.S. big-box stores. To successfully grow, Dunn said, the company must pursue commerce through multiple store formats, like Best Buy Mobile, as well as various channels from its website to vending machines to mobile devices to calling centers.

"In the future, physical stores alone will not be enough," Dunn said. "Digital alone will not be enough. How they come together is what really matters."

The company must also replicate its business model in places like Europe, China, Canada, and Mexico, Dunn said.

To some analysts, however, Best Buy's overseas woes are a costly distraction when considering the retailer's problems in the United States, its core market. Given the declines in consumer confidence and persistent unemployment, Best Buy's sales at stores open for at least a year, a key metric for the retail industry, is down 2.6 percent so far in 2011, significantly worse than the already meager gain of 0.1 percent during the same period in 2010. Since January, Best Buy stock has dropped about 36 percent.

Matthew Arnold, an analyst with Edward Jones Investments outside of St. Louis, thinks Best Buy has better uses for its precious capital.

With the world economy in flux, "it's not a good backdrop to be testing" store formats overseas, Arnold said. "If [fixing its ailing American business] takes 90 percent of management's focus, then that's what needs to be done."

Perhaps nothing better represents Best Buy's global ambitions than its $2.1 billion joint venture with British mobile phone retail giant Carphone Warehouse Group PLC. When Best Buy first announced in 2008 the venture, then-CEO Brad Anderson lauded the deal's "extraordinary" growth potential.

The joint venture, a 50/50 partnership in Best Buy Europe, would include Carphone Warehouse's stores in such countries as Great Britain, Spain, France and Portugal. But strikingly for Best Buy, the unit would open perhaps 80 Best Buy-branded suburban big box stores in Britain, a risky proposition in a country that has traditionally favored smaller High Street (Main Street in American parlance) electronics stores.

So far, Best Buy UK has struggled. In fiscal 2011, the unit reported a loss of $97.2 million, up considerably from the $32.8 million loss it posted the previous year. British press has been rife with speculation that Best Buy will shut down the operation.

Dunn said the company has no "imminent plans to close the stores."

"This is a marathon, not a sprint," he said.

At the same time, Dunn did not rule out the possibility, saying "we are constantly reviewing our businesses around the world."

Dunn blamed Best Buy UK's woes mostly on the economic malaise sweeping through Europe, an economic downturn "we are feeling more intensely there than what we feel in the United States."

But Arnold of Edward Jones said the venture is more fundamentally flawed than the economy.

"Retail is a local business," Arnold said. "You can't impose a marketplace on a consumer and expect it to succeed. The nuances of the value chain is just different. Habits have been established over a long time."

Arnold did note Best Buy's success in China with its Five Star stores, a local electronics chain the company acquired in 2007. Five Star's 166 stores generated about $1.7 billion in fiscal 2011 and Best Buy expects to open another 400 to 500 stores over the next five years, including 40 to 50 in 2012. The company projects Chinese sales to surpass $4 billion by 2016.

"We are very pleased with what we have in China," Dunn said. "It has been a profitable business. We couldn't be more pleased with the progress."

In fact, China's solid same-store sales growth helped offset weaker operations like Best Buy UK. In the second quarter, the company said international comparable store sales fell 3.2 percent. While not great, the decline could've been worse without China.

But like in Great Britain, Best Buy has struggled to establish its own branded stores. In February, the company said it would take a charge of $225 million to $245 million to close its two test stores in Turkey and nine-branded stores in China, which generated about $175 million in revenue.

However, last week, Best Buy caused a stir when reports surfaced, later confirmed by the company, that it was considering plans to reopen a branded store in Shanghai. Though the retailer had said in February that it would reopen two stores at a later date, the news angered some on Wall Street.

"This just reeks of poor capital allocation decisions," David Strasser, an analyst with Janney Capital Markets in New York, wrote in a blistering note. "We question how management and the board could make this decision."

"This makes it harder for investors to buy this stock and quite frankly shows a disregard for shareholder value," Strasser continued. "They have enough to figure out in the U.S., they have a great Chinese business in Five Star, and we are shocked by this announcement."

Dunn, however, said the incident was a misunderstanding and that analysts could have confused the issue with the company's plans to open Best Buy Mobile formats in Five Star stores in Nanjing.

Burt Flickinger, managing director of Strategic Resource Group consulting firm in New York, said Dunn is right to push Best Buy's brand overseas. But whether the answer is Best Buy-branded big boxes is open to debate.

"It's too early to tell," Flickinger said. The upcoming holiday shopping season and Chinese New Year next year "will really determine the fate of the company's international strategy over the next decade."

Thomas Lee • 612-673-4113

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