One man's force of will built a retailing empire

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: May 19, 2012 - 2:53 PM
Richard Schulze
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Richard Schulze built Best Buy from scratch. He will step down as chairman on June 21.

Photo: Adam Bettcher, Wireimage for Starkey Lab

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From his start in 1966 selling hi-fi stereos out of a St. Paul storefront to his role in building the nation's largest consumer electronics chain, Best Buy Co. Inc. founder Richard Schulze always found ways to get the company out of a jam.

He mortgaged his house at least twice to raise cash, held a now-legendary tent sale after a tornado tore through his most profitable store and risked alienating vendors as he turned the company's business model on its head.

Those who've watched Schulze steer the company through dark days of the past say Best Buy's 46-year survival can be attributed to the sheer force of his personality and optimism in the face of adversity.

"He has an aberrant amount of faith," said former CEO Brad Anderson, Schulze's right-hand man for more than three decades. "Faith in himself and -- maybe part of what's just happened here -- sometimes too much faith in others. That was a strength and potential weakness. He just believed he could push through anything, and he believed others he trusted could do that, too."

Last week, the Richfield-based company said Schulze, 71, will step down as chairman next month and leave the board in June 2013. The move came after an internal review found that Schulze knew about allegations of an inappropriate relationship between now-ousted CEO Brian Dunn and a female subordinate, but failed to tell the board.

His exit comes with the company at a critical juncture, the sort of turning point Schulze himself has adeptly handled through the years. Anderson recalled meeting with Schulze shortly after moving from store manager into the executive suite in 1979, with the firm unable to pay its bills and on the verge of bankruptcy.

"I know the company is losing a lot of money, there's a drug problem inside the staff, there's a lot of reasons to believe the company has no future," Anderson said. "And in my first conversation with him he's talking about the $50 million company he's building out of this $4 million ash heap I'm in. I'm thinking he's either crazy or brilliant."

Best Buy punched through the $50 million mark within a few years, hit $1 billion by 1992 and last year posted sales of $51 billion. Along the way, Schulze bet the company a number of times, turning adversity into opportunity.

The first gamble came in 1981, after that tornado sale at the Roseville store. The sale of discounted goods raked in more money in four days than the chain of small stereo stores, known as Sound of Music, made in a month. Schultz began to rethink his strategy. In 1983, he opened a superstore in Burnsville under the Best Buy name.

This was a time when consumers were shopping for TVs and stereos at department stores, such as Sears, Dayton's or Montgomery Ward, or else finding their way to a small mom-and-pop.

Opening an 18,000-square-foot behemoth in the suburbs to sell a range of consumer electronics was a bold move. For the company to survive, the superstore needed to do more business than the whole chain.

The concept proved so successful that Schulze took the company public under the Best Buy name in 1985, giving it the capital to start marching the big-box concept across the nation and eventually into Canada, China and Europe.

"Dick Schulze recognized that consumers in America wanted to shop differently," said Love Goel, CEO of Minnetonka-based GVG Capital Group, a digital private equity company. "They wanted to go to stores where they could buy a product from a knowledgeable salesperson without having to spend time wading through suits and ties and underwear."

A competitive threat

The next radical move came in 1989, when the biggest company in the industry, Detroit-based Highland Appliance, moved into the Twin Cities. Highland priced its wares below Best Buy's operating expenses, a move company executives saw as a ploy by the national chain to put it out of business.

Schulze decided to match Highland on price, but the threat of extinction ultimately pushed him to go a step further. He changed the way the company paid its sales force, moving them from commission-based to salary. The idea was to let customers decide what product worked best for them.

"It was revolutionary at the time," said Randy Zanatta, who joined Best Buy in 1980, when there were eight stores, and left 17 years later, when there were 350. "We lost vendors, and many people thought we'd go under at that point. But Dick was incredibly determined."

Eventually, vendors such as Sony came back. And the shift made Best Buy more competitively dangerous to the bigger stores. Over time, Highland went out of business along with scores of other retailers that failed to adapt, including Tweeter, Ultimate Electronics and Circuit City.

"He was great at demonizing these competitors and rallying the troops to go in and win," said Wade Fenn, a top executive who left Best Buy in 2002 after 22 years.

While Schulze could be driven and intimidating, he was at his best when the odds seemed stacked against the company, Zanatta said.

"He was so convincing," said Zanatta, who went on to co-found Golf Galaxy. "If there were doubters, people voiced their feelings. But then we locked hands and went down the path together."

When Best Buy moved into new corporate digs in 1991, Schulze put up a sign that called it "Best Buy world headquarters," though the company had about 45 stores mostly in the Midwest at the time.

Strong vision

There were no test runs of ideas. Schulze knew where he was going, and left it to his executives to figure out the steps to get there. Though he was not much of a collaborator, his top lieutenants say he gave them an enormous amount of freedom.

Anderson said he and Schulze never stopped butting heads over their opposing worldviews -- calling Schulze the "irrational optimist" and himself the "irrational pessimist."

"Our method of dealing with each other when we disagreed was to shout louder," Anderson said.

While Schulze, the risk-taking entrepreneur, would see through the mountain of trouble to a bright future ahead, Anderson would "tell him everything that was wrong with the company in spades."

"That actually was kind of constructive," said Anderson, who became president in 1991 and served as CEO from 2002 to 2009. "It helped build a very open culture about the flaws that existed in the company."

The ride has often been bumpy for Schulze.

In 1997, after years with his foot on the gas pedal, Best Buy's profits plummeted from $48 million to $1.7 million. Investors called for his head.

Schulze turned for the first time to outside consultants who helped engineer a turnaround. He also re-examined his approach to leadership.

"Dick was fairly command-and-control," Fenn said. "He never lost that. But he did learn to trust other disciplines over time."

As Schulze became at one time the richest man in Minnesota, thanks to his then-majority stake in the company, some say it became impossible to be the hungry, risk-taking entrepreneur that launched his career.

But, many believe that's just the prescription needed as the company faces competitors from mass merchandisers such as Target and Costco as well as nimble players such as Apple and Amazon.

"That's their challenge today -- they're trying to be like a department store, when the department store is dying," Goel said.

"There's space for Best Buy to do exactly what it did in the 'store world' in the 'online world,'" he said. "People don't want to go to Amazon and dig through all those books and toys and shoes and diapers. They're hungry for a focused specialty retail model."

Jackie Crosby • 612-673-7335

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Richard Schulze