Best Buy's European joint venture could be history

  • Article by: THOMAS LEE , Star Tribune
  • Updated: June 23, 2012 - 10:15 PM

Company's plan to operate small mobile stores with Carphone Warehouse is likely to fall victim to the recession.

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The clock is ticking on Best Buy Europe.

As Best Buy Co. Inc. weighs further cost cuts, the fate of its $2.1 billion joint venture with Carphone Warehouse (CPW) remains murky at best. Over the past year, Best Buy has closed all of its branded big-box stores in the United Kingdom and Turkey. It also exited its contract with CPW to develop Best Buy Mobile stores, a hit format, in the United States.

What remains are 2,393 smaller format Carphone Warehouse and the Phone House stores Best Buy operates in partnership with CPW in recession-racked Europe. Given Best Buy's preoccupation with finding a new CEO for its U.S. operations and its struggling North American business, analysts say it makes sense to exit the joint venture because there is little financial upside in the long term.

"The best element of the partnership with CPW was [launching Best Buy Mobile] in the United States," said Matt Arnold, a retail analyst with Edward Jones near St. Louis, Mo. "What's left is the lowest-return part [of Best Buy Europe].

Even CPW leaders privately expect Best Buy to pull out of the 50-50 joint venture, according to a source close to the London-based phone giant. Best Buy Europe sales make up about 10 percent of Best Buy's annual sales of $50 billion.

A Best Buy spokesman declined to comment.

Best Buy Mobile has been a big hit, generating about 30 percent of Best Buy's domestic operating profits, according to Carphone Warehouse filings. The company operates about 305 stand-alone Best Buy Mobile stores in the United States and plans to open 100 more this year.

Best Buy Europe's uncertain fate comes at a time when Best Buy leaders have vowed to redirect its limited capital to more profitable and efficient businesses. Instead of building stores, interim CEO G. "Mike" Mikan said the company will move to a "return-on-investment orientation."

"We're also going to make some tough decisions about shrinking the company's physical footprint," he told investors during the annual shareholders meeting last week. "Total square footage will go down as we make decisions about the best use of resources."

"We need to focus on both the physical and virtual customer experience, and our capital investments must reflect that accordingly," he said. "All future investments need to meet -- or exceed -- our return expectations."

Best Buy has made money overseas and plans to expand its successful Five Star chain in China. But as a whole, the international segment has mostly underwhelmed Wall Street analysts, especially when they measure return on invested capital. That's what investors use to determine how well a company is using its money to generate profits.

Best Buy's return on invested capital in the United States is about 4 percent, said Jeremy Brunelli, an analyst with Consumer Edge Research in Stamford, Conn. None of its international businesses comes close, he said.

"When you think of capital efficiency, you do wonder just how much time they are willing to give international to get a good return," said Arnold of Edward Jones.

At the very least, Best Buy will try to limit how much money it invests overseas, Jones said.

"International will be kept on a much shorter leash," he said.

Europe has been particularly rough. When Best Buy and CPW formed Best Buy Europe in 2008, the plan was for the new company to build Best Buy branded big boxes and operate Carphone Warehouse stores in countries like Spain, France and Portugal.

But Europe's economic woes have weighed heavily on the joint venture. For fiscal 2012, Best Buy Europe sales dropped nearly 6 percent to $5.2 billion from the previous year, according to CPW documents. Operating profits were mostly flat at $342 million.

Nowadays, Best Buy seems more interested in CPW's brainpower than its physical stores. As conceived by former Best Buy International CEO Robert Willett, the joint venture called for CPW to help the company develop the Best Buy Mobile format in the United States.

Before the joint venture, Best Buy dominated sales of personal computers and televisions but lacked expertise in mobile devices. CPW, on the other hand, operated small mobile phone shops throughout Europe.

Last year, Best Buy paid CPW a hefty $1.2 billion fee to end their agreement to split profits from Best Buy Mobile in the United States. At the time, Best Buy said it decided to buy out CPW's original contract so both sides can move beyond smartphones and focus on selling and connecting to other mobile devices such as tablets, eReaders and laptops.

But CPW will continue to help Best Buy to develop Best Buy Mobile stores around the world, particularly within Best Buy's Five Star electronics chain in China.

To prepare for the holiday shopping season, Mikan said 50,000 employees in the United States will receive the same intensive customer service training given to Best Buy Mobile employees.

"Our people will offer advice and insight," Mikan said during the annual meeting. "They will be problem-solvers and they will unlock the knowledge our customers need to take full ownership of their technology."

Thomas Lee • 612-673-4113

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