Best Buy's European exit means retailer will need to tap inner talent for innovation

  • Article by: THOMAS LEE , Star Tribune
  • Updated: May 1, 2013 - 5:55 AM

Analysts say the company will now rely on its internal talent such as Sharon McCollam and Scott Durchslag in its next moves.

Best Buy Co. Inc.’s decision to pull the plug on its partnership with Carphone Warehouse in Europe is not just a partial retreat from the world stage. It also suggests that the Richfield-based consumer electronics retailer, which has leaned on joint ventures, consultants and strategic alliances, will need to seek its best ideas from within the company instead of outside it.

Best Buy said Tuesday it will sell its 50 percent stake in Best Buy Europe to Carphone Warehouse for $775 million in cash and stock, continuing its strategy of simplifying its operations. Best Buy shares jumped 7 percent, or $1.79, to close Tuesday at $25.99.

Since CEO Hubert Joly joined Best Buy last September, the company has wound down its venture capital business, reduced its reliance on consultants, and ended its Geek Squad experiment with Target Corp. The company, of course, is trying to cut costs while focusing its resources primarily on fixing its core U.S. stores. But the moves also suggest that if Best Buy needs innovation, it will rely on its own talent, including chief financial officer Sharon McCollam, U.S. stores chief Shawn Score, and e-commerce president Scott Durchslag.

Best Buy’s “intellectual fire power will come from within,” said Brian Yarbrough, a retail analyst with Edward Jones. That includes recent hires like Joly, who previously led Carlson; McCollam, who launched Williams-Sonoma’s e-commerce business, and Durchslag, a former president of Expedia.

“We concluded that the timing and economics were right to enter into this agreement,” Joly said of Best Buy’s announcement. “This transaction allows us to simplify our business ... and strengthen our balance sheet.”

Best Buy declined to comment further Tuesday.

Throughout its history, the company has relied on an army of consultants and coaches to craft strategy and mentor leaders, yet reserved its most important position, CEO, to longtime store veterans Brad Anderson, Brian Dunn and founder Richard Schulze.

In addition, over the past decade, Best Buy has partnered with a hodgepodge of outside groups including MIT Media Lab, Carnegie Mellon and Silicon Valley tech enthusiasts. The company created a Strategy and Innovation Department, which even included a venture capital unit that invested money in high-tech start-ups.

“It was more of an organized way to discover outside innovation and vetted where it might fit in Best Buy,” said Kim Garretson, the company’s former liaison to the venture capital community.

But Best Buy’s European joint venture with Carphone Warehouse, launched in 2008, was its most ambitious alliance with an outside partner. Best Buy invested $2.1 billion in the new company, which would build branded big boxes and operate Carphone Warehouse stores in countries such as Spain, France and Portugal.

But Europe’s economic woes have weighed heavily on business. In 2012, Best Buy closed all of its branded big-box stores in the United Kingdom and Turkey. What remains are about 2,400 smaller-format Carphone Warehouse and the Phone House stores Best Buy operates in partnership with Carphone Warehouse in recession-wracked Europe.

Given Best Buy’s focus on its struggling North American business, analysts say it makes sense to exit the joint venture.

“The long nightmare is finally over,” Carol Levenson, director of research at Gimme Credit, wrote Tuesday in a research note. “Best Buy finally gave up on its ill-fated acquisition of half of the Carphone Warehouse and its ambitions to spread its big-box format throughout Europe.”

But the joint venture was not just about building stores in Europe. Carphone Warehouse helped Best Buy develop its successful smaller mobile store format in the United States. Today, Best Buy Mobile generates about 30 percent of the company’s overall operating profit, according to past Carphone Warehouse regulatory filings. This year, Best Buy plans to close up to 10 big-box stores and open about a dozen Best Buy Mobile stores, according to the company’s recent annual report.

The Best Buy officials who worked on the mobile store format — Score and Jude Buckley — now hold top executive positions at the company.

Also, Best Buy has used the training it developed for Best Buy Mobile employees to retrain its regular Blue Shirt workers, which the retailer credited for helping to generate a better-than-expected performance during last year’s holiday shopping season.

The Carphone Warehouse joint venture “did give Best Buy ammunition to push the mobile space,” Yarbrough, the Edward Jones analyst, said. “From a customer service standpoint, that’s what they developed and that’s what they need to improve on” with the rest of Best Buy stores.

In some ways, Best Buy’s struggles to grow sales have less to do with creating new ideas but rather implementing the ones they already have.

“We took our eye off the ball,” Score told analysts during an investors meeting last November. “It’s not as if we haven’t been thinking about it. We just haven’t done them.”

Indeed, Joly’s Renew Blue strategy depends more on execution than it does creativity. Given Best Buy’s sales woes, that’s fine for now, analysts say. But the company’s leadership will need to eventually craft a long-term vision about where to position Best Buy in a rapidly changing industry, Yarbrough said.

“Retail evolves so much,” he said. “You do need to stabilize the U.S., but how do you grow the business from there?”

 

Thomas Lee • 612-673-4113

 

 

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