Big plans, new horizons for Best Buy

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: June 28, 2008 - 8:48 PM

The giant consumer electronics retailer has plans to push into new markets in Mexico, Europe and Turkey.

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Best Buy opened its first foreign store in Shanghai in 2007, and plans more stores in the financial center.

Bob Willett readily admits that for many retailers, the road to international growth is "littered with failure."

Yet Willett, the hard-charging CEO of Best Buy's international operations, is confidently leading the consumer electronics company on a massive global expansion that will take it into 11 new countries in the coming months.

"We see this as an opportunity to accelerate our growth in the U.S. and internationally," Willett said. "But we're going to do it very carefully."

To date, the Richfield-based company has taken a cautionary approach to international sales. All but one store is in North America, and even when it ventured into Canada, where it has nearly a third of the consumer electronics market, it did so by buying its way in through an existing company before expanding with its nameplate Best Buy stores.

And as its international plans unfold over the coming months, they're notable for their unusual approach. Turkey and Mexico are at the top of the list.

A partnership with London-based mobile phone giant Carphone Warehouse, which is expected to be clinched Monday, catapults Best Buy Co. Inc. into nine European cities and 2,400 stores. Willett said he's confident a Best Buy big-box store will open in the United Kingdom in the first part of next year.

The retailer also soon will reach into Mexico, with a store in Mexico City set to open in October and a second likely to follow in quick succession.

Turkey isn't far behind. Best Buy has signed a lease to build a smaller-footprint store in Istanbul, with the aim of opening in February or March.

"We did a ton of research across the world," said Willett, who commissioned a study of developed and developing nations to look at 57 attributes. Included were things such as the repatriation of profit, stability of the legal system, ease of entry and strength of such categories as consumer electronics and appliances. From that, Willett gave his boss, CEO Brad Anderson, his top-10 list.

"We won't be perfect. We'll make mistakes," he said. "But we now have a template of why retailers succeeded and why they failed, and we're trying to mitigate those things."

Wal-Mart Stores Inc. is one of many retailers whose international experience could provide a cautionary tale. In the late 1990s, it tried and failed in four overseas markets -- Hong Kong (1995 to 1997), Indonesia (1996 to 1998), Germany (1997 to 2005) and South Korea (1998 to 2006).

French-based grocer and discount giant Carrefour recently pulled up stakes in nine countries. And British retailer Marks & Spencer spent three decades trying to amass a presence in the United States, Europe and Asia, only to abandon plans in the early part of this decade.

Meanwhile, Target Corp. may be letting others make all the mistakes first. The Minneapolis-based retailer has yet to expand outside U.S. borders -- even into Canada.

Growing pains

University of St. Thomas Prof. David Brennan and his colleague at the Institute for Retailing Excellence, Lorman Lundsten, are in the process of publishing a case study about Wal-Mart's global international expansion, based on analysis of financial reports and their own observations.

The professors' conclusion: Wal-Mart's key strength -- highly controlled distribution centers where it could squeeze vendors and deliver predictable "everyday low prices" -- can't always be achieved on foreign soil.

"Wal-Mart had really good success in Canada and the [United Kingdom], and they thought they could go out and conquer the world," Brennan said. "Geographically, they were all over the place, with different cultures and different kinds of market-entry strategies. ... As a result, I think they overreached. They went too far too fast in too many areas. You can see some parallels potentially taking place here with Best Buy."

Brennan said that Wal-Mart's success in China is far from assured. And after decades of acquisitions and joint ventures, the Bentonville, Ark.-based giant is operating stores under 50 names across the globe, from restaurants to free-standing supermarkets to banks, Brennan said. Still, Wal-Mart's $90 billion in international sales makes up about a quarter of total revenue.

And therein lies the allure of global retailing.

Best Buy has about a fifth of the U.S. electronics market, with opportunities for more if rival Circuit City Stores Inc. doesn't get a buyer that can turn its fortunes around. With a dominant position in this country, Piper Jaffray analyst Mitch Kaiser believes the time is right for Best Buy to move into untapped markets overseas, either by going it alone -- as in Turkey and Mexico -- or through joint ventures, such as the Carphone Warehouse deal.

Lured by growing economies

"At some point, the square-footage growth in the U.S. is going to dry up, and you have to think about what's going to be your next leg of growth," Kaiser said. "You have to have a good strategy in place with a well-thought-out plan, and do some experimentation in the markets before you deploy a ton of capital."

Turkey, a nation of 70 million people with an average age of 26, is the world's sixth-fastest-growing economy. Foreign retailers already are clamoring to grab its young, affluent middle-class. More than 70 shopping malls are under construction, and mall space is expected to double in five years.

Many of Best Buy's international competitors already are there -- including German consumer electronics retailer Media Markt, U.K.-discounter Dixons, Marks & Spencer and Carrefour. Even Donald Trump is said to be building a mixed housing-retail and office development in Istanbul, Turkey's population center in the northwest.

Turkey also could provide a new sourcing opportunity, as 40 to 50 percent of Europe's TVs are manufactured there.

But there are risks to the upside: the consumer confidence index fell to a historic low this spring, and inflation is rising to about 9 percent a year. "A rising middle class is not in and of itself a strong enough business model," St. Thomas' Brennan said. "Turkey in 2010 may be a viable economy. But in terms of the Islamic culture and business practices ... you have to be really sensitive to that and build that into whatever business model you're going to have in that country."

Best Buy spent two years checking out Mexico, which Willett describes as having some of the world's best retailing in addition to a massive informal market. With a common supply chain and common technology, it doesn't have the same hurdles to get up and running as in Turkey, Asia or some other European markets.

He said the company has learned from mistakes in China, where it owns a majority share in 160 Jiangsu Five Star electronics and appliance stores and a lone Best Buy in Shanghai. The company will march forward with new openings this year, albeit with drastically scaled-down expansion plans.

Best Buy will open a new group of stores in the financial center of Shanghai this year. The plan, Willet said, is to saturate the city, where it can maximize its existing supply chain, before moving elsewhere in the country.

With a $100 billion electronics market, "China has a huge upside," Willett said, "but we have to be patient, because we've got to build an infrastructure there."

Mistakes were made

The company recruited too many part-time workers when what it really needed was a more permanent workforce to bring expertise. It also underestimated some of the hurdles to getting government approvals.

It has learned about opening times, shopping trends and cultural differences. A contract signed and agreed upon one day could change the next, Willett said. "We learned that when someone said, 'Yes,' it doesn't mean they've understood it or that they were agreeing to it. It just means, 'yes,' " Willett said.

Best Buy expects the partnership with Carphone Warehouse to boost annual revenue by $5 billion and increase earnings by 5 to 7 cents per share this year. But to finance the deal, the company is scrapping its $800 million share buyback plan.

CPW has a legal system that works across these countries, they have an experienced real-estate team and they have a supply chain in place. That helps Best Buy diversify, but also brings what Willett said is the key component to worldwide success: smarts.

"Going global isn't about scale, it's about skill," said Willett, a Brit and former Best Buy consultant who took over the job at Best Buy International when it was created 2 1/2 years ago. "I don't give a bugger how many synergies you've got, if you don't have the skill, you're wasting your time. All you're going to do is waste shareholder money and you're going to make a lot of failures."

Jackie Crosby • 612-673-7335

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