Best Buy Surprised By Breadth Of Downturn: Dunn

By Alan Wolf -- TWICE, 11/17/2008

MINNEAPOLIS — Business dropped off so quickly for Best Buy beginning in late September that it was unable respond fast enough to the new marketplace realities, president and COO Brian Dunn said.

Speaking to a small group of reporters at Best Buy headquarters here late last month, Dunn said the company "made a lot of adjustments but couldn't change fast enough," given the three to four weeks it takes for the $40 billion retail giant to shift course.

The chain is responding by cutting discretionary expenses, including work hours for store personnel, and may curtail plans for new store openings. But despite cutbacks, Dunn promised to accelerate spending in areas that will deliver "massive return.

"We won't cut our way through this, we will grow our way through this," he said, and will emerge from the downturn a stronger business.

Indeed, Best Buy has been anticipating a major restructuring of CE retailing over the next year, and is prepared to absorb real estate and market share as businesses fail and storefronts close.

"We're sure there'll be material consolidation in the industry," Dunn said, which will create "potential opportunities" for the No. 1 CE chain. "If storefronts close, we'll jump in and connect with those consumers."

Dunn was reluctant to name potential targets, but acknowledged that Circuit City's plight obviously represents a "tremendous opportunity" for the company, although he takes no glee in it.

"It would be a sad day for the industry if Circuit City went out of business, and I wouldn't be drooling over it," he said.

Dunn described the current environment as the most challenging he's seen in his 23 years with Best Buy. "It's difficult as a retailer to plan," he said, given the whipsaw effects of the financial markets and the simple fact that no one can predict the duration or the severity of the downturn. "It's a real tough nut to crack."

Dunn said he had always prided himself on the accuracy of his holiday forecasts, but said this season's outcome is anyone's guess. "Does the fear subside after the election? I don't know. Vendors are expressing great concern about what's going on here and how long it will last. They have questions about whether they should keep the factories going."

What is certain is that consumers "will still have gift lists" for the holidays, even though most will opt for smaller, less expensive items given the "deterioration" among the company's midlevel and lowest-tier shoppers. Nevertheless, Best Buy's best customers — the 20 percent who are affluent, young and mortgage-free, or are "fanatics about tech gear" — were still spending money on fully featured products through October.

What's more, he assured, "We're only in the early innings of our industry's most exciting era. Half of the TVs out there aren't hooked up to an HD source," meaning that the HD revolution hasn't even begun.

Still, conditions won't "magically change over the next 90 days," Dunn said — including the "great pain points" seen among low- and middle-income consumers. "Over the longer term, strong brands will emerge even stronger while weaker brands will go away."