Magnolia A/V Preparing National Expansion

By Alan Wolf -- TWICE, 7/25/2007

Kent, Wash. — Magnolia Audio Video, the regional A/V specialty chain, is planning a national expansion that could build the $160 million Best Buy subsidiary into a $1 billion business over five years.

The plan, according to CEO Jim Tweten, is contingent upon a successful transformation of the 53-year-old Northwest chain from its current retail model to that of a service-oriented provider of whole-house systems.

The re-engineered Magnolia would operate out of a smaller footprint — 3,000-square-foot showroom/design centers located next to Best Buy stores with Magnolia Home Theater shops — and would target architects and luxury home developers in addition to well-heeled consumers.

Best Buy currently has Magnolia Home Theater shops in about 300 stores.

Tweten said the expansion would fill a need for a national custom installation chain with a recognizable brand and the financial backing of a Fortune 500 company. In the process, it will create an “end-to-end solution” covering all CE bases with Best Buy, Magnolia Home Theater and Magnolia Audio Video representing a good-better-best step-up scenario. He estimates that a national footprint could give Magnolia a 15-percent to 20-percent share of the country’s custom install business.

But Magnolia’s new business model was also compelled by profound structural changes in CE retailing, Tweten said, which doesn’t bode well for regional A/V specialty chains.

“We saw what happened to the business in the latter half of 2006, with the oversupply of TVs, the fall in average selling prices, new competitors, the lack of exclusive brands and the speed with which the products have become commoditized,” he told TWICE. “TV had been our core category and it just changed overnight. This channel doesn’t have a bright future within the TV business. You’ve got to change from a brick-and-mortar model or you’re dead.”

Magnolia will begin its transformation this summer by closing six underperforming stores and remodeling the remaining 13 by early November. The chain will then spend a year tweaking and evaluating the new operation before embarking on its expansion plans.

The concept, more than a year in the making, has been successfully tested at two remodeled Magnolia stores in California, and a ground-up prototype in Atlanta. The new design features a lifestyle showroom, including a great room and kitchen with “female-friendly” automation systems, plus a design center with conferencing capabilities that will allow customers and store-based project managers to communicate with Magnolia’s systems engineers at headquarters.

Internally, sales staff will be re-trained and re-deployed as project managers and system designers who split their time between the store and in-home consultations, while a separate business group will be responsible for contacting and serving luxury home builders, interior designers and architects.

“We’ll still have a la carte TVs and receivers for walk-in traffic,” Tweten said, “but we’re going to minimize that. That’s old model. If someone wants to buy a 50-inch plasma TV, Best Buy can do that. We can’t wait for customers to come in. We don’t have traffic drivers like music, movies and gaming. The new model is going out to the customers, and moving from brick-and-mortar to a balance of services and solutions. That’s what we have to do.”

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