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Best Buy’s Lenzmeier Lays Out Game Plan

Coeur D’ Alene, Idaho – Wall Street and many industry observers were relieved when in February Best Buy chairman and founder Dick Schulze passed the title of CEO to Brad Anderson and president/chief operating officer to Allen Lenzmeier, two Best Buy veterans.

Lenzmeier joined Best Buy as finance and operations VP during 1984, eventually becoming executive VP and chief financial officer in 1991, responsible for the chain’s long-range planning, accounting, logistics and other activities. He became president of the company’s Best Buy Stores last year.

TWICE caught up with Lenzmeier at the CEA CEO Summit, held here late last week just prior to Best Buy’s annual meeting. He discussed the new challenges for him and the chain as it continues to expand Best Buy Stores in the U.S. and overseas, while continuing to work into the corporate mix its recent acquisitions, Magnolia HiFi, Musicland and Canada-based Future Shop.

Here is some of what he had to say:

As you and Brad take on your new roles with Best Buy, what are the biggest challenges you face?

My focus is on the acquisitions that we have made, and that they have been properly integrated within our structure. For example we acquired Future Shop about a year and a half ago. We are also going to open Best Buy stores in Toronto later this year. It is crucial that we open those stores successfully. We believe strongly that there are opportunities for both Future Shop and Best Buy in Canada. Currently Future Shop has a 15 percent market share. When we operate both Future Shop and Best Buy stores [in Canada] we think we can get a 30 to 35 percent share.

So do you see Canada being the only area of overseas expansion in the short term? Also, what plans do have for expansion in the U.S.?

In the foreseeable future our overseas plans will [only involve] Canada. We will dip our toes in the water there to see what’s involved in customer requirements, transfer best practices to Future Shop and other operations and learn the market.

In the U.S. we will have beyond this year three more years of expansion, with 60 plus stores per year. The size of those stores will [mostly] be 45,000 and 30,000 square foot stores, but we are also looking at 20,000 square foot stores.

We think there is an opportunity to have 150 of those 20,000 square foot stores, and there will be more 30,000 than 45,000 square foot locations. [In three or four years] the U.S. market will be pretty well penetrated.

Why are you moving towards smaller stores?

We think there are more opportunities there. Why only go [with stores that serve] 200,000 populations? Why not try to serve those areas with 100,000 or 125,000? We think there’s another billion and half dollars’ worth of business going into those smaller markets, and we can use our existing infrastructure of distribution, advertising, and other operations with these new stores.

Speaking of your acquisitions, what are your plans for Magnolia HiFi? What does that type of operation bring to Best Buy?

We are expanding Magnolia HiFi from 13 stores to 19 stores this year, opening six stores in the San Francisco area. We acquired Magnolia two years ago and it is really the top tier of customer demographics. The products are high-end, and it is a service-oriented operation where relationships between customers and salespeople are very important.

We are looking at Magnolia now to take some of its [best practices] and move them to other parts of the company. We are really just starting to look at now at what Magnolia does, let’s say in terms of home installation, that could migrate to Future Shop and Best Buy. We are also looking at things that they can do in support of Best Buy and vice versa.

What can you tell us about your plans for Musicland in the next six months or so?

We plan to re-merchandise 250 of the mall stores and expand the assortment of movies and games, as well as spend money on new display racks and [store] designs. We are moving some small CE items into those stores, the type that the consumer can grab and take with them. Anything too big would not work in a mall store. At Musicland and its Sam Goody stores, we want to sell solutions like we do at Best Buy. We want to sell accessories, add-ons, storage devices and so forth. and to do that you have to change the layout of the stores.

Getting back to Best Buy stores, how has the vpr Matrix PC brand rollout been? Do you plan any other private label brands for other categories?

[More private label] would be premature at this point. We introduced the brand in selected stores during January, and in April we had a full assortment in all stores. Sales have been good and we are very pleased with the introduction.

We saw a void in the assortment of PCs, in terms of brands and features. We also saw the aggressive stance direct resellers can take. Matrix can make us more flexible and enable us to respond quicker to offers that let’s say Dell can put in place. We will be able to work through product [evolution] faster than other retailers. It is important to say that [vpr Matrix] was not developed to take business away from brands we already carry. We want [vpr Matrix] to be an additive business to our overall PC selection.

Several years ago Dick Schulze told TWICE that Best Buy’s aim was to be this generation’s Sears, to get consumers shopping at the chain at a young age and hold onto them. Is that still a basic premise at Best Buy?

We want to get consumers to shop with us throughout their entire lives, starting with music and games when they are young, and develop a shopping pattern. If we take care of them as they get married, buy a house, they will return to buy appliances, video products and so forth.

So theories that Best Buy will leave the major appliance business at some point are incorrect?

Appliances are part of the plan, part of the mix. Eventually some of the technology of the CE business will appear in appliances. At the Kitchen & Bath Show this year companies showed refrigerators with Internet connections. Those products attract our type of customer.

Concerning product mix, how will it change for Best Buy in the near future?

The video business will grow in the next year or so, with flat screens, plasma, expanding assortments in sub-categories . another big growth area is going to be digital cameras.

And finally, about industry conditions. How do you rate the first half and what does the second half look like for the CE business?

We had good results for the first half, as well as Circuit City and Good Guys. Things are looking good for the second half. I think there will be [sales] growth [for the industry] in the mid single digits area. During the third quarter the industry will be running against somewhat easier numbers from last fall, due to September 11. It may be more difficult during the holiday period because people held off shopping for six weeks after September 11 and then bought at lot later on.