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Best Buy Lays Out Its Best-Laid Plans

Best Buy plans to aggressively roll out customer centricity stores, expand its Magnolia Audio Video in-store shops, phase out rebates, increase its service offering, and revamp its supply chain and IT infrastructure, the company told investors during a conference call earlier this month.

During the session, which followed the release of its fourth-quarter results (see p. 53), CEO Brad Anderson called the decision to accelerate Best Buy’s conversion into a customer-centric company “a major milestone.”

“We’ve reached a tipping point, and there’s no turning back,” he said.

Best Buy developed the customer centricity concept of tailoring individual stores and assortments to specific consumer segments to better distinguish it from mass merchants like Wal-Mart and direct sellers like Dell, which have been encroaching on the chain’s traditional CE turf. So far, the company’s 67 customer centricity stores have been outperforming their regular counterparts on such metrics as gross margin, comparable-store sales and sales per square foot.

Best Buy plans to bring the program’s training elements to all stores this year, and to complete full conversions system-wide in three years.

The first wave of full conversions will begin in late spring and run through 2006, affecting as many as 220 stores. Initially, the focus will be on the premium customer segment, or “Barry” stores, which is one of five customer profiles that Best Buy has targeted. Those store types, which feature Magnolia Audio Video home theater shops, will be “aggressively expanded,” according to John Walden, the recently formed customer business group’s executive VP.

Walden did not elaborate on the Magnolia expansion, but retail analyst Dan Wewer of CIBC World Markets believes that Best Buy will bring the concept to eight markets and as many as 120 stores outside of its initial California test area. Based on a survey of Best Buy want ads for “Magnolia Home Theater” custom installers, on Web site, Wewer believes those markets will include Boston; Denver; Las Vegas; Minneapolis; New York; Phoenix; Nashua, N.H.; and Washington, in addition to Los Angeles, San Jose, Irvine and Westminster in California.

That scenario places the Magnolia-enhanced Best Buy stores on the home turf of key PRO Group dealers Tweeter (Boston), Ultimate Electronics (Denver) and MyerEmco (Washington).

Similarly, industry consultant and former Tweeter exec Noah Herschman pegged the Magnolia rollout at 100 stores over 18 months during a panel discussion at last month’s Home Entertainment Source Summit in Dallas.

Retail president Brian Dunn acknowledged during the conference call that the company will bring its custom installation services in-house this summer, while expanding the ranks and awareness of Geek Squad, which will begin to aggressively target small businesses.

To support the company’s customer centricity strategy, Best Buy is “re-engineering” its global supply chain and technology infrastructure. The retailer is basing its supply chain model on European food retailing giant Tesco, which it described as “best of breed.” The three-year revamp includes price optimization, supplier integration and RFID tags, and will also allow for tailored market assortments, said chief information officer Bob Willett.

Best Buy has also created an “alliance” with 11 core vendors to eliminate waste from the supply chain and increase speed to market, Willett said.

On the IT side, the company has invested $200 million in infrastructure, including a new point-of-sale system that provides more precise customer data and analytics.

On the product front, general merchandise manager Ron Boire said that Best Buy is planning “a major upgrade” of the center of its stores, where entertainment software is sold. The retrofits will make the sales floors more flexible and allow for quick changes as new gaming software and high-definition DVDs are introduced.

Regarding the latter, Boire reiterated Best Buy’s wish for a unified high-definition format. “Our customers don’t want to be guinea pigs in a format war,” he said.

Boire also announced that Best Buy will phase out mail-in rebates over the next two years, due to customers’ disdain for the process. But the move also follows a recent decision by the Federal Trade Commission that makes retailers accountable for all rebate fulfillment — even for vendor-sponsored programs — and which cost CompUSA several hundred thousand dollars in make-good payments.