How Best Buy Business Model Transformation Saved It From Sure Failure

While from a superficial look at its revenue streams, Best Buy seems the same company it was in 2012. In reality, in the last decade, Best Buy has undergone a massive business model transformation. Due to a shift in consumers behaviors driven by phenomena like “showrooming” (the practice of choosing a tech gadget in a physical store like Best Buy, only to finalize the purchase on an online store like Amazon), Best Buy had to respond by matching prices of online competitors. By redefining its offerings, like the vendor experiences or the “stores-within-stores” services. And broader support to customers throughout Best Buy stores and directly to the consumers’ homes.

The story of an (almost) disrupted business

In 2012, Best Buy was going thourhg hard times.

As its revenues slew down and its margins tightened, the executives’ team struggled to understand what was happening with their business.

Traditional approaches and business tools didn’t help understand what was going wrong. Yet the business was in danger.

For an organization that, as of 2012, was making over fifty billion dollars in revenue but at the same time had seen its operating income tighten, from a whopping $2.37 billion in 2011 to just over a billion in 2012, understanding what was happening was a matter of life or death.

And Best Buy had to figure that out quickly.

Looking back to 2012, the company didn’t find a clear explanation for its tightening margins yet. In the 2012 shareholders’ letter, that is how, former Interim CEO, Mike Mikan, described the situation:

The consumer marketplace is changing rapidly, and we have to change with it. Best Buy not only has to adapt to new realities in the marketplace, where competition is strong. We also must anticipate changes before they occur and lead the way with innovative products and services.

He was called to bring the company back on its tracks, and it would take a few years and several experiments before Best Buy would finally understand how to deal with that crisis.

Enter the showrooming effect

As digital companies, e-commerce, and comparison apps have grown in popularity.

More and more people could go to Best Buy, look at the latest tech gadgets, play with them, and then finalize the purchase on an online platform like Amazon.

That is called “showrooming.”

In short, consumers would examine the merchandise available in physical stores (like Best Buy); they would take the time to browse and evaluate what suited them best and also make a choice.

But at the time of purchase, rather than finalizing it at the traditional brick-and-mortar retail store, consumers would buy the same item online.

What for? Well, they could find it at a more reasonable price.

And with the rise of comparison apps, Amazon stores, and others, that was extremely simple and frictionless.

That simple practice of “showrooming” apparently killed Best Buy’s margins.

How to deal with it?

Where is the disconnect?

When Best Buy executives tried to figure things out, they started to take several steps and experiments.

Among them, the Best Buy executive team tried to stop showrooming altogether by working out some ingenious barcoding strategies to prevent consumers from comparing prices on other online stores.

But things didn’t improve.

In 2015, in a Shareholders Letter, Best Buy started to articulate its vision and finally understand how to tweak its business model to accommodate those new consumer behaviors, such as showrooming by focusing on added services that could not be provided online:

In FY15, we articulated our value proposition around advice, service and convenience at competitive prices and started to use Expert Service. Unbeatable Price. as our signature. We also defined our growth strategy, Renew Blue: Ignite the Possible, around key growth opportunities across product categories, “Life Events” and Services, all supported by the transformation of our key functions.

Best Buy business model change

When Best Buy understood that there was no way out from the “showrooming effect,” it started to focus on a few key steps, as highlighted in the 2015 Shareholders’ Letter:

We have significantly improved the customer experience. Our Net Promoter Score (NPS) is up by 450 basis points, and we have gained market share across multiple product categories.

And it continued:

We have been deliberate about developing more strategic partnerships with our key vendors, entering into these vendor partnerships when they make sense for the customer, the vendor and you, our shareholders.

What it meant is that Best Buy, on the one hand, started to match the pricing that customers could find on Amazon.

While on the other hand, they began redefining how they made money by using their physical space to showcase their vendors in exchange for dollars.

As explained in the 2015 shareholders letter:

Our vendors spend billions of dollars developing amazing new technology products. There is typically a growing gap between what these products can do and what customers may be aware of, or understand. The successful commercialization of these products increasingly requires the customer to be able to touch, feel and experience them in real life. Often, a customer needs a physical experience and must use their senses to make a purchasing decision (think about buying a pair of headphones or buying a new TV).

Redefine how Best Buy makes money

To face and thrive when new consumer phenomena showed up, like showrooming, Best Buy had to redefine the way it made money and its business model.

Stores-within-store strategy

As highlighted in the Best Buy 2019 Shareholders’ Letter:

We continue to partner with our vendors (i.e., the world’s foremost technology companies) to help them commercialize their technology. Over the last seven years, our vendors have invested with us to improve the customer experience through storeswithin-stores and other unique vendor experiences. We ended fiscal 2019 with more than 5,000 of these experiences across our U.S. stores.

This is what Best Buy called “vendor experiences.” Or agreements with the company’s vendors to offer stores within Best Buy that could showcase their products:

Example of a Best Buy “Vendor Experience” offered by Samsung within Best Buy retail stores (Source: bestbuy.com)

In-Home Advisor Program

Best Buy also moved aggressively in expanding its service and support offering in the stores (something hardly matchable on online stores for now), like the in-home Advisor program, which provides free in-home technology consultations that counted in 2019, more than 500 advisors visiting more than 175,000 to customers’ homes.

Best Buy also launched the “Total Tech Support program,” which provides 24/7 support for all of a customer’s technology regardless of when and where they bought it.”

In other words, Best Buy is doubling down where digital-based businesses aren’t willing to go.

After years of tweaking its business model, Best Buy’s operating income was again close to two billion dollars in 2019.

Key takeaways

• Business change is unsettling for anyone, small and large organizations. And the fact that large, established, and existing organizations have executive teams made of smart individuals don’t help.
• Understanding and acting upon business model disruptors isn’t simple, and it requires a broad view of an industry and a broader understanding in general of the forces that are shaping the business world.
• Where new entrants can afford to break and redefine the value chain, established businesses usually don’t see that as an option, as that would jeopardize their money-making machines.
• When the money-making machine is broken, those established businesses have to move fast and experiment with new ways of doing business, so they have to be open to redefining how they make money.
• They need to understand also the core of the disruptor business model so that they can tweak and change their business to enter and cover parts of the value chain where the disruptors can gain access (take the case of Best Buy going all in with “vendors experiences” and support for customers in the physical stores, or in their homes).

Key Highlights

• Background of Transformation:
  • In the past decade, Best Buy underwent a significant business model transformation due to changing consumer behaviors, like “showrooming,” where customers would examine products in-store but buy them online from competitors like Amazon.
• Challenges Faced:
  • Best Buy’s revenues declined, and margins tightened, leading to a crisis that required understanding and adapting to new market realities.
• Response to Showrooming:
  • Best Buy responded to showrooming by matching online prices, enhancing the in-store experience, and offering services that couldn’t be replicated online.
• Understanding the Crisis:
  • In 2012, Best Buy struggled to understand the reason behind its tightening margins, despite making over $50 billion in revenue. The traditional approach and tools failed to provide answers.
• Vision Articulation:
  • By 2015, Best Buy articulated its value proposition around advice, service, convenience, and competitive prices, and defined a growth strategy called “Renew Blue: Ignite the Possible.”
• Dealing with Showrooming:
  • Best Buy realized it couldn’t eliminate showrooming, so it focused on providing added services and experiences that couldn’t be replicated online.
• Improved Customer Experience:
  • Best Buy significantly improved the customer experience and gained market share across multiple product categories, boosting its Net Promoter Score (NPS) by 450 basis points.
• Strategic Partnerships:
  • Best Buy developed strategic partnerships with key vendors, creating stores-within-stores to showcase and commercialize technology products.
• Stores-Within-Stores Strategy:
  • Best Buy adopted a “stores-within-stores” strategy where vendors create unique experiences within Best Buy to showcase and sell their products.
• In-Home Advisor Program:
  • Best Buy launched the “In-Home Advisor” program, providing free in-home technology consultations to customers and offering 24/7 support through the “Total Tech Support program.”
• Adapting to Consumer Needs:
  • Best Buy focused on areas where digital-based businesses couldn’t compete, like physical support, customer consultation, and in-home services.
• Realigning Business Model:
  • Best Buy redefined its business model to cover areas that disruptors couldn’t easily access, providing value through physical experiences and services.
• Results of Transformation:
  • After years of adjustment, Best Buy’s operating income recovered to nearly $2 billion in 2019, indicating the success of its transformed business model.
• Lessons Learned:
  • Business model transformation is challenging but essential in responding to disruptors.
  • Established businesses must be open to redefining how they make money and adapting to new market realities.
  • Understanding the core of disruptors’ business models is crucial to strategically enter and cover value chain areas where disruptors excel.

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