How Best Buy Became a Retail Success Story

Best Buy (NYSE: BBY) hired outsider Hubert Joly as its CEO in 2012, perplexing many investors given his background in hospitality, not retail.

In this segment from Industry Focus, Vincent Shen and Motley Fool contributor Daniel Kline break down how Joly brought the big box chain out of turmoil before looking at the company's roadmap for the future.

A full transcript follows the video.

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This video was recorded on July 17, 2018.

Vincent Shen: Around the time that Hubert Joly took the reins, the company was in a tough spot in terms of negative same-store sales being reported for many quarters, starting in late 2008. They didn't really recover to consistently positive levels until 2014, years and years later. You have to keep in mind, this is also a very challenging period when profitability was hurt by weaker operating margins. Shareholders had to have an iron will to stomach the stock, and it lost 80% of its value.

Dan Kline: This is where we should bring up the word "showrooming." Around this time, as Amazon was becoming ubiquitous, and most people had accounts, you weren't going to buy a TV sight unseen. There wasn't this level of trust where, on Prime Day, we're all buying stuff we've never seen, we don't know what it is. You would go to Best Buy and waste Best Buy resources by having the salesman show you the TV, take you through the features. Then, you'd go, "Hmm. I'll come back tomorrow and buy it." And you wouldn't. At that time, in 2012, you'd probably go home and buy it on your computer rather than buy it on your phone. But, there was a decent chance that you were doing all this work. When I ran a toy store, as we've talked about, we experienced this sometimes. Someone would take us through two hours on a $1,200 train set, and then we'd never see them again, until a year later, they came with a broken train, and they had bought the train set somewhere else.

That was happening. Best Buy had to take major steps to deal with that. They dealt with it in two ways. Price matching was one of them. We've both talked about it off-air that their price matching is sketchy because it doesn't include delivery, and it's not as convenient as Amazon. But, the other one they did -- and, again, we were just talking about this upstairs -- is, they lowered some of their prices. It used to be, you'd need something -- batteries, a cable, a printer cable, whatever it is. You'd go to Best Buy, and the price would be 15 times higher than Amazon. It would be $40 vs. $2. They took a lot of those items and made them $6, $8, $10. Things like headphones, that are a commodity -- if you break your $12 headphones, you don't want to wait until two days from now to get them. But if you go to Best Buy and they're $35 like they are at the airport, then, well, you're going to wait and order them. They corrected a lot of that stuff.

They also took salespeople off commission and changed the vibe in their store, where you could trust that the person who was pointing you toward a product might actually like that product, rather than getting a slightly higher commission on it. And, they doubled down on service. Geek Squad, handling all this stuff. Yeah, you can buy your TV from Amazon. Are they going to mount it? I mean, yeah, Amazon sells that now, but it's still a lot easier to do that all in one.

Shen: Let's step back a little bit. To clarify, some of the initiatives that you mentioned, they're all part of a push that they branded as their Renew Blue campaign. This campaign launched in 2012 and ran for about four or five years. They wrapped that up last March.

Kline: It didn't have a timetable on it. It had goals. Yes, last year, they declared that they are no longer a turnaround.

Shen: OK, or, in that phase. That was the silver lining, if you've been following this story, because many of the Renew Blue initiatives pushed the company in the right direction. There was also cost-cutting measures and a realignment of a lot of their resources.

Kline: I think it's important, again, to bring up Sears. Sears has been aggressively cost-cutting. But, if you cost-cut and don't add or change the experience, maybe you can shrink your way to some level of profitability. The reality is, Best Buy cost-cut, but they also did things like bring in Apple, Microsoft, Samsung, store-within-a-store concepts. They gave you more reasons to go to their store while also meticulously cutting costs. Over $1 billion, I want to say $1.4 billion.

Shen: $1.4 billion, yeah. Wrapping up on some of the lead-up here, which I think is important context to understand this next phase now that the company's entering. That brings us to their current status and its outlook going forward, which they've, again, branded as their New Blue, pretty clever. Details for this 2020 roadmap were shared last fall. Can you give us a little bit of detail on what that looks like?

Kline: It's really building their place as a brand expert, as a place to go. It's doubling down on, yes, you could buy these products facelessly from a lot of other people, but you could come into Best Buy and get the full experience, and it's going to cost you the same amount. It's adding more store-within-a-store, other brands, and that. If you want to buy an Apple product, you're actually working with a salesman who knows the Apple products. It's not just someone who's picking it up off a shelf or can tell you what the pricing is. It's really enhancing that. It's also adding to the service model further with Geek Squad and home setup, and pricing some of those things a little bit differently so it's maybe a little less off-putting to people.

Shen: At this point, their comparable store sales have recovered to positive levels. Their operating margins are back to more sustainable levels, as well. Definitely in a stronger financial position. I was looking at the very long and detailed investor presentation that they shared about this New Blue initiative. Some of the things that jumped out to me, they're looking at underpenetrated or new product categories, things like appliances and mobile phones.

Kline: Smart homes.

Shen: A small market share or big opportunity, and they can really look into investing into that more. They're focusing on services a lot over hardware. They have numbers pitting services spending, in terms of consumer technology, as being 80% of where consumers are putting their money. So, that's a really important part of their efforts going forward.

Then, trying to differentiate, like you mentioned, in terms of that service level, with things like tech demos, having more knowledgeable employees in general, and the tech support after you've taken a product home -- for example, Geek Squad and home advisors.

Kline: I'll give you an example. We just got a smart thermostat in our second home. We didn't intend to get one, it was just what the guy had on his truck and he installed it. It took me three hours of reading and playing to download the app, get everything hooked up, and I can still only control half of the things I think I can control fully. I would have paid a slight premium for Best Buy to come out and set that up and teach me. Or, I would happily go to a Best Buy in-store seminar to learn how to use it better, and maybe, while I'm there, I would buy a video game.

Shen: At least you have someone you can ask questions to.

Kline: Yeah. I think those markets -- which is sort of a parallel to the consumer electronic market -- the smart home market and smart home services market is going to explode. You and I might be able to figure out how to install a Ring doorbell ourselves. My mom can't.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.