Best Buy’s strategy for an expected downturn
Opening in 1966 under the name Sound of Music, Best Buy’s original focus was high end stereos. Founder Richard M Schultz used personal savings and a second mortgage on his home to finance the store opening. In his first year of business Schultz brought in over $1M in revenues with just under 6% net profit. Not bad for a first year brick and mortar. By 1969 Schultz bought out his partner, acquired another company, and took his company public to be traded on NASDAQ exchange. Sound of Music had expanded to seven stores and over $10M revenues by 1983. They continued to expand product offerings and also rebranded as Best Buy Company Inc.
Over the last thirty years Best Buy has significantly expanded its product base, acquired several businesses providing products and services in entertainment and electronics. There’s a lot of history and evolution that we could dive into, but what I’ve found interesting and worthy of sharing is how Best Buy is dealing with the overall downturn of their industry after record highs in the midst of the pandemic.
Pre-pandemic revenues were approximately $42B, and soared to almost $52B in 2022, a 20% increase. There was an unprecedented tech demand during the pandemic that no one could have predicted. But, what we could see coming was the rapid decline of 2023.
Through my research, Best Buy is making two primary strategic decisions in what they see as a new era in consumer technology and demand. First, they are cutting costs with two rounds of layoff already this year. It’s an unfortunate part of managing profitability during a downturn. The reality is that whether you are a $42B company, or a $50k company, managing your costs relative to your revenues and sales is vital. Costs 100% impact cash flow, which needs to be a priority during the challenging season. Most often tough decisions have to be made, and being willing to not just make the decision, but have the hard talks is a marker of a good leader.
Best Buy has also decided to lean into its membership program. Launched as Total Tech in 2018, the membership program was taken nationwide in 2021. Total tech provides round-the-clock tech support, up to two years of product protection and 20% off repairs, among other benefits. Since my husband and I are both self employed, the Total Tech membership has been a valuable tool for our businesses. Total Tech will be rebranded this month and become the top tier of the new ‘My Best Buy’ Total, and two more lower tiers will be added to the program.
Why are they leaning so heavily into their membership program? There was a surge of consumer tech purchases in 2022 during the pandemic, a lot of items that aren’t typically purchased often such as computers. In my opinion, Best Buy realizes that they need to grow its revenue stream to support those customers that made purchases the last two years. They found that Total Tech services were needed and valuable, but their customers wanted a variety of cost/service options.
What can we learn from Best Buy’s most recent moves?
That downturns happen. If you are looking to build a business for the long term you need to expect them. Develop the muscle to always be looking for what your customer will need next. Lasting businesses are always evolving. And have the financial data and metrics to manage your cash flow. You want to be able to always pay your bills and pay your team.
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