Tuesday, February 23, 2010

Reduce Velocity – Increase Margin (slow down and do it right)

What if we are going after our objectives the wrong way? What if during this past holiday season we pursued the wrong path by embracing the high velocity strategy? The answer to becoming a more customer centered company that is also more profitable cannot be found by increasing velocity. Conventional retail and Best Buy are not congruent. Wal-mart is the king of conventional retail; let’s let them keep that smoldering battlefield and move on to something that actually serves the customer.

Shrinking Product Margin – (the land of diminishing returns)

I will start off with a bit of math, the point of this exercise should become clear, but I will explain below.

If the average selling price (ASP) of an item is $1000 this year with 30% product margin ($300). The next year its ASP has dropped to $800, but the cost remains the same, the margin drops to 12.5% ($100). The next year its ASP drops to $600, but the cost has dropped a bit as well, and the margin only falls to 6% ($36).

If we sell $100,000 worth of this item the first year, $110,000 the second year, and $121,000 the third year, we have shown a 10% comp year over year which is a great gain in revenue. The problem with this gain in revenue is that the first year we make $30,000 in margin, the second year we make $13,875, and the third year we make $7260.

In this example we would have to sell nearly $250,000 the second year to actually grow, and the third year this number moves over $500,000.

The point is that there are products in our stores that are following a trend similar to this, and if we don’t find a way to stem the tide of margin erosion we will not be able to keep our doors open. Keep reading I will try to find a way out of this.

Competition (Wal-Mart, Target, Lowes, Sears, HHGreg, ABT, Amazon, the list goes on and on and on)

When you ask anyone who are competitors are it typically turns to other retailers, whether they are brick and mortar or online. The list is too long to accurately recreate here, but it suffices to say there are a ton of other businesses fighting for the same customers.

Do we want to compete? Ask yourself if a Wal-mart experience is the type that we even want to compete with. Wander around a vacuous space, hoping to find whatever it is that you came in for (try to remember after trekking for miles throughout the store), asking someone for help (if you can find someone) only to ask yourself if the answer they gave was really correct or just something they made up (depending on the training they have received around the products/services they offer and what that person’s idea of helping is.)

The easy answer is that hopefully we don’t compete with these retailers; we offer customers a better experience that doesn’t even come close to paralleling the scenario outlined above. The unfortunate truth however is that we do offer this experience for a great deal of our customers, especially during the holidays, especially when we increase the velocity.

The logic being that if an associate sells 20 of any given item in an hour vs. selling 2 of that same item in an hour, which is going to be the better customer experience? Which interactions are more likely to leave a customer in a position to take advantage of all of our competitive differentiators? It isn’t very likely going to happen in any one of those 3 minute back to back to back rapid fire interactions that leave the employee racing to the next customer and each customer getting either a canned presentation or just a few basic needs taken care of instead of the complete solution.

The other downside to this activity is that many of our associates are starting their path with our company during the holidays. Those who we train this way as a starting point with the company then retain many of these habits when we move onto the rest of the year. This means that we have to try to train out bad habit that we have instilled as we needed to speed up to handle the increased velocity.

Let other retailers handle the velocity, and let’s become something better

To simply state the case for change: If we continue down this path where we are competing against other retailers by selling product and relying on Home Theater and PC revenue streams to provide an outlet for growth we will not be able to continue being in business.

Here is my view on how we not only survive as a company, but drive growth and expansion through the foreseeable future just by refocusing our efforts and utilizing what we already have working for us.

Products & Services

There are products in our stores that still carry large product margins typically found in Appliances, Car Fi, and Best Buy Mobile. The issue we have now is that we use most of our marketing towards drawing traffic in Computers, Home Theater, and Media (cd/dvds). The question I ask here, would you rather have a customer spend $500 on a transaction and generate $50 in or $500 to generate $100 or better yet $0-250 spent by the customer generating $100s in profit? Yes this is just hypothetical, and an easy choice when it is put this way, but the point remains that put simply we are picking the first option, and $50 may be setting the bar to high.

If we put a focus on departments that sell profitable product instead of ones that sell profitable attachments we could increase margin growth regardless of the revenue lost. I realize that we are a public company and that revenue seems to be one of the biggest indicators of success, but I beg the question, isn’t profit a better measure of success than the total dollar amount that you bring in?

If attaching Geek Squad services is a profitable venture, wouldn’t it be more profitable to sell services on products purchased elsewhere? In this vein, we don’t have to warehouse it, sell it, etc. We just take care of it after the fact. If we advertised services instead of the product, sending the message that no matter where you buy your products Geek Squad will be here for you to Mount it, Optimize it, or protect it. If the product is in our system, why can’t we offer Geek Squad Black Tie Protection, even if it was purchased somewhere else (perhaps a functionality check is necessary first, but there should be a system for this).


NPV and DSUBs, Best Buy Mobile comes to mind again, but so does Home Theater, Gaming, Digital Imaging, Computers, MP3s, Car Fi, and even Appliances in terms of the departments that can offer a D-Sub to a customer and sell products that we don’t have to warehouse or even deliver. There are so many products in the store that we can give to a customer and ring out in our store, that take up very little space in the logistics system. These include service from Smilebox, Napster, iTunes, CinemaNow, DirecTv, Comcast, AT&T, MediaCoMM, HughesNet… The list goes on and on.

These are all items that are essentially free (by comparison to other products) for us, and may have a great impact on our bottom line. The issue is that we have a very low offer rate around these services. If we focused on these parts of our business, if we change our culture in a way that we are actively attaching these services to our customers solutions, we can increase productivity, margin, and make the customers’ experience better all at the same time.

Vendor Show

Perhaps one replacement for our media department that could give us a huge potential to WOW customers along with driving the business, would be to host a vendor show in the front of the store. This would change out once a month (to keep it fresh), different vendors would have interactive displays that would show customers the latest and greatest of everything they have to offer through their technology. During different times in the week we could have our employees or vendor reps actually staff these stations and give presentations and demonstrations of the newest technology (like going to a CES). We could use these to show people how all of the products we offer in the store can work together, and use it as a starting point to talk about having Geek Squad come to their house to either give a consultation or to come out and make it work for them.

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