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Best Buy CEO Dunn Reboots to Win Back Customers From Wal-Mart, Amazon.com

Best Buy Co. is rebooting -- again.

Concerned that consumers are coming to view the world’s largest consumer electronics merchant as just another big-box chain, Chief Executive Officer Brian Dunn is rethinking just about everything the Richfield, Minnesota-based company does.

He’s reorganizing the stores; new test locations in Pittsburgh and Las Vegas are less cluttered and bear more than a passing resemblance to Apple Inc. (AAPL)’s retail minimalism. Floor walkers have been retrained to show shoppers how gadgets work together -- a concept Dunn calls the “connected store.” The company is moving to “everyday” pricing, a guarantee that shoppers will get the lowest price Best Buy can offer.

“We have an industry that’s transforming, so naturally we’re transforming,” Dunn, 51, said in a telephone interview. “All of those initiatives show how we are transforming to what our customers need and want from us.”

The connected store represents a midcourse correction for Dunn, whose previous strategy involved loading up stores with exclusive products, including an electric bike. Best Buy has since lost customers to Apple, Amazon.com, Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corp. (COST), say analysts.

Tomorrow, when the company reports fiscal 2011 earnings, annual revenue may rise about 1 percent to $50.3 billion, according to analysts surveyed by Bloomberg News. That’s the slowest pace since 1990. Profit may rise 4 percent to $1.37 billion compared with a 31 percent increase the year before.

The connected store strategy won’t solve Best Buy’s challenges, according to Michael Pachter, an analyst at Wedbush Securities in Los Angeles who rates the shares “neutral.”

‘Irrelevant Solution’

“With the Internet and smartphones, we don’t need to shop at Best Buy to figure out which TV or electronics we want,” he said in a telephone interview. “Their solution may be good for 2011 but will be irrelevant by 2014. Technology is going to pass them by like they’re standing still.”

Dunn, who has been CEO since June 2009, is betting big on services. While trying to match the discounters on price, Best Buy aims to sell add-ons Wal-Mart and Costco don’t offer, including extended warranties, digital content streamed to devices and remote home-monitoring and repair, says Mike Vitelli, co-chief of the North American division.

Store No. 584 in the Pittsburgh suburb of North Fayette, Pennsylvania, provides a glimpse of Best Buy’s new direction. Gone are the tall enclosing shelves that have long typified the stores. Instead, a range of gadgets -- from tablets to cameras to digital photo frames -- are displayed on low tables. Shoppers get there via “the runway,” a stretch of blue tile leading from the front doors through the center of the store.

Saturday Workshops

As few as half of the store’s employees were trained to sell gadgets storewide. Now most are trained to sell across all categories. On Saturdays the store holds workshops. In one, a staffer demonstrates how to wirelessly display a photo on a TV.

“It used to be I could say, ‘This Blu-ray player can connect to the Internet and it can do Pandora and Netflix,’” said Mark Staub, a Pittsburgh store employee who oversees the displays of connected devices. “Now I can say, ‘Hey, let’s walk back there and I can show you how to do this.’”

Keen to reclaim customers who have defected to online retailers such as Amazon.com, Dunn is bringing the Web to the connected stores. Touch-screen kiosks allow customers to shop on bestbuy.com, print out price comparisons and see gift card balances. Just inside the front door, shoppers can pick up merchandise ordered online. Smartphone-packing salespeople check out customers right on the floor.

Geek Makeover

Best Buy’s Geek Squad is getting a makeover, too. Besides installing and repairing entertainment and computer systems in customers’ homes, the corps of technicians will staff consulting booths and troubleshoot and fix simple problems in the stores.

In the interview, Dunn acknowledged that the new stores look more Apple-like. Still, Best Buy didn’t take its cues from Apple, whose products it sells, says Ken Morris, field executive director for connected services.

“We heard from our female customers, ‘Lower your tables so we can talk,’” he said. “We’ve created a conversation.”

Dunn’s strategy to sell exclusive merchandise ran aground during the most recent holiday shopping season when Best Buy stocked 3D and Web-connected televisions for as much as $4,000 at a time when consumers remained budget-conscious.

Many flocked to discounted TVs at Wal-Mart, Costco and Amazon, and Best Buy’s third-quarter profit missed analysts’ estimates. In December, the retailer reduced its most bullish full-year profit forecast by 30 cents a share to $3.40, and the stock fell the most in eight years.

‘Out to Pasture’

According to the average of analysts surveyed by Bloomberg News, earnings will be $3.31 a share.

Best Buy rose 43 cents to $31.85 at 4:02 p.m. in New York Stock Exchange composite trading. Over the past 12 months the shares have fallen 23 percent, compared with a 49 percent increase for Apple and a 28 percent rise for Amazon.com.

With online retailers surging, Dunn’s latest strategy is like “re-arranging pictures on the wall of the stable with the horses already out to pasture,” said Colin McGranahan, an analyst at Sanford C. Bernstein & Co. in New York.

“You can have pretty stores,” said McGranahan, who rates the shares as “market perform.” “But with traffic declining, is it going to fix the problem? I am skeptical.”

To contact the reporters on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net; Clifford Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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