Oh, how the mighty fall. As news surfaced this week that US retail giant Best Buy is to park its ambitious assault on the UK market in the light of yearly losses amounting to £62.2m, observers are asking how it could all go so wrong, so soon, for Best Buy in the UK.
It was barely a year ago that Best Buy formally landed in the UK with the opening of its first store in Thurrock, Essex amid great fanfare. The launch pad for its assault on the UK market was its joint venture with Carphone Warehouse, forged via a £1.1bn deal
signed in 2008.
Opening day at the Thurrock store in May 2010 saw throngs of shoppers queuing around the block, with Best Buy recording the highest sales figures it had ever seen from a newly opened store anywhere in the world.
The retail giant promised more of the same, pledging to open a further nine stores by the end of 2010 and 80 stores by 2013.
But the euphoria was short-lived as reality quickly set in. Best Buy’s store rollout quickly fell behind schedule, held up by the UK’s snail-paced planning system and a lack of suitable sites. To date it has opened eight stores, with a further three store openings planned this year.
The much-needed transactional website, which would have helped boost the brand and sales, was hit by a series of glitches that saw its launch delayed by months.
At the same time, the company began losing senior personnel at an unholy pace. First to leave was Paul Antoniadis, Best Buy’s branded operations chief, who exited the business just three months after Best Buy’s UK launch.
Just a few months later, Scott Wheway, CEO of Best Buy Europe, and DeVere Forster, Best Buy’s online business chief, also quit. DeVere’s exit came just two months after the delayed launch of Best Buy’s e-commerce site.
Shortly after, UK marketing director Kevin Styles and the company’s commercial director Harry Parmar also left the business.
£62.2m losses
Carphone Warehouse Group’s latest results this week (see box) revealed the true extent of the crisis, with Best Buy UK haemorrhaging losses of £62.2m, almost triple the losses it posted in the previous year. Now the company is reviewing its megastores, with sources claiming it will limit store numbers in the UK to 11.
Best Buy has so far refused to comment on the claims but sources close to the firm said no final decision has been made yet.
Analysts say Best Buy would be wrong to place the blame entirely on the economic downturn. They argue that this is a classic case of ‘pride before a fall’ as Best Buy US seriously underestimated the European market, leading a badly timed and poorly planned assault on the UK and following up with far too much micro-management.
Nick Bubb, retail analyst at stockbroker Arden Partners says: ‘It’s certainly embarrassing for them as they said they would open tons of stores. But Best Buy took far too long to arrive in the UK and their arrival was not well executed. They announced their intentions a good while before they actually arrived, which alerted the competition and gave rivals such as DSGi the time to raise their game and target prime locations in which to open rival stores.’
Richard Perks, retail analyst at market research company Mintel takes a similar view.
He says: ‘They took their time and then chose the worst possible time to launch – in the middle of an economic downturn. The delay allowed Currys and Dixons the breathing space to do a terrific job of improving their stores and their service.’
Best Buy has also struggled to differentiate its stores from rival outlets and failed to capitalise on its joint venture with Carphone Warehouse, pundits claim.
Perks explains: ‘The Thurrock store was very underwhelming and I thought it a bit odd that by December it still hadn’t synchronised its systems with those of Carphone Warehouse. It was also so much smaller and had less impact than the new Curry’s store on the same site – and this is an unknown brand, so it needs to make a big impact.’
Perks also questions the strategy behind Best Buy’s rapid turnover in senior staff.
‘Was this because the venture was doing badly or was it the result of too much micro-management from the States? Like many US companies, I think Best Buy had a certain arrogance towards the European market. They underestimated how tough it would be and failed to adjust to the local market.’
So what does the future hold for Best Buy in the UK? There has been speculation for some time that the retailer will eventually target the high street. Any such move would allow Best Buy to raise its profile with consumers, take its low-cost goods to the high street and tap into the convergence market.
Smaller format stores
Retail analyst Sam Hart of stockbroker Charles Stanley predicts smaller format stores in areas of high footfall, ‘such as outside stations in London, in order to display part of their range. It is a proven format used by Carphone Warehouse’.
Perks also believes Best Buy could make a move on the high street trade but under the Carphone Warehouse banner in their larger stores.
He says: ‘When the merger was first mooted, Carphone Warehouse was seen as the vehicle to do that with. Best Buy needs someone to do small design hi-tech portable electronics, particularly as the boom in brown goods such as flat screen TVs and audio visual is over, while the Hi-Fi market and even the DVD market is disappearing. Convergence is the way to go.’
But an even more radical solution could be in the pipeline. Bubb says the company has three options. ‘It could carry on regardless, it could freeze its expansion into the UK or it could close down the whole UK operation. It appears to be considering suspended animation, but it could take option three and let its UK operation quietly die.
'For Best Buy, the key rationale for the joint venture was always to get a stake in the phone business, which it has achieved with Carphone Warehouse bringing a lot of expertise into the US side of the business.’
Neil Mawston, director of wireless practice at Strategy Analytics, takes a similar view. He says: ‘Best Buy has four options at this stage; it can expand, pause, downsize or exit. Given the shaky UK economic climate, aggressive expansion would be unwise, while outright exit or downsizing after such a short period of time would be a huge dent to their prestige. Therefore, we think a temporary pause in growth is the likeliest option at the present time.’
However, Mawston warns: ‘If Best Buy does not benefit from an Olympics boost, and if the UK high street is still struggling by the end of next year, then the chances of Best Buy exiting the UK market will increase significantly.’
Editor: Carol Millett