Eight Companies Ruined By Their Founders

Story first appeared on USA Today -

For every Sergey Brin, there is a Michael Dell. While the Google co-founder and CEO made his company one of the most valuable in the world with its shares trading near an all-time high, Dell has laid waste to his namesake. Dell and financial supporters offered to buy the company for $13.65 a share, 40% lower than what it was worth when Dell returned to the company as CEO in early 2007.

Investors who bought Dell shares a year ago have taken a haircut of more than 20%. Dell's failure is not unique. He belongs to a group of founders of large public companies that showed great promise but were ultimately wrecked by poor decisions, legal problems, and a lack of innovation.

Perhaps the greatest hallmark of founders who ruin their companies is that they appear to look out mostly for No. 1 rather than the interests of the company and its shareholders. For starters, they accept excessive compensation.

Steve Jobs of Apple, earned $1 in salary and bonus in 2010. By contrast, Aubrey McClendon, who was recently ousted as CEO of Chesapeake Energy, made over $100 million in 2008, and remarkably large sums in the years since then. Some of his other actions, such as allegedly borrowing against assets that he co-owned with Chesapeake, raised concerns of conflict of interest.

Martha Stewart recently received a new contract from her company, Martha Stewart Living Omnimedia, which has lost money four years in a row. Under the arrangement, she will continue as founder and chief creative officer at the firm until 2017. That is in addition to the more than $20 million she made over the three years that ended in 2011.

Dov Charney, who drove the company he founded, American Apparel, to the brink of bankruptcy in 2011, made $11.6 million that year. Michael Dell, who in 2010 settled Securities and Exchange Commission charges that he helped misrepresent Dell's financials, made more than $21 million during the company's last three combined fiscal years.

A more complex measurement of these founders' performance is their lack of vision to transform their companies as the markets in which they operate change. None have shown the foresight Brin did when he moved Google beyond search and into mobile operating systems. And his company is also the dominant force in online video.

Dell did not drive any comparable revolution at his company, which never stepped aggressively into the new age of personal computing— tablets and smartphones. The same holds true for Mike Lazaridis, the co-founder of BlackBerry, which did not transform its market share in the corporate smartphone industry into a lead in the consumer sector.

Richard M. Schulze, who was the founder, largest shareholder, and de facto head of Best Buy oversaw a period in which the retailer failed to move into e-commerce quickly. In the meantime, Amazon has nearly bulldozed Best Buy under.

The most often damaging problem with founders is that they cannot be pushed out. Martha Stewart owns the controlling interest in her company. Groupon founder Andrew Mason and two other shareholders control that company. Schulze and Dell own commanding portions of the shares in the companies they founded.

24/7 Wall St.'s review of large, U.S. publicly traded companies included an analysis of company financials, as well as share price changes over time. We reviewed company documents filed with the SEC to identify voting share of the founders. If that could not be determined, we used the founder's total share ownership. In Dell's case, the voting share reflects his ownership before the completion of the company's pending leveraged buyout.

Eight Companies Ruined by Their Founders:

1. Dell, founded 1984
Founder: Michael Dell, 13.97% voting share
Dell started his company when he was 19 years old. By 2001, the company he founded as a college student was the largest computer systems provider in the world. In 2004, Dell resigned as CEO but returned to the position in February 2007. By then, the company had already begun to lose its appeal with consumers in the competitive PC business. Despite Dell's return, the company continued to struggle in its core business. Dell's worldwide PC market share fell from 15.9% in 2006 to 10.7% in 2012. Consumers' growing preferences for tablets and smartphones over PCs and regulatory scrutiny have hurt the company. In 2010, the SEC fined Dell $100 million, and Michael Dell $4 million, alleging the company engaged in accounting fraud intended to mislead investors about financial performance. On Feb. 5, Dell reached a deal with a group of investors that included Michael Dell to go private for $24.4 billion, the largest leveraged buyout since the 2008 financial crisis.

2. Chesapeake Energy, founded 1989
Founder: Aubrey McClendon, under 1% voting share
McClendon, Chesapeake's CEO since he helped co-found it has become known for his lavish compensation packages and extreme bets on his company's performance. In 2008, McClendon lost much of his personal fortune after borrowing money to buy massive stakes in Chesapeake. McClendon was paid $100 million that year. Between 2009 and 2011, McClendon's earned more than $57 million in total compensation. In April 2012, Reuters reported that McClendon had again borrowed a large amount of money, in this case, $1.1 billion, using his stake in the company's natural gas and oil wells as collateral. Reuters also discovered McClendon was running a $200 million hedge fund from within company headquarters that speculatively traded in "the same commodities Chesapeake produces." Within weeks, McClendon gave up his position as chairman due to concerns over potential conflicts of interest. He is scheduled to resign as CEO April 1.

3. Martha Stewart Living Omnimedia, founded 1997
Founder: Martha Stewart, 86.7% voting share
Stewart's company continues to struggle while she remains chairman. Stewart's audience is aging and the company relies too much on it's print magazine revenue. Stewart's image took a serious hit in 2004, when she was found guilty of conspiracy, obstruction of justice, and making false statements to a federal investigator after she was indicted for insider trading. Although Stewart launched a high-profile "comeback" campaign after her release from prison, her efforts have not paid off for the company. It has not turned an annual profit since 2007. The company's stock price is down more than 58% the past five years. Part of the problem is executive turnover. There have been at least five CEOs and five CFOs since the company's start. Many executives argue that Stewart's excessive involvement has hampered their ability to make change. The sixth CEO, Lisa Gersh, announced in December that she was leaving the company after serving in the position for just five months. Despite the company's struggles, Stewart was paid more than $21 million between 2009 and 2011.

4.BlackBerry, founded 1984
Founder: Mike Lazaridis, 5.7% voting share (outstanding shares)
Lazaridis co-founded BlackBerry, formerly known as Research In Motion, in 1984 and served as co-CEO of the company, alongside Jim Balsillie, through January 2012. The two pioneered the smartphone revolution. Lazaridis, however, failed to prepare BlackBerry for the upcoming competition from consumer-facing rivals. Among the largest mistakes marking the end of Lazaridis' tenure were the failed BlackBerry PlayBook tablet, a four-day global service outage — which left phones unable to browse the Internet or access emails and texts — and a focus on business professionals even as iPhones and Androids absorbed market share. In the third quarter of 2012, BlackBerry's worldwide market share of mobile device sales, by operating system, was just 5.3%, down from 11% in the third quarter of 2011, according to Gartner research firm.

5. Countrywide Financial, founder 1968
Founder: Angelo Mozilo, less than1.5% voting share
Mozilo, former Countrywide CEO, became the face of the subprime mortgage mess after that market collapsed. Under his watch, his company began financing mortgages to high-risk borrowers, which during the housing boom drove the company's spectacular growth. In 2006, Countrywide financed about 20% of all mortgages in the U.S., more than any other mortgage lender in the country. But the company fell apart when the housing market tanked and borrowers defaulted on their high-interest loans. Countrywide was eventually sold to Bank of America in 2008 for $4 billion, with Mozilo forced out a few months later. The company faced a barrage of lawsuits, arguing that Countrywide had used deceptive practices to get people to apply for mortgages they could not afford. Mozilo's integrity was also called into question when it was reported that several government officials and politicians, such as then-U.S. Sen. Chris Dodd, received favorable mortgage deals simply by being "friends of Angelo." In 2010, Mozilo settled an insider trading charge with the SEC for about $67 million. He is permanently banned from serving as an officer and director of a public company, under the terms of the settlement.

6. Groupon, founder 2008
Founder: Andrew Mason, 19.5% voting share
Mason, Groupon's quirky founder and CEO, has stumbled repeatedly the past couple years. His company, which provides discounts and daily deals online, had to revise its financial reports in August 2011 after regulators and analysts took issue with its accounting methods. Groupon issued another revision to its financials in early 2012 as the company overstated its 2011 profit by more than $20 million. Because of these problems, along with general concern that the daily deal fad — the company's core business — may be slowing, the stock price has been declining. It is now roughly a quarter of its initial public offering price of $20 a share, with the company's market capitalization at $3.3 billion. It didn't have to be this way. In 2010, Groupon rebuffed Google's offer to buy the company for up to $6 billion. There has been talk that Mason isn't mature enough to run a company of this size. For instance, he was criticized for drinking beer at the company's annual meeting and for his public gaffes commenting on why it turned down buyouts.

7. American Apparel, founded 1989
Founder: Dov Charney, 43.3% voting share
Charney started and ran American Apparel from his dorm room at Tufts University in the late 1980s. Twenty years later, in 2008, the apparel company had more than 6,700 employees and 197 stores worldwide. But provocative ads and rapid expansion did little to address problems plaguing the company. In 2009, the Immigration and Customs Enforcement agency said that a quarter of workers at the company's downtown Los Angeles manufacturing facility were illegal immigrants. In 2011, two sexual harassment lawsuits were filed against Charney. In December, a former store manager accused Charney of choking him and rubbing dirt in his face. Charney has denied all allegations of misconduct. The company has also struggled to stay afloat financially, running an operating loss in the last 12 months for which financial statements have been released.

8. Best Buy, founded in 1966
Founder: Richard Schulze, 20.24% voting share
Schulze has presided over a company that has struggled to stay relevant in a sector that is increasingly moving online. Best Buy's business has taken a sizable hit from online retailers such as Amazon.com. Some industry experts and analysts point out that Best Buy is increasingly becoming a showroom for electronics consumers — meaning that people go to the store to check out the product and then buy it cheaper online. In the most recent quarter, Best Buy lost $10 million as revenue fell 4% compared to the previous year. The company's share price is approximately one third of what it was five years ago. Schulze also found himself embroiled in a company sex scandal. A Schulze lieutenant, former CEO Brian Dunn, was forced to resign from the company after it was discovered he had an affair with another staffer. The founder received criticism after an internal investigation found that he had knowledge of the affair and did not report it to the board. Schulze announced his retirement from the board shortly after the investigation.

Best Buy Losing the Fight

Story first appeared in the Los Angeles Times.

How can Best Buy be saved?

The question has been swirling around the huge retailer for a couple of years, as its same-store sales have been falling. But it picked up steam last week with the sudden resignation of the Chief Executive, who had been in his job less than three years.

The unceremonious departure looked at first as though it was connected with his professional performance, which hadn't thrilled many Best Buy watchers. But it soon transpired that the reason had something to do with questionable personal conduct, reportedly involving a female subordinate.

His method of leaving his job was the most modernistic step he's taken in years — personal behavior has been trending higher in recent years as a rationale for top-level firing in both industry and sports.

In most other respects, Best Buy under recent leadership was moving backward. The stores have been looking more forlorn and less like the teeming shoppers' carnivals of years past, and the inventory choices shrinking. Meanwhile the sales staff comes off as less knowledgeable and more indifferent. Former customers of the extinct Circuit City and Border's, the last big retailers to go down this road, must be feeling a sense of deja vu.

The challenges facing Best Buy are easy to discern. It's caught between the Scylla and Charybdis of Apple and Amazon.com. Apple has become a retail juggernaut, generating astronomical sales estimated at $5,600 per square foot at its snazzy toy-stores-for-grown-ups.

Best Buy's figure, according to its most recent annual report, is $866 per square foot — respectable for a retailer in its class, if not in Apple's league. Amazon consistently beats Best Buy on price, even without counting the advantage it gets by not charging sales tax for many customers outside its home state of Washington.

That advantage will soon be extinct in California, as it is in several other populous states. But even without the sales tax bump, Amazon beats Target andWal-Mart as well as Best Buy on the prices of many items, as investment analysts at William Blair & Co. recently documented.

Like Best Buy, those chains suffer from "showrooming," in which customers try out merchandise on their sales floors and then place their orders at Amazon for less money. But Target and Wal-Mart aren't facing the sickness unto death that appears to be confronting Best Buy. Not at the moment, anyway.

Sure, judging Best Buy against premier marketer Apple and online-only Amazon is a mite unfair. Apple stores sell essentially five branded products with cult-like followings (Mac desktops, Mac notebooks, the iPad, the iPhone and the iPod).

Amazon doesn't have to build and maintain walk-in stores; on the other hand, after launching in 1995, it spent so relentlessly on distribution and technology systems that it didn't show a profit until 2003. But that spending yielded what today stands as the best customer experience on the Web.

Every retailer is different, like Tolstoy's unhappy families, and good lifeline-caliber ideas can be found anywhere. The architect of Apple's retail store strategy, came from Target at a time when Apple's lack of any retail strategy threatened its very existence.

Nothing is stopping Best Buy from picking out the best ideas in the field and adapting them to its own space. At least that would be an improvement over its current strategy, which seems to be to pick out everyone's worst ideas and try to take them to the bank. These include its shift toward smaller, mall-based storefronts with limited merchandise.

The former CEO's last major announcement before resigning was that he would close 50 of the chain's 1,100 U.S. big-box stores while expanding small-format locations.

So what are the best ideas?

One is that expertise sells. The first Apple stores opened in early 2001 — believe it or not, this was before the iPod. Since then, they've built on the company's reputation for hip design and first-class technical service. The products are laid out on tables to encourage the touchy-feely experience. Employees are ubiquitous but unobtrusive.

The techs at the Genius Bar seem trained in Apple technology to the last brain cell. The hard sell is so deeply submerged in the store experience that you may not even know you've been sold until you're out the door with a MacBook in hand. But you'll think the staff has identified your need and found a way to meet it.

Another retail lesson worth internalizing is that a chain doesn't have to be pitched toward the affluent to offer good service.
Nordstrom, which occupies a high-end market segment, is known for its attentive sales staff. But walk into a Men's Wearhouse and you don't have to chase after a salesperson with a butterfly net — typically you're greeted promptly by someone in full command of the inventory on the floor. By the way, Men's Wearhouse collects more revenue per square foot of selling space than Nordstrom ($451 versus $431), according to the firms' most recent annual reports.

Put these two notions together, and you might just have a new Best Buy paradigm. As our lives become more enslaved by technology, the need for expert help sorting out how best to integrate every Bluetooth- and Wi-Fi-enabled thing grows greater.

Best Buy nodded to this reality with its techie-staffed Geek Squad. The Squadsters are not especially well-trained to divine a customer's tech-related problems and cobble together a solution from all the inventory at hand. In any case, the last time I was in a store, two of them gave me two completely different answers to the problem I brought them; I suppose it's to their credit that only one of them was wrong.

The chain could do worse than to hire and train more employees with real knowledge of technology and an incentive to solve customers' dilemmas instead of selling them useless extended warranties, which is by far the most offensive aspect of dealing with Best Buy.

And how about staffing up? It hasn't been unusual for the first salesperson to accost me inside a Best Buy to be an embedded sales agent for a service such as Verizon or DirecTV. Yet the big idea in the last Christmas season was to hire only half as many seasonal workers as the year before.

Then there's the dilemma of online. Conventional retailers wasted years treating their online arms as though they were fifth columns.

Best Buy's online integration has been so poor that in the week before Christmas it canceled what may have been thousands of online orders placed as early as November for lack of inventory, certainly a mortal sin in customer service.

The chain may be crippled by "showrooming," but why not offer customers looking over items in the store an incentive to place their orders through Bestbuy.com rather than Amazon? And the company may have to bite the bullet and extend its price match policy to cover not only its brick-and-mortar competitors but online merchants too.

All this points to lower profit margins ahead, but that's the cost of investing in new strategy and tactics. But if the choice is between rebuilding your customer base or letting it fade away like those of Circuit City, CompUSA and other retailers done in by, well, Best Buy, the road is clear. The worst thing that could happen to the chain is for the question to change from "how Best Buy can be saved" to "can it be saved," especially if the answer is no.

For more national and worldwide related business news, visit the Peak News Room blog.
For healthcare and medical related news, visit the Healthcare and Medical blog.
For local and Michigan business related news, visit the Michigan Business News blog.
For law related news, visit the Nation of Law blog.
For real estate and home related news, visit the  Commercial and Residential Real Estate blog.
For technology and electronics related news, visit the Electronics America blog.
For organic SEO and web optimization related news, visit the SEO Done Right blog.

Best Buy Downsizing Stores

Story first appeared in The Detroit News.

Minneapolis -- In order to grow, Best Buy is shrinking.

The largest U.S. specialty electronics retailer for years expanded quickly by opening big-box stores across the country. But shoppers have started using the stores as showrooms, testing products before buying them cheaper elsewhere.

To revamp the struggling chain, Best Buy said Thursday it plans to close 50 of its U.S. big box stores, cut 400 corporate jobs and trim $800 million.

The company, which has about 1,400 U.S. locations, also plans to open 100 smaller and more profitable Best Buy Mobile stores throughout the country.

Best Buy is trying to avoid the fate of its rival Circuit City, which liquidated in 2009 after it struggled with the changing electronics landscape. Sales of TVs, digital cameras and videogame consoles -- once the bread-and-butter of electronics retailers -- have weakened, while sales of lower-margin items like tablet computers, smartphones and e-readers have increased. The rise in competition from Internet rivals like Amazon.com and discounters like Target also has hurt electronics retailers.

To better compete, Best Buy is shaking up its business. The company said it will focus on what sets it apart from its rivals: trained sales staff that can help shoppers get the most out of their tablets, TVs and other electronic devices, including tech support from its "Geek Squad" service and repair unit.

But as Best Buy announced its changes Thursday, the Minneapolis-based firm posted a $1.7 billion fourth quarter loss due in part to restructuring charges.

Walmart, Best Buy in Sub-$300 Laptop Price War

PC World

 

Walmart and Best Buy appear to have kicked off a price war in time for the back-to-school shopping season, with both retailers offering Compaq laptops with 15.6-inch screens for under US$300.

Walmart is selling Hewlett-Packard's Compaq Presario CQ62-219WM for $298 through its online store. Best Buy is selling a Compaq Presario CQ60-615DX for $299 on its website.

The cheap laptops have similar specifications. Both come with a single-core Intel Celeron 900 processor running at 2.2GHz and include 2GB of DDR2 memory. They also have 250GB hard drives, wired and 802.11 b/g/ wireless networking capabilities, DVD burners and Intel's 4500M integrated graphics.

The systems come with Microsoft Windows 7 Home Premium 64-bit OS and include other applications often referred to as bloatware. One notable feature absent from the laptops is a webcam.

Best Buy is also selling a $299 Toshiba Satellite C655-S5049 laptop on its website. That laptop also has a 15.6-inch screen and Celeron 900 processor, but includes 2GB of the faster DDR3 memory type.

The price war is similar to one that broke out before last year's back-to-school season, said Stephen Baker, vice president of industry analysis at The NPD Group. That battle ignited last July when Best Buy offered an Acer laptop for $299, and Walmart undercut the price by $1 with a Compaq machine.

"They are selling them because they drive traffic into the stores, provide great value to their customers [and] help each other compete against one another," Baker said.

The stores will keep at it for as long as PC makers supply them with products that allow them to hit those price points, Baker said. Cheap PCs may have tweaked configurations, by reducing the amount of memory or hard drive capacity, for example, to let the stores sell the machines for less.

But reviewers seem to be content with the products. On the Best Buy website, 463 reviewers gave the Compaq laptop an average rating of 4.5 out of 5 stars. On the Walmart site, 15 reviewers gave its $298 laptop close to a 5 star rating.

One Walmart reviewer said the discount laptops are good for basic productivity and Internet applications, but not for more demanding tasks.

"With an Intel Celeron 900 processor and 2GB of RAM, don't expect to be zipping through video editing apps, especially considering it is a single-core CPU," wrote one reviewer under the name noraaregnilc.

Why Tech Continues To Bow To Best Buy

Business Week

As the last major electronics retailer standing, the chain has unparalleled clout. And CEO Brian Dunn means to use it, shaping technologies and helping to develop products

For the past four years, employees at Best Buy (BBY) have taken regular tours of what the company called its "retail hospital." A group of about a dozen would don white lab coats, walk a row of real hospital beds, and scan charts describing the maladies afflicting each of the giant retailer's major competitors. But this fall, Best Buy staffers made their last trip to the darkened room on the company's Richfield (Minn.) campus. The retail hospital is closing because all of Best Buy's major rivals have succumbed to terminal illness. "It's kind of like ultimate fighting," says Barry Judge, the company's chief marketing officer. "One retailer goes down, and then who's next?"

At least for now, Best Buy stands as uncontested champ. It's the last major consumer electronics retailer in the country this holiday season, after the liquidation of Circuit City earlier this year. But Brian J. Dunn, who became Best Buy's chief executive officer in June, isn't taking success for granted, especially with rising competition from nontraditional rivals such as Wal-Mart Stores (WMT) and Amazon.com (AMZN). So Dunn has ambitious plans to take advantage of Best Buy's newfound clout: He wants to go beyond the typical big-box retailer role of selling commodity products such as televisions and personal computers and become a central player in determining which products come to market and how big-spending customers choose the latest gear.

Best Buy plans to launch its own advertising business early next year. The company will let movie studios, PC makers, and other companies run trailers, songs, or commercials on the thousands of televisions, PCs, and cell phones within its stores.

The plan is already under way. Rather than waiting for electronics makers to ship Best Buy the same products that its rivals get, Dunn's lieutenants are walking factory floors with executives from companies such as Hewlett-Packard (HPQ) and Toshiba, influencing product development and design. The retailer is pushing suppliers to use standardized software and digital services so consumers can listen to music or watch movies on any device. And Best Buy has set up its own venture capital fund to pour millions of dollars into startups from Silicon Valley to Asia. The goal is to shape development of new technologies in promising fields such as green vehicles, digital health, and home monitoring. "We are talking to players deep into engineering the future," says Dunn. "It leads us nicely to a space where we can make a real difference to consumers."

"AVANTE GARDE"

Shoppers wandering Best Buy aisles this holiday season will see the difference. Along with the latest flat-screen TVs, digital camcorders, and computer games, the company's shelves are stocked with exclusive items. Among them: the thinnest laptop on the market, a motorcycle that runs solely on electricity, and a watch-like gadget you attach to your wrist to monitor daily activity and sleep patterns. "We want to become a digital playground where people come in, experience it, try it, and find out how all these things can work together around their life," says Dunn.

The strategy, for all its ambition, could backfire. As Best Buy broadens its focus, it risks clashing with crucial partners. The company is already selling certain products in competition with suppliers, and will likely push other products off store shelves to make room for gear it's developing. Best Buy's new role makes it a kingmaker for companies that play along and a serious threat for those that refuse. "Best Buy is avant-garde in its thinking," says Eugene Fram, a retail expert and professor emeritus at the Rochester Institute of Technology's College of Business. "The big question is whether they can succeed without alienating their partners."

Executives at several major consumer electronics companies worry privately about Best Buy's growing influence.

They're concerned that Dunn and his team could block them from getting innovative products in front of customers or favor Best Buy-backed goods over their own. "We used to call them the 800-pound gorilla," says the executive of one company that sells televisions and other products to Best Buy. "Now with a lot of competition gone, they're the 1,000-pound gorilla."

One example of the rising sensitivity is Best Buy's recent move into digital services, including music and movies. The company acquired the online music service Napster a year ago and then took a stake in CinemaNow, Sonic Solution's (SNIC) movie-streaming service, in November. Now the retailer is giving prominent play to Dell (DELL) computers loaded with Napster, beginning with a free year of the music service, and plans similar promotions with CinemaNow through participating partners. Hardware makers, which usually get paid bounties to load such software on their PCs, may find it tougher to get payments from rival services such as Netflix (NFLX) or Rhapsody if they want a piece of the $300 billion digital services market.

Apple (AAPL), Sony (SNE), and other manufacturers could retaliate if they feel Best Buy is getting too heavy-handed, although they would think long and hard before doing so. They could pull products out of the retailer's stores or forge closer relationships with rivals such as Wal-Mart. Michael Fasulo, Sony Electronics' chief marketing officer, says that so far his company and Best Buy have avoided serious rifts in part because their executives talk every week and the discussions tend to be more cooperative than adversarial. "They are so focused on the customer experience, and they give us great insights into how to translate technology for customer needs," he says. "We are both pretty aligned with that."

Dunn is clear about why he's pushing for change. He wants to give Best Buy a strategic edge over other retailers. Slugging it out on price with Wal-Mart, Amazon, and Costco is a brutal business, especially as strapped consumers grow hesitant to buy new televisions and home theater gear. If he can make Best Buy the go-to store to test out the latest gear or get exclusive goodies, he can insulate the company from some of the competition.

SAFE BET

Investors appear optimistic. The company's stock is up more than 80% over the past year, to 44, compared with a 20% increase for the Standard & Poor's 500-stock index. Analysts expect revenues for fiscal year 2010, ending in February, to rise 7.8%, to $48.5 billion, even as profit margins hold steady, according to consensus estimates from Bloomberg. Analyst Thomas Kurey of Gardner Lewis Asset Management, which held about 2 million shares in Best Buy at the end of September, says the company has a very secure position in the tech industry. "The thing about Best Buy is you're not betting on a single technology. Best Buy is going to be there regardless of where technology is," he says. "There's a big swath of customers that are going to want to get a little advice and to touch and feel that new gadget. Best Buy will continue to play an important role in that."

Dunn, now 49, seemed an unlikely future leader when he joined the company in 1985. At 24, he was working off and on and living at home with his mother, Ethel, who prodded him to find a permanent job. She was employed in accounting at Best Buy, which had a dozen stores at the time, and helped him land a position selling VCRs at one Minnesota outlet. The New Jersey native proved a quick study in learning from the best salespeople and managers. He worked his way up and became heir apparent in 2006.

Brad Anderson, the previous CEO, says he wanted to stay in the job "until I found a leader who would take the organization farther than I could."

On a recent weekday in New York City, the burly Dunn strolled into a store in Union Square to check out the company's new "discovery zones." In the Best Buy Mobile zone, for instance, dozens of customers were checking out how Motorola's (MOT) new Droid smartphone stacks up against Apple's iPhone. Although it's too early to tell whether the strategy that lets users try out multiple brands in one place will goose sales and create a more loyal following, Dunn nods approvingly. "What we're able to do is show how all these things can work together," he says. "Convergence is actually here now, and all those roads will lead through the center of our store."

Best Buy isn't the first to try rewriting the rules of tech retailing. Since Apple started opening retail outlets in 2001, the company has turned its sleek stores into magnets for anyone who wants to test-drive an iPod, iPhone, or Mac. Amazon is trying to make up for its lack of physical stores by offering same-day delivery in several big cities.

BEYOND RETAIL

Still, Best Buy's strategic position is unique. It has more than 1,000 stores, compared with Apple's 280, and sells a wide range of competing products, while Steve Jobs' company doesn't. Best Buy has 155,000 people working in its stores, and its 20,000-strong Geek Squad is in the field every day, helping customers set up home electronics or fixing products on the fritz. Through its Reward Zone program, a sort of frequent flier card for shoppers, the retailer has built up a list of more than 2.5 million customers who shell out thousands of dollars every year for the latest tech gear. "Users come into Best Buy for reasonably good answers and solutions to the question of what's the right gadget to buy," says Manish Rathi, co-founder of Retrevo, an online product-tracking and review company. "Wal-Mart can't solve that today. Neither can Amazon."

The job of knowing just how far Best Buy can push before manufacturing partners push back falls in large part to Kal Patel, executive vice-president for emerging business. Former CEO Anderson hired Patel away from the consulting firm Strategos in 2003 to direct the retailer's strategy, and Dunn has given him broad leeway to transform Best Buy into a technology company. Patel suggests, unapologetically, that Best Buy and its partners will have to get used to a new relationship. "If you're in the technology business, we're going to have to learn to deal with constant conflict," he says.

Over the past two years, Patel has virtually lived on planes and in hotel rooms in an attempt to guide the company's technology push by learning from established giants and startups. On a recent trip to California, he huddled with executives at Cisco Systems (CSCO) to discuss partnerships aimed at connecting more consumers to more devices. While prepared for conflict, Patel also found plenty of collaboration.

In late 2007, Craig Bramscher, chief executive of Brammo, started searching for an investor and retail partner for the Enertia powercycle, a full-size motorcycle that drives like an electric scooter, with no clutch, gears, or transmission. He thought Best Buy was a natural fit, since the company already has service bays for car stereo installations. A few months later, while munching on hors d'oeuvres at a dinner party with a longtime friend, he discovered the friend knew Patel, and the two got in touch. "I thought they were the only company innovative enough to take a risk on us," Bramscher says.

Within weeks, 30 Best Buy employees were in Brammo's Ashland, Ore., headquarters to vet the Enertia. The team spent two days in the skunkworks lab, tearing apart the powercycle and grilling Bramscher's team to determine whether it fit into their growth strategy. They ultimately were convinced, and in August 2008, Best Buy invested $10 million in the company.

As the retailer began lining up approvals in the test markets of California and Oregon to be licensed as motorcycle dealerships, Dunn sent Bramscher a brief note over Twitter. "We're exercising muscles we didn't know we had," he wrote. Best Buy is now pushing to expand the availability of the Enertia to other states.

Dunn and his team, meanwhile, are working on a variety of similar deals. One key area is health and wellness. Earlier this month, the company launched new fitness zones in 40 stores across the nation that include devices such as a Bluetooth-enabled scale that sends weight information to a computer for charting. Next year the company will introduce a toothbrush that wirelessly reports to a PC the number of brushstrokes that a child uses. "We're scouring the world over, bringing in new talent to help us in a particular space," says Dunn.

The entrepreneurial spirit is filtering down to established businesses. Jason Bonfig, vice-president of the computing division at Best Buy, works closely with Toshiba and other PC makers to create notebooks under the Best Buy-exclusive Blue Label and Next Class brands. Based on customer feedback, the designs include perks such as backlit keyboards, bigger batteries, and custom chassis colors. It used to take weeks for color samples or material choices to make their way from Taiwan to the PC maker, then on to Bonfig in Minnesota. Fed up, Bonfig began joining the manufacturers on trips every six months to set road maps with their subcontractors.

BROADER FOOTPRINT

The cozier relations helped on the eve of the Oct. 22 Windows 7 launch, when HP offered to put together an exclusive bundle for Best Buy that included a desktop PC, monitor, laptop, netbook, and wireless router for $1,199.99. Best Buy also got the exclusive on Dell's sleek new $1,799 Adamo XPS notebook, in part because of its early involvement in the manufacturing process. "When you work closely together, there's more time to innovate elsewhere," Bonfig says.

Conflict still happens. Some top PC makers are upset about Best Buy's recent expansion of a service that lets customers reduce the amount of third-party software installed on new computers. Software companies pay HP, Dell, and others hundreds of millions of dollars a year to install trial versions of their programs for virus protection, photo-editing, business VoIP services and the like on new computers; PC makers get another check if buyers sign up to keep using them. Best Buy lets customers select just one antivirus program, say, and removes alternative products. The retailer's executives say they are simply responding to customer complaints that their new machines are overloaded and sluggish. But PC makers are concerned the retailer is trying to grab more of their scant profit pool.

They may be right. One unusual deal Best Buy has struck is with the antivirus company Kaspersky Lab. The Moscow-based company agreed to let Best Buy manage its software and subscription program in exchange for more prominent placement in stores, says Randy Drawas, Kaspersky's chief marketing officer. "We get a broader footprint within Best Buy and are seen as a premium brand," he says. Best Buy salesmen promote Kaspersky's software, and the retailer gets a slice of the revenues when customers use it. PC makers, though, may lose out on revenues as software from rivals such as McAfee are stripped off machines.

Although it is exerting more influence over the types of software installed on devices, Best Buy says it will continue to sell products from companies that opt out of its programs, such as the one aimed at reducing software clutter. That approach may help Best Buy skirt antitrust issues, even as its share of the U. S. consumer electronics market expands from the current 25%. "I hope we're not seen as picking winners and losers," says Dunn. "What we stand for is choice."

In another move, Bloomberg BusinessWeek has learned, Best Buy plans to launch its own advertising business early next year. The company will let movie studios, PC makers, and other companies run trailers, songs, or commercials on the thousands of televisions, PCs, and cell phones within its stores. Sony, Toshiba, and Samsung have already signed on to advertise. Still, the effort could prove controversial since rivals may end up advertising on each other's devices. Dunn won't reveal revenue projections but says the business will "grow into a big piece of what we do."

Dunn clearly relishes this kind of experimentation. As customers drop into stores around the globe this shopping season, they might run into kiosks where they can swap used games or movies, or DJ booths where would-be disc jockeys can pick up digital turntables, headphones, and lighting. Best Buy is testing out different logos and store layouts, even stocking solar panels in a few markets. Many of the tests won't pay off, but Dunn figures the retailer can learn and make adjustments for the future. "The easiest changes are when you are backed up against the corner and it's sort of 'change or perish,'" he says. "Now we're trying to change at a time when we are very, very successful."

How Best Buy Plans To Beat Wal-Mart

CNN Money

The scariest six words a consumer electronics chain can hear are "Wal-Mart is getting into your space." That's exactly the problem Best Buy is facing this holiday season.

Wal-Mart (WMT, Fortune 500), for the first time, is offering shoppers installation as an extra on TV and computer purchases -- turf that Best Buy (BBY, Fortune 500) had carved out to differentiate itself from the discount retailer.

Best Buy CEO Brian Dunn says he's ready for the challenge. He plans to dull Wal-Mart's attack through the concept of "connectivity" -- getting all the gadgets in your life to talk to one another. If that sounds like a page from the Apple playbook, you're right.

Dunn, citing proprietary estimates, says connectivity holds the potential to be a $250 billion business -- that's far bigger than plain-vanilla sales of consumer electronics, which are expected to fall 7.7% this year to $165 billion.

Included under the connectivity umbrella are things like mobile services, satellite TV, and digital photography. Best Buy makes money by collecting installation and other fees from customers as well as from service providers such as DirecTV. Even better: Connectivity carries higher margins than sales of gadgets, which suffer from constant deflation.

To capitalize on this lucrative market and to offset declines in CD and DVD sales, Best Buy is experimenting with a new store layout. Gone will be the racks of CDs and DVDs that currently occupy valuable floor space. In their place will go stations for MP3 players, video Nanos, notebook computers, and cameras.

Each station will be manned by Best Buy employees -- known as "blue shirts" for the blue polo shirts they wear -- who will field questions like "How do I get the songs from my iPod to play on my TV?" Best Buy says it plans to open two prototypes in undisclosed locations before the end of its fiscal year in February.

Another edge for Best Buy: The technicians making house calls are part of Best Buy's Geek Squad division. By contrast, Wal-Mart is outsourcing installation to NEW, a firm based in Sterling, Va., that handles warranties for the retailer.

"The operative word here is 'owned,'" Dunn says. "Outsourcing works for back-office operations, but we believe that when an experience touches a customer, you must own it." Wal-Mart says it's very encouraged by early results of its program.

What about the lure of low prices that Wal-Mart has used to beat so many competitors (remember Circuit City) into submission? According to a recent Deutsche Bank study that compared flat panel TV prices at Wal-Mart and Best Buy over a 15-month period, Best Buy's prices actually averaged 1% less than the discounter's. "Low prices are table stakes," Dunn says. Creating a connected, wireless world -- that's the jackpot.

Best Buy Scales Down as Net Slides

As posted by: Wall Street Journal

Best Buy Co. reported a steep drop in profit Tuesday, but investors cheered amid signs it is weathering the recession better than many of its retail rivals.

The nation's largest consumer-electronics chain by sales reported improved margins at a time of heavy discounting. Best Buy also said it continued to gain market share for highly discretionary items such as home-theater equipment, mobile phones and global positioning systems.

The retailer based in Richfield, Minn., said it was taking measures to shore up finances -- a step that Wall Street had urged for months.

Best Buy will limit new store openings in the U.S., Canada and China, and is offering buyouts to nearly all its 4,000 headquarters employees.

The combination of cost-cutting and signs that Best Buy was persevering through the downturn pleased investors, who believe it will prosper when the economy picks up. "Much of our enthusiasm on Best Buy over time is its potential for market-share gains as competitors fall by the wayside," said Credit Suisse analyst Gary Balter.

Best Buy shares surged 18%, or $4.21, to $27.68 at 4 p.m. in composite trading on the New York Stock Exchange as critics of the company's expansion plans, which include moves into Mexico and the United Kingdom, saw the results as confirmation that executives wouldn't put growth over profit.

Still, earnings were worse than expected for the fiscal quarter ended Nov. 29. The company posted a 77% drop in net profit, to $52 million from $228 million in the same period a year earlier. The latest period included a $111 million pretax charge for writing down its 2.9% stake in Carphone Warehouse Group PLC., a U.K. mobile-phone retailer. Third-quarter sales were better than expected, rising 16% to $11.5 billion.

Gross margin, a measure of profit before overhead, rose 1.5 percentage points to 24.9% in part because of the addition of higher-margin phone sales through the European joint venture with Carphone.

Margins in the U.S. also rose, the company said, despite a continuing liquidation sale at 155 stores due to be closed by a direct rival, Circuit City Stores Inc.

Chief Executive Brad Anderson said in an interview that the Carphone write-down wasn't a reflection of the joint venture's standing. The company last year paid $183 million for its Carphone stake.

"We invested in Carphone Warehouse at a time when the stock was worth a lot more than it is today. It was a little heart-wrenching for us because this is one of the best partnerships we have made."

Mr. Anderson said that the company was now cutting costs, including a 50% reduction in capital spending next year, because it couldn't reasonably predict the near future -- and, if anything, expects a long-lasting economic slump.

"We want to make sure the company retains its financial strength," he said. Nonetheless, Mr. Anderson said Best Buy plans to continue to invest strategically because he is convinced that companies that have the strength to do so will reap huge rewards.

"We are going to plant quite a few seeds over the next few years, things that will give us quite a few options when the economy begins to prosper again. We could increase our short-term profits by stopping that, but we hold that sacrosanct."

Best Buy didn't specify how many corporate jobs it wants to reduce, but it didn't rule out firings. Even though it will slash capital expenses in half during the next fiscal year, it won't necessarily translate to a 50% reduction in new-store openings, executives said.

Best Buy said it already had invested in remodeling many of its stores to showcase global positioning systems, mobile phones and other hot-selling categories, and has begun promoting more heavily a customer-loyalty program it began years ago.

Best Buy opened its second-largest store world-wide in Mexico this month, and plans to continue expanding Best Buy Mobile, a smaller stand-alone store format catering to phones, handheld games and music players that the company believes has strong potential. It now has 40 Best Buy Mobile stores in the U.S.

"We know there are a good number of customers at play in this marketplace," Best Buy President Brian Dunn told analysts, adding, "I hope you don't hear, 'hunker down, duck and cover.'"

At Best Buy, an Album Sounds a Sour Sales Note

As posted by: Wall Street Journal

"Chinese Democracy," the notoriously long-in-coming Guns N' Roses album, hasn't turned out to be the big hit that Best Buy Co. expected when it scored the exclusive rights to sell the CD in the United States.

That's bad news for the nation's biggest electronics chain by sales, which paid millions of dollars up front for 1.3 million copies of an album that has sold just 318,000 copies in the U.S. during its first two weeks in stores -- and looks destined for bargain bins.

Despite considerable curiosity about singer W. Axl Rose's marathon production -- which took well over a decade, prompting the makers of Dr Pepper to declare that if the album ever came out, they would give a soft drink to every consumer in America -- "Chinese Democracy" entered the Billboard charts in third place after being released Nov. 23. Then sales plunged 78% in the second week, to just 57,000, according to Nielsen Soundscan.

The disappointing performance of "Chinese Democracy," which was distributed by Universal Music's Interscope Geffen A&M label group, comes at a tough time for Best Buy. The Richfield, Minn., company recently warned that sales for the last third of its fiscal year ending Feb. 28 could fall 5% to 15% from a year earlier. The company is expected to post lower quarterly earnings Tuesday.

Best Buy declined to discuss "Chinese Democracy." In an interview before the album's debut, Gary Arnold, the retailer's senior entertainment officer, predicted it would be the rock record of the year.

Reached for comment, Guns N' Roses manager Irving Azoff predicted the album would ultimately sell well, adding: "The race is far from over."

The album's poor showing contrasts with the success of AC/DC's "Black Ice," which is sold exclusively in the U.S. by Wal-Mart Stores Inc. "Black Ice" made its debut at No. 1 on the Billboard album charts after it was released by Columbia Records in October; it has sold about 1.6 million copies in the U.S., with about six million copies shipped world-wide.

Whereas Best Buy backed "Chinese Democracy" with a marketing campaign centered solely on the album, Wal-Mart saw "Black Ice" as a way to sell more than music. The company hawked AC/DC T-shirts and an exclusive AC/DC version of MTV Networks' Rock Band videogame.

"As we looked at AC/DC's loyal fan base, that's when this idea came about: How do we pull in the music with other things?" Gary Severson, Wal-Mart's senior vice president for entertainment and electronics, said in an interview. "Some artists allow you that opportunity."

AC/DC has served as a youth icon for decades. It came into the release of "Black Ice" with the most popular back catalog of any band other than the Beatles, even though its music isn't available through download services such as Apple Inc.'s iTunes Store.

Columbia Records Chairman Steve Barnett said the Sony Corp.-owned label began the marketing groundwork for "Black Ice" before AC/DC was in the studio, mindful of the band's lasting power. "Almost every avenue to connect with youth culture in America, we took," Mr. Barnett said in an interview.

"Chinese Democracy" generated its share of publicity, thanks in part to the negative reaction Mr. Rose's album title elicited from the Chinese government. But while AC/DC did its part to ensure its album's success -- it granted dozens of magazine interviews, and 50-something guitarist Angus Young put on his iconic schoolboy outfit for another world tour -- Mr. Rose went AWOL.

The reclusive singer declined interviews with Rolling Stone and the New York Times, according to people familiar with the matter. He also didn't complete a music video in time to promote "Chinese Democracy," which diminished Interscope's ability to advertise the album online and on television, and undercut Best Buy's ability to promote it on monitors in stores.

Nonetheless, Interscope is unlikely to be hurt by the sales because Best Buy agreed not to return any of the 1.3 million discs it bought. Interscope and Universal Music are owned by Vivendi SA of France.

During a question-and-answer session on a fan Web site last week, Mr. Rose remarked that "it very well could be true" when a questioner suggested his detachment was hurting sales. But, he added, "What I have to say a lot of people have no desire to hear."

While "Chinese Democracy" has failed to catch on with radio stations, Mr. Rose's record company is betting on a heavy rotation of another sort to boost sales. Two cuts from the album were included in "StripJoints," a CD compilation packaged with Exotic Dancer magazine that went out to 2,500 sexually oriented clubs.

"It's always nice to present music to people when they're having a good time," said Bob Chiappardi, chief executive of Concrete Marketing, which was hired for the strip-club promotion. "It's all about association."

Best Buy Warns of Dire Holiday Sales

Best Buy Co., the nation's largest consumer electronics chain, sent a shiver through the retail and financial markets Wednesday as it sharply reduced its profit forecast due to plummeting sales -- a sign that even stronger retailers are on their knees in this economy.

Saying it could no longer accurately predict its future, the Richfield, Minn.-based retailer warned sales for the final four months of its fiscal year ending Feb. 28 could decline 5% to 15%. Those end-of-year sales typically make up more than half of Best Buy's annual profit.

"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," Best Buy Chief Executive Brad Anderson said. "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."

Best Buy now expects sales for the full fiscal year to drop as much as 8%, a far cry from the 3% gain it had estimated in September. The retailer chopped its annual earnings projection to anywhere from $2.30 to $2.90 a share, down from a prior prediction of $3.25 to $3.40 a share.

Analysts are predicting sharper price cuts on flat-panel televisions and Blu-ray players in the coming weeks as a result of Best Buy's announcement, saying that there is no longer any doubt that retailers are stuck with more electronics than they can sell.

That could mean better deals for consumers but lower profit for big manufacturers, such as Sony Corp., Samsung Electronics Co., and retailers. Retailers will be forced to seek new buying terms with manufacturers so that they can lower prices, or return merchandise.

Barron's Online Bob O'Brien says that we are facing the worst holiday sales season in 25 years, and Wal-Mart may be one of the better performing companies. (Nov. 12)

Retail analysts had expected Best Buy, an industry bellwether which commands 21% of the U.S. consumer electronics market, to reduce its profit forecast. But the severity of the cuts caught them by surprise and led some to conclude that spending declines could spell doom for weaker retailers -- notably Circuit City Stores Inc., which sought bankruptcy-court protection on Monday.

"The dire scenario" Best Buy described "makes it hard to believe the secondary players survive," said Credit Suisse retail analyst Gary Balter.

One factor contributing to slower sales, especially sales of big-ticket electronics, is tightening credit card limits. A Federal Reserve survey of 55 domestic banks and 21 branches of foreign banks earlier this month found that nearly 60% reported stricter lending standards on credit-card loans.

At a briefing last month with a small group of reporters at the company's Minnesota headquarters, Best Buy President Brian Dunn had expressed confidence that the company would be able to prosper despite the downturn. But on Wednesday, he said, "In 42 years of retailing, we have never seen such difficult times for the consumer."

Best Buy's grim outlook stung shares of rival retailers as well as consumer electronics manufacturers. RadioShack Corp., videogame retailer GameStop Corp., and regional appliance seller Conn's Inc. all fell along with Best Buy's stock, which dropped 8%, or $1.91, to $21.97 in 4 p.m. New York Stock Exchange trading.

Among Best Buy's revelations Wednesday was that it believed it had gained market share during September and October, even as it sales dropped markedly -- suggesting that other retailers fared even worse. While Best Buy pointed to macroeconomic trends, critics noted that the company had embarked on an ambitious growth strategy that included expansion into Europe and China, and new mall-based Best Buy Mobile stores in the U.S., even as the economy was softening. Best Buy overreached, they said, and may now be forced to retrench. The company said it is reviewing its options.

"We are making adjustments to planned levels of discretionary spending and inventory for the remainder of the year," said Jim Muehlbauer, Best Buy's chief financial officer.

That's bad news for a variety of suppliers, which are seeing their own sales contract. Of course, not every electronics manufacturer is feeling the pinch. Bob Perry, a senior vice president at Panasonic Corp., said TV sales are still expected to show an increase this year. No retailers have begun to return TVs, he said.

"In terms of their TV business, we are not suffering the great depression," Mr. Perry said. Best Buy, which last quarter said inventory levels had increased by 9%, said stocks continue to be high, but are below a year ago. Spokeswoman Susan Busch said the retailer won't detail the steps it is taking to reduce inventory until it reports third-quarter earnings on Dec. 16.

Best Buy also said it secured a new $150 million line of credit after its access to capital was hurt by the bankruptcy of Lehman Brothers Holdings Inc.

Best Buy Profit Falls Despite Sales Gains

Best Buy Co.'s fiscal-second-quarter net income fell 19% as higher spending on stores and growth initiatives more than offset better-than-expected sales at the consumer-electronics retailer.

The Richfield, Minn., company said Tuesday that the investments were "prudent" for long-term growth despite the difficult times for consumer spending and maintained its full-year earnings guidance of between $3.25 and $3.40 a share.

The company curtailed estimates for sales growth at stores open at least 14 months.

"In a challenging environment that finds many of our competitors retrenching, we are growing and opening more new stores," Chief Operating Officer Brian Dunn said.

The retailer said it planned to cut some advertising, infrastructure and labor costs during the second half of the year. Federal stimulus checks helped buoy sales in recent months, and their absence, coupled with consumers' already strapped wallets, led the company to curtail estimates for sales growth at stores open at least 14 months to between 1% and 3%, less than half its present rate.

Best Buy shares declined $1.30, or 3%, to $42.40 in 4 p.m. composite trading on the New York Stock Exchange.

"The inability of [Best Buy] to control spending in a tough macro environment adds to our angst towards [its] shares over the balance of 2008," said UBS analyst Brian Nagel.

Best Buy has moved aggressively on several fronts to ensure future growth -- retrofitting all 973 of its U.S. stores with mobile-phone sales outlets, pushing store development in places like China and Turkey, and paying $2.1 billion for a joint venture with U.K.-based Carphone Warehouse Group PLC to jump-start a push in Europe. On Monday, it announced it was buying digital-music-downloading company Napster Inc. for $121 million.

For the quarter ended Aug. 30, the retailer recorded net income of $202 million, or 48 cents a share, down from $250 million, or 55 cents a share, a year earlier. Revenue rose to $9.8 billion from $8.75 billion.

Comparable-store sales climbed 4.2%, compared with a 1.9% forecast among analysts polled by Thomson Reuters. Best Buy said its domestic market share increased by 1.6 percentage points.

Analysts at both Jefferies & Co. and UBS had warned earlier this month that an industry-wide glut of flat-panel televisions will hamper Best Buy's future profit margins because the store may have to lower prices in order to sell its supply.

But Best Buy's gross margin was in line with analysts' expectations, and the company said its growing mobile-phone business, which carries higher profit margins, helped.

Last week, Best Buy became the first retailer to start selling Apple Inc.'s latest version of the iPhone.

By: Mary Ellen Lloyd
Wall Street Journal; September 17, 2008