September 23, 2019 • 45 mins
Formed in the wake of a tornado, the story behind Best Buy has plenty of twist(er)s. How did this retail chain survive the digital age when so many other box stores went under?
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Episode Transcript
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Speaker 1 (00:04):
Welcome to Business on the Brink, a production from I
Heart Radio and How Stuff Works. If you avoided crazy
Eddie and navigated cities of circuits, you would inevitably find
yourself there. You might consult with the squad of geeks,
or lose yourself in aisles of electronic do dads and gizmos,
(00:24):
and Heaven help you if you happen to be wearing
a blue Polo shirt at the time. This is best
Buy in Business on the Brink. Hey everybody, I'm Jonathan
Strickland and I'm Ariel Casting, and today we're talking about
(00:46):
best Buy. This topic was requested by to Count them
to listeners Emily Welch and Ryan MacArthur, both employees the
Best Buy who wanted to hear how the company avoided
the pitfalls at all these other big tech and big
box stores. Hit. Yeah, the retail apocalypse that has closed
down many stores, like we talked about Borders being one
(01:07):
of them, and Radio Shack. And then there's also a
circuit city, which I'm sure we'll cover at some point,
and we'll talk about a little bit in this episode.
It does play into the history of best Buy. So
in the age of Amazon and online shopping. Best Buy
stories pretty interesting, and you could say that the company
owed its entire existence to a natural disaster. It's a twister.
(01:28):
It's a twister. It's like Wizard of All. Yeah. Here's
the crazy thing is that we're making a joke, but
that's actually true. The reason why best Buy exists, you
could argue, is largely because of a rogue tornado. How
many businesses can say that, I mean, usually they don't create.
Usually tornadoes don't create industry. They destroy industry. They might
(01:52):
create opportunities for construction, and that's but they rarely, they
rarely improve a business. Yes, okay, so uh, how did
best Buy get started? Jonathan? Well, if you look at
the name best Buy, that dates back to three but
the history of the company is older than that. It
actually goes back another twenty years almost, and that history
(02:16):
really starts in nineteen sixties six. There was a guy
named Richard M. Schultz, and he also had a mysterious
business partner. And no, no, I don't. I don't know
who the business partner was because every article I read, everyone,
every single one said Richard Schultz and his business partner. Yeah,
(02:40):
there was never a point where it actually identified who
that person was. Now, ultimately we could say that name
doesn't really play into the history of Best Buy that
much because Schultz would go on and buy out his
business partner after about a year, so it was pretty
early on when that business partner was extricated for the business.
(03:00):
So I guess it doesn't really matter, but it bugs
me as a researcher. I'm sure when you've researched some
of these topics, you've encountered similar things where you Yeah,
I go down a rabbit hole and I spend hours
trying to find and then corroborate information, Like, uh, we
recorded an episode on Blastic and I tried to find
the stork's name, and I could find one article and
(03:21):
it was uncorroborated, but I spent so much time trying
to confirm the information. Yeah, that's the level of detail
and dedication we bring to you to figure out the
name of a cartoon mascot stork of a pickle company. Anyway,
let's get back to Best Buy. So, according to the story,
Schultz would actually mortgage his own home in order to
(03:43):
get enough money to really get into this business and
to open up a store, which was at the time
a stereo equipment store for car stereos and home stereos,
and he called it Sound of Music. Oh, Jonathan, I
know who the mysterious part there was. Are you gonna
say it was Julie Andrews. I was going to say
a nun named Maria, but save different. Okay, no, if
(04:05):
neither of those are correct. Uh. The first store was
established in St. Paul, Minnesota, and within the first year
of business he he led the company to go ahead
and make its first acquisition. I guess you go bigger,
you go home. And in this case it was actually
a couple of companies called Kincraft Hi Fi Company and
the Burgo Company. These were other audio equipment companies, guessing
(04:27):
in a similar area. You know, this was all in Minnesota.
It was all in the the stereo business arena. Like
that was all that he was concentrated on for for
about twenty years. So he was just cleaning up street
corners at that point. He was just getting the music
out to the people by selling them the equipment. So uh,
(04:50):
the Sound of Music store hit hit a good amount
of revenue in its first year. And I say a
good amount of revenue. The figure I have in our
notes is a hundred sixty thousand dollars. But again, I
just want to be clear here. There are a lot
of conflicting reports in the sources, and so while many
of the sources referred to a hundred sixty thousand dollars,
(05:12):
not all of them did. Some of them had it hires,
some lower, and it was a private company so it
didn't have to report. Yeah, so let's just say it
was doing okay. Now, that was just in revenue. That
wasn't in profit. You know, obviously your profit is dependent
upon your product, and stereo comments a decent profit margin
(05:33):
if you don't mark it up too high, and if
your retail space isn't that expensive. Yeah, so I don't
know how profitable the company was, but it was doing
good business. Uh. And he was pretty aggressive in those
early days as a businessman. By nine sixty nine he
had opened two other locations, also in Minnesota, so now
there's three stores. And around that same time he bought
(05:56):
out his mysterious partner person whose name we never learned,
and became the sole owner of Sound of Music. Again,
the store, not the musical. The hills were not alive
with radio equipment. No, it's just the stores at this
point receivers just trampling all over the yes and and
having adorable songs as they went to bed. So once again,
(06:21):
the details of the history are pretty sketchy. No one
was really chronicling the sound of music chain of stores,
which means that things probably were not going poorly. No, no,
they weren't. They weren't remarkable, and they weren't terrible. Uh
sometime around nineteen sixty, nineteen seventy or nineteen seventy one
this all happened. That's because again reporting is shaky. Yeah,
(06:46):
and by the end of nineteen seventies, by the end
of that they had nine stores from three, right. Yeah.
They continue to grow throughout the seventies, again still focusing
on stereo equipment. So he keeps on pushing for the
company to grow. And uh, yeah, he was doing well.
He had nine stores open. And and this is when
we get up to this pivotal moment in with the tornado.
(07:10):
Do you want me to make the noise again? It's okay,
I think we can just play it back because we
haven't recorded. Tari can actually insert that wherever she likes
into this episode. Every five minutes, you're going to get
a poor tornado sound could be. She seems pretty excited
about this possibility. We don't know when it's gonna happen, alright,
So we get this regular old music stereo store. They
(07:35):
would do commercials and stuff. Schultz would appear on them occasionally.
Uh you know, they had their little Sound of Music logo.
And the tornado in question is a truly historic event
in this part of Minnesota. It's called the har Mar tornado,
not the Hardy hard tornado, which is what I first
read when I looked at the next She thought it
was like a hilarious tornado from the cat's skills or
(07:57):
something cartoon tornado. No, No, that it's called the hard
Mar tornado because it really devastated the area around the
har Mar mall um At. Some other people called the
Lake Harriet tornado or the Adina tornado, and a tornado
by any other name would reak just as much havoc
as Shakespeare once wrote, or would have if you knew
(08:19):
about tornadoes. So the tornado touched down. Now this I
have a lot of information on, because when tornadoes happened,
people really pay attention to. The Weather Service does keep
decent notes, yes, so on June four, at three forty pm,
the tornado touched down in Adena, Minnesota, and then it
began a fifteen mile journey to the northwest. And in
(08:42):
case you aren't familiar with the way tornadoes travel, we
live in Georgia, where tornadoes are not uncommon. Tornadoes tend
to hop right, they'll they'll touch down, they'll travel along
the ground for a bit. They tend to hop up.
They might travel another couple of miles and they might
touch down again. So you can have In fact, we've
(09:03):
seen this. We've seen neighborhoods that are completely destroyed, with
the exception of maybe a house where the tornado just
hopped over. I was actually in a tornado quite a
few summers back, I want to say, like six or
seven summers back, and all around me there was destruction,
but my little community was fine. Yeah. Yeah, that's happened
(09:24):
a few times in fact, where I was growing up.
The same thing. Well, Sound of Music's main store, the
largest store, not their first one, but their largest and
most popular store, was not so lucky. It was not
spared this tornado. So it was a store that was
near this harmar Mall area and by the way, trying
(09:45):
to say, harmar mall is very tricky for me. You
can understand why I thought it was hardy hard It's
just it's easier, fair enough. And the roof was completely
torn off of the store. It raised the roof, it
raised it and then threw it away. Yeah, and this
is a stereo store, like this is still what they're
selling is stereos. Around this time, they were also looking
(10:06):
at getting into other electronics, but still really largely stereo equipment.
And a lot of the stuff was destroyed, but some
was salvageable. In fact, all the stuff that was in
the storeroom was water damaged but not completely destroyed. So
Schultz got this idea. He said, why don't we have
(10:28):
a fire sale, Except it's not really a fire sale,
it's a water damage sale. Tornado sale is what they
would think of it. And they set up a tent
essentially across the street in a parking lot from the store,
because of course the store was not structurally ready for
people to walk through it, so they set that up,
(10:48):
and a lot of histories will mention that this sale,
Schultz was talking about offering up the best buys of
electronics in the area. So that's how he got the name.
That's the way a lot of the story tell it,
But to me it sounds like, uh, it took a
little longer for that to really take effect, Like maybe
thinking back on these best buys, because they would refer
(11:09):
to that again, they would make this an annual sale.
They would have a tornado sale on the on the
anniversary of the first one in order to try and
uh recapture the performance of that because the sale did
really well. Yeah, in four days they made as much
in sales revenue as they would in a full month
(11:31):
at that typical store. Yeah, so that's that was enough
for Shultz to say, like, well, we should definitely do
this on the reg maybe not with the tornado but
with the sale, but with the sales. I mean, if
you can bring in revenue send selling your goods at
a lower cost, why not. And there's actually a commercial
that you can find on YouTube from two I believe
(11:53):
it is where they refer to getting the best buys.
But this store is still Sound of Music at that
point it was or they had changed the name. Uh.
And so again, this is right around the time they're
starting to get into other electronics, particularly the brand new
technology known as the VCR, which predates the Blue Blu
(12:14):
ray and DVD player for those who do not know, yeah,
and is no longer in production. As of a few
years ago, the very last factory making VCRs stopped doing it,
which is unfortunate because my VCR broke a few years back.
I know, I know some guys over at uh At,
a VCR repair company in Wisconsin, who could help you
(12:35):
open nice Well back to your story. Yes, so comes
around and at this point, partly because they're no longer
just carrying stereo equipment, but also because they were looking
at how the sales event was so successful, Schultz decides
to rename his company. This is when he calls it
(12:57):
best buy. Um. I mean it makes sense. You want
to capitalize on the thing that is bringing you success. Yeah.
And also you no longer want to send people the
message that the only thing you're selling is music equipment yea,
or musicals or children or nuns. You don't want people
to think that those are all the things you're selling.
But people didn't because the store brought in around ten
(13:18):
million dollars in sales revenue. Yep, yep. So this was
where he had changed the names to all the remaining stores.
At that point there were only seven left, so he
had built nine, but h Or had established nine and
now he was down to seven. He made ten million
in that time, and that same year he would open
up a new type of store in a place called Burnsville, Minnesota.
(13:41):
And this was the superstore model. So you know, it
would jump into a phone booth and change into a
cape and you know, I was holding back a Burnsville pun,
but yours was better and worse at the same time.
But Chells didn't invent the superstore. No, no, this was
an idea that had been around since the nineteen sixties.
(14:04):
In fact, the questionable but probable original superstore was called
thrifty Acres and it was in Kalamazoo, Michigan, which is
just fun to say it. And also Circuit City, the
big competitor to best Buy, had established its own superstores
in the nineteen seventies, so that the best Buy superstore
(14:26):
idea was not brand new. But they had a different
approach than Circuit City. Yes, because that Circuit City, Uh
for you young uns who never win to a circuit
city in that era, they did things on commission, so
they had salespeople who would greet customers as soon as
they came in the door, and they would try and
find out what the customers were looking for. They would
(14:46):
answer questions, they would run through demonstrations. They would typically
steer people to the most expensive version of whatever it
was they were looking for that they felt like, Yeah,
just like when you asked what the best thing on
a menu is? Yeah, yeah, I let me ask you,
what do you like the nachos or the filet mignon. Well,
I like the filet mignon and it goes really well
(15:07):
with this very expensive line. That's very expensive radio. Yeah.
And they also could I interest you in the radio set? Yeah,
So circumstany did this commission thing. Also, their stock was
almost always just in a stock room. They had demonstration
models on the floor. But you couldn't just pick up something,
put in a in a cart and then push it
to a cashier. Instead, you were kind of joined at
(15:30):
the hip with the salesperson, who, once they had established
what you wanted, would arrange for a stock person to
go and get it, and then they would ring you
up at one of the mini cash registers throughout the storeroom.
But Best best Buy let you grab your own stock
and bring it up to a cash register, right, yeah, exactly.
So it's it's very much in the model that if
(15:51):
you've ever been the Best Buy, it was like that
from the beginning, which I mean to me, I personally
would rather have that because I'm not going to go
to a store if i feel like I have to
buy something. But I'm going to go to a store
if hey, I kind of need something and I want
to look at options, I'm more likely to buy it
than if I'm feeling pressured. Not to say that Circuit
City employees were pressuring you, they were, but they were
(16:14):
because it's it's sales. It's what sales does, right, Like
if you've ever bought anything that had someone working on commission,
because I mean, the incentive there obviously is to make
the sale, because that's how you make your money, right,
You're getting money from every sale you make. You don't
get money from sales you don't make, so you have
the incentive to try and get that sale to close.
(16:35):
Best Buy, by the way, at the time, was also
working on commission sales. They just didn't use the distributed
cash register model that Circuit City did, which I mean
means you still might have pushy salesman. But you can
also be like, no, I'm going to help myself. You
also have here that best Buy had lower priced items
in low margin products like near the door. They still
(16:58):
do today. Yeah, the whole it was let's get people inside.
That's the important thing. Get them inside, and even if
they just buy these low profit margin items, you still
are making the same And because they were a big
box store, it was successful for them, unlike Radio Shack,
who tried to put in more random objects into their
store and it didn't quite fly. Yeah. It never felt
like the Radio Shack approach had a coherent strategy to it,
(17:21):
and best Buy had a much more coherent approach. And
uh yeah. So while other companies were kind of struggling
with this transition, best Buy at the time was doing
pretty well. It had differentiated itself enough from Circuit City
so that the experience of going into a best Buy
was much more casual. You could see all the stock there,
you could you know, you could ask questions. But there
(17:43):
weren't nearly as many sales people on the floor of
the best Buy as there were at a typical Circuit City.
So that was what was setting things apart. But this
was just the very beginning of best Buy, and we
haven't gotten into how the company would grow exponentially over
the next few years or what would happen when the
retail apocalypse sets in. We will talk about that, but
(18:06):
first we're going to take this quick break, Okay, So
so Ariel, you know what we could do. We could
go year by year of everything the best Buy ever did.
That sounds tedious, Jonathan, it does, and that's why I
didn't put it in the notes. So really, let's just
give the super short version of what was going on
(18:26):
in best Buy joined the New York Stock Exchange. It
had previously traded as Sound of Music on the NASDAC.
So now it's moving up in the world of business.
In nine they stopped doing commission sales, right. Yeah, this
is where they got rid of commissions entirely. Uh. This
is also where they would make sure the entire stock
(18:46):
of the store was on the showroom floor, so they
they very rarely had very much in a stock room
in the back. It was essentially convert the entire floor
space into the showroom. Yes, this was, by the way,
called their concept too. Yeah, this was where they the
original superstore was Concept one. This was concept too that
rolled out, and again they were like they were looking
(19:08):
at how to maximize the space for the customer and
to they eliminated even more salespersons, like yeah, because again
it it put things on the customers, uh kind of scheduled.
If they had questions, they could ask salespeople about things,
but they weren't feeling pressured into buying stuff, which I'm
(19:31):
sure made some companies unhappy. Absolutely it did, because it
meant that their products weren't being pushed by salespeople super hard.
So if your whirlpool or your Maytag or you're one
of these big companies like Sony, you want the salesperson
to steer people towards your products so that they are
more likely to buy them, because obviously that's all you
(19:52):
make your money. And without the commission sales people, that
was the fear was customers wouldn't go to these big
ticket items as frequently, and so some of these companies said, well,
we're just going to take our refrigerators and washers and
dryers and we're gonna go home fully on them. Yeah,
it didn't last long because the concept two stores ended
(20:13):
up being immensely popular and it turns out that if
everyone's going there, that's where you got to put your stuff.
So the companies came I won't say crawling back, but
they did come back. We also got the yellow tag
Wogo around this time. Yep. That's when Best Buy would
adopt that, and the company hit a billion dollars in
sales revenues in and by it was only behind Circuit
(20:39):
City in the electronic retail market. And remember a Circuit
City had been doing all electronics for longer and had
been more entrenched in that particular market. So this is
pretty good. Yeah, Now they weren't content just to stick
with that and and write it out as long as possible,
because we got the Concept three store, yes, which is
(20:59):
Concept two but more bigger. As I wrote, Yeah, this
was where they introduced demonstration areas. If you ever went
to a Best Buy where they had like the theater
room where you could sit down and listen to your
ears get assaulted by whatever usually was the matrix, I
think that was almost always on h Yeah, that was
that was those concepts, and then beyond that you would
(21:23):
get Concept four stores in they were slightly smaller than
Concept three stores, and they also put cash registers throughout
the stores, kind of like Circuit City did to distribute
the points of sale, but you could still bring your
items to that cash register. Yes, yes, so you could
have a cash register dedicated for a particular section of
the best buy. So for example, if you were shopping music,
(21:44):
or you were shopping you know, camera accessories. I think
you still sort of can if like if you go
and you buy a phone. Yeah, it all depends on
the best Buy and it depends on which blayout it follows,
but yes, you still can do that. And and during
this time they were also opening up new locations in
various markets, including international, uh partially through I read one
article it says that partnership with Microsoft helped them expand internationally.
(22:07):
Some Yeah, that was a big deal, was their their
partnership with Microsoft. That was also seen as a big
deal just in the industry in general, because here's Microsoft.
It's just an enormous company making a deal with a retailer.
I mean that was that was a big deal. That
was a big Yeah. And then they also bought Magnolia
Hi Fi. So now you could sit and have your
ears assaulted by the Matrix, but you couldn't see what
was assaulting your ears because it all looked like rocks
(22:30):
or tables. Okay, we're going to ignore that. Best Buy then,
in two thousand and one had one of its what
people would in retrospect would call missteps. They bought a
company called music Land Stores Corporation. And this was a
company that had several different retail stores under its ownership
that would operate typically in malls. So there are a
(22:52):
lot of those music stores that were in malls, things
like Sam Goodie Music and electronics stores. A lot of
those belonged to this particular company. And the thought was
best Buy was singing, well, we can we do this
really well in retail spaces, so we can do it
really well in malls too. And the deal cost foive
million dollars, plus best Buy agreed to assume music Lands debt,
(23:15):
which was another two hundred seventy one million dollars and
more than half a billion when you add in the
the price of the acquisition plus the debt. UH By
two thousand two, the division was losing tens of millions
of dollars. Again, the numbers kind of very depending upon
the source, but it's always in the tens of millions.
(23:36):
Like sixty seventy million dollars. In two thousand three, best
Buy would divest itself. It would quote unquote sell music
Land to Sun Capital Partners. But selling is being very
generous because they gave it away. Well, I mean, cut
your losses while you can. I guess Sun Capitol got
the deal cash free. The only thing that Sun Capitol
(23:58):
had to agree upon, and this would ultimately collapse that company,
but that's a different story, was they had to agree
to assume the debt associated with that company, So Best
Buy was out the money they had spent to buy it,
but at least they no longer had the debt from
music Land on their ledger as well. Well. Around this time,
Richard Shells also retired the CEO. Right yep, he was
(24:22):
worth about two billion dollars at that point. Good time
to retire, Yeah, not not bad. Brad Anderson, who had
joined Sound of Music back in those days, would become
the new CEO. He had worked his way up from
like salesperson all the way up to well now CEO
of the company. And you would see this, by the way,
(24:44):
in best Buy you would see a lot of these
leadership positions were from within the company. Which typically we
think of as a good thing. In the case the
Best Buy, as we will ultimately see spoiler alert, it
wasn't always a good thing. I mean, you want to
you want to be loyal to your to your employees,
but at the same time, you may not have the
best candidate within your employees. And sometimes if there is
(25:06):
a problem within the company that you grew up with,
then you won't see it. Yeah, you don't see it
because it was there the whole time and you were
You can't see the forest for the trees, is what
we would say. But Anderson did make a really good
move because he acquired geek Squad. Yes, and this would
end up being a very important part of Best Buys
(25:26):
success ultimately. And geek Squad at the time was an
independent company that was providing tech support to customers, So
people would essentially pay geek Squad to fix their electronics
what weren't working no more. Yes, but you know, not
super surprising because we see this a lot. When a
CEO retires, a first CEO, the company started seeing lower
(25:48):
sales and I don't know if that's because of his
retirement or just the economy. I think it was a
combination really, I think it's mostly the economy. Honestly, I
think that the sales were starting to lag a bit.
It was just one of those cycles we see. Plus
we were getting into the recession. And around this time
in two thousand and eight, Best Buy acquired Napster. So
you do you know what Napster is A real I
(26:09):
do know what Napster is. It's I know it for
music piracy. Yes, yes, So Napster that best Buy acquired
wasn't exactly the same as that company. So Napster, the
piracy one that we associate with was a file sharing service,
but that had been shut down in two thousand and one.
The government shut it down. Yes, they were like, this
(26:30):
is illegal, guys, you cannot do this no more. Uh,
there's no safe harbor for you. You are pretty much
enabling music piracy and and software piracy. So a company
called Roxyo ended up getting the intellectual property assets, so
essentially the rights to use the name and logo of Napster,
but not like anything else associated with the company. Was
(26:53):
essentially the the appearance of Napster, but not the souls.
That's interesting, I guess there trying to appeal to the
people who like Napster for the illegal stuff. Well, they
were trying to appeal to young hip folks who were
associating Napster with digital music, so they took an already
existing software called press Play, they slapped Napster's name and
(27:15):
logo on it, and best Buy purchased that in two
thousand eight for a hundred twenty one million dollars. So
while you could say best Buy bought Napster, there's a
big asterisk there because it's not it's not the Napster
that everyone thinks about from two thousand one. Yeah, in
two thousand nine we got a new CEO, so yeah,
(27:35):
we sure did. Anderson was out and Brian Dunn was in.
And Brian Dunn had also been with best Buy since Nive,
so he had been there since the after they changed
the best Buy, but he had been there for for
two decades and it worked his way up, and now
I was leaving the company. Uh. In two thousand eleven,
Done oversaw a deal that led to Napster leaving best
(27:57):
Buy and it and also would end up merging with
a different company called Rhapsody. That's a story in its
own and best Buy we have a small steak in
that company as part of this arrangement, and really it
was an attempt to get out of a flailing business
because there were some companies like Pandora and Spotify that
(28:18):
were on the rise, and it just looked like Napster
was not gonna compete against them. And Napster wasn't the
only thing they're getting rid of. They also closed some
of their overseas stores at that time. Yeah, they were
trying to consolidate some of their their assets and get
rid of some things that were not being terribly profitable.
Then we get to two thousand eleven, and this is
where things get ugly. Jeez, you didn't allude to that
(28:41):
at all when I said Brian Dunn's name when you're like, oh, geez, yeah,
this was so. Brian Dunn's name would often get listed
on like the worst CEOs of two thousand and twelve,
that kind of stuff, And why is that, Jonathan? So
the board of directors had an inquiry into Brian Dunn's
behavior because there were reports that he was having an
(29:04):
inappropriate relationship with a fellow best By employee. So he's
CEO this woman who was twenty nine years old at
the time, he was fifty one, not that that necessarily
should match. The problem. The problem was that he was CEO,
she was also working for him, and that this was
a relationship that he should have just closed to HR.
(29:28):
Plus He's also was also married, so there was some
other Now. Granted, he has always maintained that it was
never a romantic relationship, but there are a lot of
people who thought that perhaps that was not entirely true
because they were frequently seen together. Yes, and then he
would eventually resign in the spring of two thousand twelve
under intense pressure from the Board of directors, and not
(29:51):
very long after that, Richard Schultz, who had no longer
been CEO but had maintained his role as Chairman of
the board, was asked to design because it became clear
he knew about Brian Dunn and this employee but had
not disclosed it to the Board of Directors or the auditors.
But despite that, and despite his retirement, he tried to
(30:13):
buy Best Buy back. Yes, he cut the he got
the honorary title of Chairman emeritus, and then he said, hey,
you know what I'm gonna do. I'm gonna turn Best
By private again. I'm going to lead a buy out
of Best Buy. But it turned out he was not
able to raise the financing he needed in order to
achieve that, so that ultimately went nowhere. Yeah, and by
(30:34):
two twelve, best Buy was really kind of spiraling. Yeah,
it was not in a good space space. So you
had this controversy, you had the departure of the CEO,
you had the departure of the chairman of the board.
The stock price had fallen to its lowest point in years.
The sales of the stores, like the sales at the
(30:57):
actual individual retail stores, were on the decline. They were
either not growing at all or they were actively falling.
Other retailers were starting to close up shop. This is
what we were referring to with the retail apocalypse is
where companies like Borders and Radio Shack we're really having trouble.
And it looked like Best Buy was going to join them,
but it didn't. But we'll tell you guys how it
(31:21):
didn't after this quick break. Okay, so here's the interesting
part of this story. Now. We have said that usually
we like companies that promote from within. It tends to
be good for morale. It gives incentive for people who
(31:41):
are working within the company to strive for leadership positions,
but it can also blind you from what's going on
and failing in a company. So in this case, the
board of directors ended up reaching out to an outsider
to come in and lead Best Buy, and that would
be Hubert Jolie. And he came from like the uh,
the sort of the hospitality industry and things like that. Like,
(32:04):
he came from a totally different world in retail, but
it seems like a good compliment to the retail world
because so much of your product is hospitality to your customers. Yes,
and he thought that the first thing he needed to do,
and I think this is incredibly insightful, was to talk
to actual Best Buy employees and find out what's working,
(32:27):
what's not working, what are you concerned about, what are
you seeing Because you're the ones operating these stores. You
see what's what's happening day by day, and I want
to make sure that we figure out how to best
move forward. And that ended up by itself helping a
lot with employee morale because it showed that he was
taking a direct interest in the frontline employees. He he
(32:49):
was using the ever important and business emotional intelligence. Yes,
good old EI, good old Ei. So he initiated some
really big behind the scenes changes for Best I. It
was called renew Blue. It was actual initiative that's referred
to it. Yeah. This is also why I said, Heaven
help you if you wear a blue Polo shirt walking
into Best Bike, because everyone will think you work there.
(33:11):
It's like wearing a red shirted target. Yeah. Yeah. So
he did a total redesign of the shipping infrastructure to
make it easier for stores to to not just know
what their individual stock was inside the store, like you know,
how much of each item did they have, they also
(33:32):
could quickly figure out where other products were and then
order them more efficiently. So in other words, he was
really streamline the supply chain side. And that can get
really dull and boring when you're talking about it, like
from numbers perspectives, but it is so incredibly important for
retail establishment particularly but really all companies two have a
(33:55):
really strong handle on your supply chain, so you know
where everything is and so you don't lose money from
over stalking even or or having you know, having a
demand in one store that cannot be met because they
can't get hold of the product. Meanwhile, another store has
an excess on it and nobody wants it. Yes. In
addition to this, he also really improved the customer experience
(34:18):
as well. So he did that by giving them the
option to look at an item in the store and
play with it in the store and then decide whether
to buy in store or online. Yeah. And this was
in response to something that was already happening and I'm
sure all of you out there have done it. It's
called show rooming in the industry. This is the habit
of customers going into a physical location to get that
(34:41):
hands on experience with various products, then more often than not,
pulling up Amazon on their smartphone and seeing how much
it costs on Amazon versus wherever they are. Yes. So,
instead of fighting it, he embraced it. Yes, and so
as part of that, in order to embrace that, he
so instituted a price matching philosophy, saying that if you
(35:03):
could find a product for a lower price at say Amazon,
best Buy would match that price because rather than you know,
deal with the loss of a sale, He's like, well,
it's better for us to have a lower profit margin
than to not get the sale at all, which is
kind of how best buy started in the beginning by
having that Yeah, it's just that this case, the tornado's
(35:24):
name was Amazon. Yes, it was a metaphorical tornado. And
this was a good move because it caused best Buy's
sales to grow incredibly. It grew so fast it reached
uh to the point where the online sales for best
Buy would make up six of their total revenue, which
was already incredible. So this was also a really important strategy.
(35:48):
It wasn't just that he was making the store experience better.
He was making the online experience better too, and that
was where they were really able to compete. So you
could use you could marry the two right, You could
go to us by look at the stuff, make your decision,
you order it online, or maybe you order it online,
you go to the store, you pick it up, that
kind of thing, so it's ready at the moment that
(36:10):
you purchase it. This was the other way to fight Amazon.
It was saying, yeah, you could order it from Amazon.
You're gonna get the same price as what we do.
You might also have to pay for shipping. Plus you're
gonna have to wait three or four days. And then
if you get something that somehow got destroyed in the
shipping process, you would have to return it and wait
for a new one. You could go look and see
(36:31):
what you were picking up at the best Buy store.
Yeah yeah, And if it was a delivery thing, it
was a delivery thing from a store that was down
the street, as opposed to a warehouse that might be
in another part of the state. So it was incredibly effective.
But on top of this, Julie didn't just fight Amazon,
he actually played nice with them a little bit too. Yeah,
this was a very This could have gone either way
(36:52):
to He started using parts of best Buy stores to
act as sort of many stores for companies that would
typically be competitors or maybe direct vendors to best Buy.
So you could find a little section that was essentially
sponsored by Amazon or sponsored by another company, and best
(37:13):
Buy was earning revenue this way because they were essentially
churching rent. So in this case, best Buy became a landlord.
And these other companies like Google and Amazon, they took
advantage of it because they lacked that capability that best
By had, which was they didn't have a physical space
where you could go in and take a look at
these products. Even companies like Apple, which does have its
(37:35):
own stores, it was using places like best Buy because
they don't have stores everywhere, but best Buy is far
more widespread than Apple stores are. Yeah. Now, another champ
pole of these these changes he was putting in was
customer service, and one of the ways he improved that
was by expanding geek squads milieu. I suppose, yeah, yeah,
(37:57):
geek Squad became not just tech support but also sort
of ambassadors and evangelists and ultimately salespeople and in home consultants. Yep, yep.
So you know the philosophy under geek squad, it's it's
all very let's don't put any pressure on the customer,
like your your goal is always trying to sell more,
but not in a way that's going to make the
(38:18):
customer feel like the experience is an unpleasant one. It's
rather you really do need to use your expertise. So
let's say you go into a person's home and they said, yeah,
I want to make a home entertainment center, and this
is the room that I have, and you're you're supposed
to really use your expertise to say, well, based upon
the size of this room, how much light is coming in,
(38:39):
here's the television I would recommend, here's the sound system.
I would recommend that kind of thing because it's it's
real frustrating when you go and you buy a solution
for your home that you think will work, it doesn't
quite fit, or it doesn't quite hook up correctly, or
maybe there's so much glare from the window that you're
not not able to watch it very well. Also, there's
always the problem of the s you see in the
(39:00):
store have been specifically tuned so that they look really
good in the store, but when you get one home,
it hasn't been tuned yet, and it can be a
bit daunting to do that. Again, Geek Squad would do
this sort of stuff. They would not just hook everything up,
but they would set it so that the settings of
the television would be or whatever would be best a
(39:23):
best match with the space. And this ended up really
helping set Best Buy apart as well, because these other
companies didn't have that. And then uh Julie put in
he used his emotional intelligence again because he improved employee benefits. Yes, yes,
one of the things that they had lost in recent
years was a really hefty discount on Best Buy products.
(39:47):
He brought that back so now employees could actually buy
best Buy products for a significant discount um. He also
was looking at other ways to help. Largely he was
trying to avoid layoffs as best he could. Occasionally he
still had to do it. He said, it's always, you know,
something that you may have to consider, but it should
(40:09):
be very far down the list of considerations. You should
be able to, you know, try and exhaust other options first.
And uh, this ultimately did improve employee morale at least
if you look at employee turnover, because before he took
the role, employee turnover was like of Best Buys employees
(40:31):
we're leaving every year, which you know, a company having
to attract and higher fifty percent of its workforce every
single year, I mean just to maintain, not even to grow.
That's an incredible expense. He got that down to thirty percent,
which is still pretty high, but much lower than fifties. Better.
All of these changes, all these things are what really
(40:51):
has helped best Buy survived this this retail apocalypse, and
not just survive but thrive. Yes, this is where we're
seeing best Buy do really well. I mean, if you
look at any Google search of best Buy performance, you're
going to see lots of articles that go into an
analysis on this, and they all pretty much agree with
the things that I've stressed that Jolie had brought in
(41:12):
the the turning the Best Buy stores into show rooms,
acknowledging the problem of the show rooming experience and making
sure that the price matching and the app experience mitigates
that as much as possible. You know, having the geek
squad really sets it apart. And now we've seen best
By reporting revenues of forty two point one billion dollars
(41:35):
in in the fourth quarter of eighteen. So that's good.
I don't know they're operating costs, but that's pretty good. Well,
they cut their their debt in half, so that's nice too.
So it tells you that not only are they doing well,
but they're addressing the problems they have with their debt.
So yeah, this has been um a pretty bumpy ride
(41:57):
for Best Buy, but I would say that upon uh,
the the emergence of Jolly as CEO, things have really
turned around. In fact, I guess because Brian Donne ultimately
sort of caused this, you could argue you could call
it a done deal. Oh, Jonathan, all right, I'm going
to move on to a fun fact because that wasn't
(42:18):
one that was. It was a fun pun. So one
of the things that we didn't talk about in all
these initiatives and changes that Jolly put into place was
all of the electronics and recycling, appliance recycling that best
Buy does. Since two thousand nine, as of recording this,
best Buy has recycled two billion pounds of electronics and appliances,
(42:42):
and recently they've made a change so when the geek
squad comes out to your house, they can take away
the old equipment and chords and cables and things like
you don't want and bring them back to best Buy
for free recycling. Now, if you've got like a big
appliance or something, you still have to call them to
pick it up for a fee. But yeah, but if
it's something like the smaller stuff, that's gray. Because electronics
recycling is a real problem. I mean, there's a lot
(43:03):
of stuff that goes into electronics that is potentially environmentally
harmful also biologically harmful to people and animals and stuff.
So it's a real challenge, especially in an age where
you know, a lot of us have been conditioned to
want to replace our electronics on a fairly regular basis.
Um so yeah, that's that's admirable. I uh really enjoyed
(43:27):
looking into this, Like it's been a long time since
I've set foot in the Best Buy. There's one that's
not too far from my house, but I don't ever
go into it. I go fairly fairly often because my
husband likes to spend his reward points. Oh I just
I remember when there used to be like the big
section of music and the big section of like the
giant boxes of computer games. And obviously those industries have
(43:48):
changed dramatically too. Now we have far more digital downloads
for both games and music, so that definitely impacted Best
Buy as well, but the company has been able to
shift with the change is in the marketplace. So yeah,
it's done well. Yes, So thank you Emily and Ryan
for the suggestion. Thank you for suggesting a company that
(44:09):
did not spiral and implode to bankruptcy. Yeah, because we've
done a lot of those recently, so it's nice to
talk about the other side of it. Yeah, And if
you guys have if anybody else out there has topics
they want us to cover or companies they want us
to look into, you can email us at Feedback at
the Brink Podcast dot show yep, and you can visit
our website that's the Brink podcast dot show. You'll find
(44:32):
an archive of all of our past episodes, plus information
about your beloved hosts. That's us and we will talk
to you next time. I have been Jonathan Strickland and
I have been aerial casting. Business on the Brink is
a production of I Heart Radio and How Stuff Works.
For more podcasts for my heart Radio, visit the I
(44:53):
heart Radio app, Apple Podcasts, or wherever you listen to
your favorite shows. Two Fi
Welcome to Business on the Brink, a production from I
Heart Radio and How Stuff Works. If you avoided crazy
Eddie and navigated cities of circuits, you would inevitably find
yourself there. You might consult with the squad of geeks,
or lose yourself in aisles of electronic do dads and gizmos,
(00:24):
and Heaven help you if you happen to be wearing
a blue Polo shirt at the time. This is best
Buy in Business on the Brink. Hey everybody, I'm Jonathan
Strickland and I'm Ariel Casting, and today we're talking about
(00:46):
best Buy. This topic was requested by to Count them
to listeners Emily Welch and Ryan MacArthur, both employees the
Best Buy who wanted to hear how the company avoided
the pitfalls at all these other big tech and big
box stores. Hit. Yeah, the retail apocalypse that has closed
down many stores, like we talked about Borders being one
(01:07):
of them, and Radio Shack. And then there's also a
circuit city, which I'm sure we'll cover at some point,
and we'll talk about a little bit in this episode.
It does play into the history of best Buy. So
in the age of Amazon and online shopping. Best Buy
stories pretty interesting, and you could say that the company
owed its entire existence to a natural disaster. It's a twister.
(01:28):
It's a twister. It's like Wizard of All. Yeah. Here's
the crazy thing is that we're making a joke, but
that's actually true. The reason why best Buy exists, you
could argue, is largely because of a rogue tornado. How
many businesses can say that, I mean, usually they don't create.
Usually tornadoes don't create industry. They destroy industry. They might
(01:52):
create opportunities for construction, and that's but they rarely, they
rarely improve a business. Yes, okay, so uh, how did
best Buy get started? Jonathan? Well, if you look at
the name best Buy, that dates back to three but
the history of the company is older than that. It
actually goes back another twenty years almost, and that history
(02:16):
really starts in nineteen sixties six. There was a guy
named Richard M. Schultz, and he also had a mysterious
business partner. And no, no, I don't. I don't know
who the business partner was because every article I read, everyone,
every single one said Richard Schultz and his business partner. Yeah,
(02:40):
there was never a point where it actually identified who
that person was. Now, ultimately we could say that name
doesn't really play into the history of Best Buy that
much because Schultz would go on and buy out his
business partner after about a year, so it was pretty
early on when that business partner was extricated for the business.
(03:00):
So I guess it doesn't really matter, but it bugs
me as a researcher. I'm sure when you've researched some
of these topics, you've encountered similar things where you Yeah,
I go down a rabbit hole and I spend hours
trying to find and then corroborate information, Like, uh, we
recorded an episode on Blastic and I tried to find
the stork's name, and I could find one article and
(03:21):
it was uncorroborated, but I spent so much time trying
to confirm the information. Yeah, that's the level of detail
and dedication we bring to you to figure out the
name of a cartoon mascot stork of a pickle company. Anyway,
let's get back to Best Buy. So, according to the story,
Schultz would actually mortgage his own home in order to
(03:43):
get enough money to really get into this business and
to open up a store, which was at the time
a stereo equipment store for car stereos and home stereos,
and he called it Sound of Music. Oh, Jonathan, I
know who the mysterious part there was. Are you gonna
say it was Julie Andrews. I was going to say
a nun named Maria, but save different. Okay, no, if
(04:05):
neither of those are correct. Uh. The first store was
established in St. Paul, Minnesota, and within the first year
of business he he led the company to go ahead
and make its first acquisition. I guess you go bigger,
you go home. And in this case it was actually
a couple of companies called Kincraft Hi Fi Company and
the Burgo Company. These were other audio equipment companies, guessing
(04:27):
in a similar area. You know, this was all in Minnesota.
It was all in the the stereo business arena. Like
that was all that he was concentrated on for for
about twenty years. So he was just cleaning up street
corners at that point. He was just getting the music
out to the people by selling them the equipment. So uh,
(04:50):
the Sound of Music store hit hit a good amount
of revenue in its first year. And I say a
good amount of revenue. The figure I have in our
notes is a hundred sixty thousand dollars. But again, I
just want to be clear here. There are a lot
of conflicting reports in the sources, and so while many
of the sources referred to a hundred sixty thousand dollars,
(05:12):
not all of them did. Some of them had it hires,
some lower, and it was a private company so it
didn't have to report. Yeah, so let's just say it
was doing okay. Now, that was just in revenue. That
wasn't in profit. You know, obviously your profit is dependent
upon your product, and stereo comments a decent profit margin
(05:33):
if you don't mark it up too high, and if
your retail space isn't that expensive. Yeah, so I don't
know how profitable the company was, but it was doing
good business. Uh. And he was pretty aggressive in those
early days as a businessman. By nine sixty nine he
had opened two other locations, also in Minnesota, so now
there's three stores. And around that same time he bought
(05:56):
out his mysterious partner person whose name we never learned,
and became the sole owner of Sound of Music. Again,
the store, not the musical. The hills were not alive
with radio equipment. No, it's just the stores at this
point receivers just trampling all over the yes and and
having adorable songs as they went to bed. So once again,
(06:21):
the details of the history are pretty sketchy. No one
was really chronicling the sound of music chain of stores,
which means that things probably were not going poorly. No, no,
they weren't. They weren't remarkable, and they weren't terrible. Uh
sometime around nineteen sixty, nineteen seventy or nineteen seventy one
this all happened. That's because again reporting is shaky. Yeah,
(06:46):
and by the end of nineteen seventies, by the end
of that they had nine stores from three, right. Yeah.
They continue to grow throughout the seventies, again still focusing
on stereo equipment. So he keeps on pushing for the
company to grow. And uh, yeah, he was doing well.
He had nine stores open. And and this is when
we get up to this pivotal moment in with the tornado.
(07:10):
Do you want me to make the noise again? It's okay,
I think we can just play it back because we
haven't recorded. Tari can actually insert that wherever she likes
into this episode. Every five minutes, you're going to get
a poor tornado sound could be. She seems pretty excited
about this possibility. We don't know when it's gonna happen, alright,
So we get this regular old music stereo store. They
(07:35):
would do commercials and stuff. Schultz would appear on them occasionally.
Uh you know, they had their little Sound of Music logo.
And the tornado in question is a truly historic event
in this part of Minnesota. It's called the har Mar tornado,
not the Hardy hard tornado, which is what I first
read when I looked at the next She thought it
was like a hilarious tornado from the cat's skills or
(07:57):
something cartoon tornado. No, No, that it's called the hard
Mar tornado because it really devastated the area around the
har Mar mall um At. Some other people called the
Lake Harriet tornado or the Adina tornado, and a tornado
by any other name would reak just as much havoc
as Shakespeare once wrote, or would have if you knew
(08:19):
about tornadoes. So the tornado touched down. Now this I
have a lot of information on, because when tornadoes happened,
people really pay attention to. The Weather Service does keep
decent notes, yes, so on June four, at three forty pm,
the tornado touched down in Adena, Minnesota, and then it
began a fifteen mile journey to the northwest. And in
(08:42):
case you aren't familiar with the way tornadoes travel, we
live in Georgia, where tornadoes are not uncommon. Tornadoes tend
to hop right, they'll they'll touch down, they'll travel along
the ground for a bit. They tend to hop up.
They might travel another couple of miles and they might
touch down again. So you can have In fact, we've
(09:03):
seen this. We've seen neighborhoods that are completely destroyed, with
the exception of maybe a house where the tornado just
hopped over. I was actually in a tornado quite a
few summers back, I want to say, like six or
seven summers back, and all around me there was destruction,
but my little community was fine. Yeah. Yeah, that's happened
(09:24):
a few times in fact, where I was growing up.
The same thing. Well, Sound of Music's main store, the
largest store, not their first one, but their largest and
most popular store, was not so lucky. It was not
spared this tornado. So it was a store that was
near this harmar Mall area and by the way, trying
(09:45):
to say, harmar mall is very tricky for me. You
can understand why I thought it was hardy hard It's
just it's easier, fair enough. And the roof was completely
torn off of the store. It raised the roof, it
raised it and then threw it away. Yeah, and this
is a stereo store, like this is still what they're
selling is stereos. Around this time, they were also looking
(10:06):
at getting into other electronics, but still really largely stereo equipment.
And a lot of the stuff was destroyed, but some
was salvageable. In fact, all the stuff that was in
the storeroom was water damaged but not completely destroyed. So
Schultz got this idea. He said, why don't we have
(10:28):
a fire sale, Except it's not really a fire sale,
it's a water damage sale. Tornado sale is what they
would think of it. And they set up a tent
essentially across the street in a parking lot from the store,
because of course the store was not structurally ready for
people to walk through it, so they set that up,
(10:48):
and a lot of histories will mention that this sale,
Schultz was talking about offering up the best buys of
electronics in the area. So that's how he got the name.
That's the way a lot of the story tell it,
But to me it sounds like, uh, it took a
little longer for that to really take effect, Like maybe
thinking back on these best buys, because they would refer
(11:09):
to that again, they would make this an annual sale.
They would have a tornado sale on the on the
anniversary of the first one in order to try and
uh recapture the performance of that because the sale did
really well. Yeah, in four days they made as much
in sales revenue as they would in a full month
(11:31):
at that typical store. Yeah, so that's that was enough
for Shultz to say, like, well, we should definitely do
this on the reg maybe not with the tornado but
with the sale, but with the sales. I mean, if
you can bring in revenue send selling your goods at
a lower cost, why not. And there's actually a commercial
that you can find on YouTube from two I believe
(11:53):
it is where they refer to getting the best buys.
But this store is still Sound of Music at that
point it was or they had changed the name. Uh.
And so again, this is right around the time they're
starting to get into other electronics, particularly the brand new
technology known as the VCR, which predates the Blue Blu
(12:14):
ray and DVD player for those who do not know, yeah,
and is no longer in production. As of a few
years ago, the very last factory making VCRs stopped doing it,
which is unfortunate because my VCR broke a few years back.
I know, I know some guys over at uh At,
a VCR repair company in Wisconsin, who could help you
(12:35):
open nice Well back to your story. Yes, so comes
around and at this point, partly because they're no longer
just carrying stereo equipment, but also because they were looking
at how the sales event was so successful, Schultz decides
to rename his company. This is when he calls it
(12:57):
best buy. Um. I mean it makes sense. You want
to capitalize on the thing that is bringing you success. Yeah.
And also you no longer want to send people the
message that the only thing you're selling is music equipment yea,
or musicals or children or nuns. You don't want people
to think that those are all the things you're selling.
But people didn't because the store brought in around ten
(13:18):
million dollars in sales revenue. Yep, yep. So this was
where he had changed the names to all the remaining stores.
At that point there were only seven left, so he
had built nine, but h Or had established nine and
now he was down to seven. He made ten million
in that time, and that same year he would open
up a new type of store in a place called Burnsville, Minnesota.
(13:41):
And this was the superstore model. So you know, it
would jump into a phone booth and change into a
cape and you know, I was holding back a Burnsville pun,
but yours was better and worse at the same time.
But Chells didn't invent the superstore. No, no, this was
an idea that had been around since the nineteen sixties.
(14:04):
In fact, the questionable but probable original superstore was called
thrifty Acres and it was in Kalamazoo, Michigan, which is
just fun to say it. And also Circuit City, the
big competitor to best Buy, had established its own superstores
in the nineteen seventies, so that the best Buy superstore
(14:26):
idea was not brand new. But they had a different
approach than Circuit City. Yes, because that Circuit City, Uh
for you young uns who never win to a circuit
city in that era, they did things on commission, so
they had salespeople who would greet customers as soon as
they came in the door, and they would try and
find out what the customers were looking for. They would
(14:46):
answer questions, they would run through demonstrations. They would typically
steer people to the most expensive version of whatever it
was they were looking for that they felt like, Yeah,
just like when you asked what the best thing on
a menu is? Yeah, yeah, I let me ask you,
what do you like the nachos or the filet mignon. Well,
I like the filet mignon and it goes really well
(15:07):
with this very expensive line. That's very expensive radio. Yeah.
And they also could I interest you in the radio set? Yeah,
So circumstany did this commission thing. Also, their stock was
almost always just in a stock room. They had demonstration
models on the floor. But you couldn't just pick up something,
put in a in a cart and then push it
to a cashier. Instead, you were kind of joined at
(15:30):
the hip with the salesperson, who, once they had established
what you wanted, would arrange for a stock person to
go and get it, and then they would ring you
up at one of the mini cash registers throughout the storeroom.
But Best best Buy let you grab your own stock
and bring it up to a cash register, right, yeah, exactly.
So it's it's very much in the model that if
(15:51):
you've ever been the Best Buy, it was like that
from the beginning, which I mean to me, I personally
would rather have that because I'm not going to go
to a store if i feel like I have to
buy something. But I'm going to go to a store
if hey, I kind of need something and I want
to look at options, I'm more likely to buy it
than if I'm feeling pressured. Not to say that Circuit
City employees were pressuring you, they were, but they were
(16:14):
because it's it's sales. It's what sales does, right, Like
if you've ever bought anything that had someone working on commission,
because I mean, the incentive there obviously is to make
the sale, because that's how you make your money, right,
You're getting money from every sale you make. You don't
get money from sales you don't make, so you have
the incentive to try and get that sale to close.
(16:35):
Best Buy, by the way, at the time, was also
working on commission sales. They just didn't use the distributed
cash register model that Circuit City did, which I mean
means you still might have pushy salesman. But you can
also be like, no, I'm going to help myself. You
also have here that best Buy had lower priced items
in low margin products like near the door. They still
(16:58):
do today. Yeah, the whole it was let's get people inside.
That's the important thing. Get them inside, and even if
they just buy these low profit margin items, you still
are making the same And because they were a big
box store, it was successful for them, unlike Radio Shack,
who tried to put in more random objects into their
store and it didn't quite fly. Yeah. It never felt
like the Radio Shack approach had a coherent strategy to it,
(17:21):
and best Buy had a much more coherent approach. And
uh yeah. So while other companies were kind of struggling
with this transition, best Buy at the time was doing
pretty well. It had differentiated itself enough from Circuit City
so that the experience of going into a best Buy
was much more casual. You could see all the stock there,
you could you know, you could ask questions. But there
(17:43):
weren't nearly as many sales people on the floor of
the best Buy as there were at a typical Circuit City.
So that was what was setting things apart. But this
was just the very beginning of best Buy, and we
haven't gotten into how the company would grow exponentially over
the next few years or what would happen when the
retail apocalypse sets in. We will talk about that, but
(18:06):
first we're going to take this quick break, Okay, So
so Ariel, you know what we could do. We could
go year by year of everything the best Buy ever did.
That sounds tedious, Jonathan, it does, and that's why I
didn't put it in the notes. So really, let's just
give the super short version of what was going on
(18:26):
in best Buy joined the New York Stock Exchange. It
had previously traded as Sound of Music on the NASDAC.
So now it's moving up in the world of business.
In nine they stopped doing commission sales, right. Yeah, this
is where they got rid of commissions entirely. Uh. This
is also where they would make sure the entire stock
(18:46):
of the store was on the showroom floor, so they
they very rarely had very much in a stock room
in the back. It was essentially convert the entire floor
space into the showroom. Yes, this was, by the way,
called their concept too. Yeah, this was where they the
original superstore was Concept one. This was concept too that
rolled out, and again they were like they were looking
(19:08):
at how to maximize the space for the customer and
to they eliminated even more salespersons, like yeah, because again
it it put things on the customers, uh kind of scheduled.
If they had questions, they could ask salespeople about things,
but they weren't feeling pressured into buying stuff, which I'm
(19:31):
sure made some companies unhappy. Absolutely it did, because it
meant that their products weren't being pushed by salespeople super hard.
So if your whirlpool or your Maytag or you're one
of these big companies like Sony, you want the salesperson
to steer people towards your products so that they are
more likely to buy them, because obviously that's all you
(19:52):
make your money. And without the commission sales people, that
was the fear was customers wouldn't go to these big
ticket items as frequently, and so some of these companies said, well,
we're just going to take our refrigerators and washers and
dryers and we're gonna go home fully on them. Yeah,
it didn't last long because the concept two stores ended
(20:13):
up being immensely popular and it turns out that if
everyone's going there, that's where you got to put your stuff.
So the companies came I won't say crawling back, but
they did come back. We also got the yellow tag
Wogo around this time. Yep. That's when Best Buy would
adopt that, and the company hit a billion dollars in
sales revenues in and by it was only behind Circuit
(20:39):
City in the electronic retail market. And remember a Circuit
City had been doing all electronics for longer and had
been more entrenched in that particular market. So this is
pretty good. Yeah, Now they weren't content just to stick
with that and and write it out as long as possible,
because we got the Concept three store, yes, which is
(20:59):
Concept two but more bigger. As I wrote, Yeah, this
was where they introduced demonstration areas. If you ever went
to a Best Buy where they had like the theater
room where you could sit down and listen to your
ears get assaulted by whatever usually was the matrix, I
think that was almost always on h Yeah, that was
that was those concepts, and then beyond that you would
(21:23):
get Concept four stores in they were slightly smaller than
Concept three stores, and they also put cash registers throughout
the stores, kind of like Circuit City did to distribute
the points of sale, but you could still bring your
items to that cash register. Yes, yes, so you could
have a cash register dedicated for a particular section of
the best buy. So for example, if you were shopping music,
(21:44):
or you were shopping you know, camera accessories. I think
you still sort of can if like if you go
and you buy a phone. Yeah, it all depends on
the best Buy and it depends on which blayout it follows,
but yes, you still can do that. And and during
this time they were also opening up new locations in
various markets, including international, uh partially through I read one
article it says that partnership with Microsoft helped them expand internationally.
(22:07):
Some Yeah, that was a big deal, was their their
partnership with Microsoft. That was also seen as a big
deal just in the industry in general, because here's Microsoft.
It's just an enormous company making a deal with a retailer.
I mean that was that was a big deal. That
was a big Yeah. And then they also bought Magnolia
Hi Fi. So now you could sit and have your
ears assaulted by the Matrix, but you couldn't see what
was assaulting your ears because it all looked like rocks
(22:30):
or tables. Okay, we're going to ignore that. Best Buy then,
in two thousand and one had one of its what
people would in retrospect would call missteps. They bought a
company called music Land Stores Corporation. And this was a
company that had several different retail stores under its ownership
that would operate typically in malls. So there are a
(22:52):
lot of those music stores that were in malls, things
like Sam Goodie Music and electronics stores. A lot of
those belonged to this particular company. And the thought was
best Buy was singing, well, we can we do this
really well in retail spaces, so we can do it
really well in malls too. And the deal cost foive
million dollars, plus best Buy agreed to assume music Lands debt,
(23:15):
which was another two hundred seventy one million dollars and
more than half a billion when you add in the
the price of the acquisition plus the debt. UH By
two thousand two, the division was losing tens of millions
of dollars. Again, the numbers kind of very depending upon
the source, but it's always in the tens of millions.
(23:36):
Like sixty seventy million dollars. In two thousand three, best
Buy would divest itself. It would quote unquote sell music
Land to Sun Capital Partners. But selling is being very
generous because they gave it away. Well, I mean, cut
your losses while you can. I guess Sun Capitol got
the deal cash free. The only thing that Sun Capitol
(23:58):
had to agree upon, and this would ultimately collapse that company,
but that's a different story, was they had to agree
to assume the debt associated with that company, So Best
Buy was out the money they had spent to buy it,
but at least they no longer had the debt from
music Land on their ledger as well. Well. Around this time,
Richard Shells also retired the CEO. Right yep, he was
(24:22):
worth about two billion dollars at that point. Good time
to retire, Yeah, not not bad. Brad Anderson, who had
joined Sound of Music back in those days, would become
the new CEO. He had worked his way up from
like salesperson all the way up to well now CEO
of the company. And you would see this, by the way,
(24:44):
in best Buy you would see a lot of these
leadership positions were from within the company. Which typically we
think of as a good thing. In the case the
Best Buy, as we will ultimately see spoiler alert, it
wasn't always a good thing. I mean, you want to
you want to be loyal to your to your employees,
but at the same time, you may not have the
best candidate within your employees. And sometimes if there is
(25:06):
a problem within the company that you grew up with,
then you won't see it. Yeah, you don't see it
because it was there the whole time and you were
You can't see the forest for the trees, is what
we would say. But Anderson did make a really good
move because he acquired geek Squad. Yes, and this would
end up being a very important part of Best Buys
(25:26):
success ultimately. And geek Squad at the time was an
independent company that was providing tech support to customers, So
people would essentially pay geek Squad to fix their electronics
what weren't working no more. Yes, but you know, not
super surprising because we see this a lot. When a
CEO retires, a first CEO, the company started seeing lower
(25:48):
sales and I don't know if that's because of his
retirement or just the economy. I think it was a
combination really, I think it's mostly the economy. Honestly, I
think that the sales were starting to lag a bit.
It was just one of those cycles we see. Plus
we were getting into the recession. And around this time
in two thousand and eight, Best Buy acquired Napster. So
you do you know what Napster is A real I
(26:09):
do know what Napster is. It's I know it for
music piracy. Yes, yes, So Napster that best Buy acquired
wasn't exactly the same as that company. So Napster, the
piracy one that we associate with was a file sharing service,
but that had been shut down in two thousand and one.
The government shut it down. Yes, they were like, this
(26:30):
is illegal, guys, you cannot do this no more. Uh,
there's no safe harbor for you. You are pretty much
enabling music piracy and and software piracy. So a company
called Roxyo ended up getting the intellectual property assets, so
essentially the rights to use the name and logo of Napster,
but not like anything else associated with the company. Was
(26:53):
essentially the the appearance of Napster, but not the souls.
That's interesting, I guess there trying to appeal to the
people who like Napster for the illegal stuff. Well, they
were trying to appeal to young hip folks who were
associating Napster with digital music, so they took an already
existing software called press Play, they slapped Napster's name and
(27:15):
logo on it, and best Buy purchased that in two
thousand eight for a hundred twenty one million dollars. So
while you could say best Buy bought Napster, there's a
big asterisk there because it's not it's not the Napster
that everyone thinks about from two thousand one. Yeah, in
two thousand nine we got a new CEO, so yeah,
(27:35):
we sure did. Anderson was out and Brian Dunn was in.
And Brian Dunn had also been with best Buy since Nive,
so he had been there since the after they changed
the best Buy, but he had been there for for
two decades and it worked his way up, and now
I was leaving the company. Uh. In two thousand eleven,
Done oversaw a deal that led to Napster leaving best
(27:57):
Buy and it and also would end up merging with
a different company called Rhapsody. That's a story in its
own and best Buy we have a small steak in
that company as part of this arrangement, and really it
was an attempt to get out of a flailing business
because there were some companies like Pandora and Spotify that
(28:18):
were on the rise, and it just looked like Napster
was not gonna compete against them. And Napster wasn't the
only thing they're getting rid of. They also closed some
of their overseas stores at that time. Yeah, they were
trying to consolidate some of their their assets and get
rid of some things that were not being terribly profitable.
Then we get to two thousand eleven, and this is
where things get ugly. Jeez, you didn't allude to that
(28:41):
at all when I said Brian Dunn's name when you're like, oh, geez, yeah,
this was so. Brian Dunn's name would often get listed
on like the worst CEOs of two thousand and twelve,
that kind of stuff, And why is that, Jonathan? So
the board of directors had an inquiry into Brian Dunn's
behavior because there were reports that he was having an
(29:04):
inappropriate relationship with a fellow best By employee. So he's
CEO this woman who was twenty nine years old at
the time, he was fifty one, not that that necessarily
should match. The problem. The problem was that he was CEO,
she was also working for him, and that this was
a relationship that he should have just closed to HR.
(29:28):
Plus He's also was also married, so there was some
other Now. Granted, he has always maintained that it was
never a romantic relationship, but there are a lot of
people who thought that perhaps that was not entirely true
because they were frequently seen together. Yes, and then he
would eventually resign in the spring of two thousand twelve
under intense pressure from the Board of directors, and not
(29:51):
very long after that, Richard Schultz, who had no longer
been CEO but had maintained his role as Chairman of
the board, was asked to design because it became clear
he knew about Brian Dunn and this employee but had
not disclosed it to the Board of Directors or the auditors.
But despite that, and despite his retirement, he tried to
(30:13):
buy Best Buy back. Yes, he cut the he got
the honorary title of Chairman emeritus, and then he said, hey,
you know what I'm gonna do. I'm gonna turn Best
By private again. I'm going to lead a buy out
of Best Buy. But it turned out he was not
able to raise the financing he needed in order to
achieve that, so that ultimately went nowhere. Yeah, and by
(30:34):
two twelve, best Buy was really kind of spiraling. Yeah,
it was not in a good space space. So you
had this controversy, you had the departure of the CEO,
you had the departure of the chairman of the board.
The stock price had fallen to its lowest point in years.
The sales of the stores, like the sales at the
(30:57):
actual individual retail stores, were on the decline. They were
either not growing at all or they were actively falling.
Other retailers were starting to close up shop. This is
what we were referring to with the retail apocalypse is
where companies like Borders and Radio Shack we're really having trouble.
And it looked like Best Buy was going to join them,
but it didn't. But we'll tell you guys how it
(31:21):
didn't after this quick break. Okay, so here's the interesting
part of this story. Now. We have said that usually
we like companies that promote from within. It tends to
be good for morale. It gives incentive for people who
(31:41):
are working within the company to strive for leadership positions,
but it can also blind you from what's going on
and failing in a company. So in this case, the
board of directors ended up reaching out to an outsider
to come in and lead Best Buy, and that would
be Hubert Jolie. And he came from like the uh,
the sort of the hospitality industry and things like that. Like,
(32:04):
he came from a totally different world in retail, but
it seems like a good compliment to the retail world
because so much of your product is hospitality to your customers. Yes,
and he thought that the first thing he needed to do,
and I think this is incredibly insightful, was to talk
to actual Best Buy employees and find out what's working,
(32:27):
what's not working, what are you concerned about, what are
you seeing Because you're the ones operating these stores. You
see what's what's happening day by day, and I want
to make sure that we figure out how to best
move forward. And that ended up by itself helping a
lot with employee morale because it showed that he was
taking a direct interest in the frontline employees. He he
(32:49):
was using the ever important and business emotional intelligence. Yes,
good old EI, good old Ei. So he initiated some
really big behind the scenes changes for Best I. It
was called renew Blue. It was actual initiative that's referred
to it. Yeah. This is also why I said, Heaven
help you if you wear a blue Polo shirt walking
into Best Bike, because everyone will think you work there.
(33:11):
It's like wearing a red shirted target. Yeah. Yeah. So
he did a total redesign of the shipping infrastructure to
make it easier for stores to to not just know
what their individual stock was inside the store, like you know,
how much of each item did they have, they also
(33:32):
could quickly figure out where other products were and then
order them more efficiently. So in other words, he was
really streamline the supply chain side. And that can get
really dull and boring when you're talking about it, like
from numbers perspectives, but it is so incredibly important for
retail establishment particularly but really all companies two have a
(33:55):
really strong handle on your supply chain, so you know
where everything is and so you don't lose money from
over stalking even or or having you know, having a
demand in one store that cannot be met because they
can't get hold of the product. Meanwhile, another store has
an excess on it and nobody wants it. Yes. In
addition to this, he also really improved the customer experience
(34:18):
as well. So he did that by giving them the
option to look at an item in the store and
play with it in the store and then decide whether
to buy in store or online. Yeah. And this was
in response to something that was already happening and I'm
sure all of you out there have done it. It's
called show rooming in the industry. This is the habit
of customers going into a physical location to get that
(34:41):
hands on experience with various products, then more often than not,
pulling up Amazon on their smartphone and seeing how much
it costs on Amazon versus wherever they are. Yes. So,
instead of fighting it, he embraced it. Yes, and so
as part of that, in order to embrace that, he
so instituted a price matching philosophy, saying that if you
(35:03):
could find a product for a lower price at say Amazon,
best Buy would match that price because rather than you know,
deal with the loss of a sale, He's like, well,
it's better for us to have a lower profit margin
than to not get the sale at all, which is
kind of how best buy started in the beginning by
having that Yeah, it's just that this case, the tornado's
(35:24):
name was Amazon. Yes, it was a metaphorical tornado. And
this was a good move because it caused best Buy's
sales to grow incredibly. It grew so fast it reached
uh to the point where the online sales for best
Buy would make up six of their total revenue, which
was already incredible. So this was also a really important strategy.
(35:48):
It wasn't just that he was making the store experience better.
He was making the online experience better too, and that
was where they were really able to compete. So you
could use you could marry the two right, You could
go to us by look at the stuff, make your decision,
you order it online, or maybe you order it online,
you go to the store, you pick it up, that
kind of thing, so it's ready at the moment that
(36:10):
you purchase it. This was the other way to fight Amazon.
It was saying, yeah, you could order it from Amazon.
You're gonna get the same price as what we do.
You might also have to pay for shipping. Plus you're
gonna have to wait three or four days. And then
if you get something that somehow got destroyed in the
shipping process, you would have to return it and wait
for a new one. You could go look and see
(36:31):
what you were picking up at the best Buy store.
Yeah yeah, And if it was a delivery thing, it
was a delivery thing from a store that was down
the street, as opposed to a warehouse that might be
in another part of the state. So it was incredibly effective.
But on top of this, Julie didn't just fight Amazon,
he actually played nice with them a little bit too. Yeah,
this was a very This could have gone either way
(36:52):
to He started using parts of best Buy stores to
act as sort of many stores for companies that would
typically be competitors or maybe direct vendors to best Buy.
So you could find a little section that was essentially
sponsored by Amazon or sponsored by another company, and best
(37:13):
Buy was earning revenue this way because they were essentially
churching rent. So in this case, best Buy became a landlord.
And these other companies like Google and Amazon, they took
advantage of it because they lacked that capability that best
By had, which was they didn't have a physical space
where you could go in and take a look at
these products. Even companies like Apple, which does have its
(37:35):
own stores, it was using places like best Buy because
they don't have stores everywhere, but best Buy is far
more widespread than Apple stores are. Yeah. Now, another champ
pole of these these changes he was putting in was
customer service, and one of the ways he improved that
was by expanding geek squads milieu. I suppose, yeah, yeah,
(37:57):
geek Squad became not just tech support but also sort
of ambassadors and evangelists and ultimately salespeople and in home consultants. Yep, yep.
So you know the philosophy under geek squad, it's it's
all very let's don't put any pressure on the customer,
like your your goal is always trying to sell more,
but not in a way that's going to make the
(38:18):
customer feel like the experience is an unpleasant one. It's
rather you really do need to use your expertise. So
let's say you go into a person's home and they said, yeah,
I want to make a home entertainment center, and this
is the room that I have, and you're you're supposed
to really use your expertise to say, well, based upon
the size of this room, how much light is coming in,
(38:39):
here's the television I would recommend, here's the sound system.
I would recommend that kind of thing because it's it's
real frustrating when you go and you buy a solution
for your home that you think will work, it doesn't
quite fit, or it doesn't quite hook up correctly, or
maybe there's so much glare from the window that you're
not not able to watch it very well. Also, there's
always the problem of the s you see in the
(39:00):
store have been specifically tuned so that they look really
good in the store, but when you get one home,
it hasn't been tuned yet, and it can be a
bit daunting to do that. Again, Geek Squad would do
this sort of stuff. They would not just hook everything up,
but they would set it so that the settings of
the television would be or whatever would be best a
(39:23):
best match with the space. And this ended up really
helping set Best Buy apart as well, because these other
companies didn't have that. And then uh Julie put in
he used his emotional intelligence again because he improved employee benefits. Yes, yes,
one of the things that they had lost in recent
years was a really hefty discount on Best Buy products.
(39:47):
He brought that back so now employees could actually buy
best Buy products for a significant discount um. He also
was looking at other ways to help. Largely he was
trying to avoid layoffs as best he could. Occasionally he
still had to do it. He said, it's always, you know,
something that you may have to consider, but it should
(40:09):
be very far down the list of considerations. You should
be able to, you know, try and exhaust other options first.
And uh, this ultimately did improve employee morale at least
if you look at employee turnover, because before he took
the role, employee turnover was like of Best Buys employees
(40:31):
we're leaving every year, which you know, a company having
to attract and higher fifty percent of its workforce every
single year, I mean just to maintain, not even to grow.
That's an incredible expense. He got that down to thirty percent,
which is still pretty high, but much lower than fifties. Better.
All of these changes, all these things are what really
(40:51):
has helped best Buy survived this this retail apocalypse, and
not just survive but thrive. Yes, this is where we're
seeing best Buy do really well. I mean, if you
look at any Google search of best Buy performance, you're
going to see lots of articles that go into an
analysis on this, and they all pretty much agree with
the things that I've stressed that Jolie had brought in
(41:12):
the the turning the Best Buy stores into show rooms,
acknowledging the problem of the show rooming experience and making
sure that the price matching and the app experience mitigates
that as much as possible. You know, having the geek
squad really sets it apart. And now we've seen best
By reporting revenues of forty two point one billion dollars
(41:35):
in in the fourth quarter of eighteen. So that's good.
I don't know they're operating costs, but that's pretty good. Well,
they cut their their debt in half, so that's nice too.
So it tells you that not only are they doing well,
but they're addressing the problems they have with their debt.
So yeah, this has been um a pretty bumpy ride
(41:57):
for Best Buy, but I would say that upon uh,
the the emergence of Jolly as CEO, things have really
turned around. In fact, I guess because Brian Donne ultimately
sort of caused this, you could argue you could call
it a done deal. Oh, Jonathan, all right, I'm going
to move on to a fun fact because that wasn't
(42:18):
one that was. It was a fun pun. So one
of the things that we didn't talk about in all
these initiatives and changes that Jolly put into place was
all of the electronics and recycling, appliance recycling that best
Buy does. Since two thousand nine, as of recording this,
best Buy has recycled two billion pounds of electronics and appliances,
(42:42):
and recently they've made a change so when the geek
squad comes out to your house, they can take away
the old equipment and chords and cables and things like
you don't want and bring them back to best Buy
for free recycling. Now, if you've got like a big
appliance or something, you still have to call them to
pick it up for a fee. But yeah, but if
it's something like the smaller stuff, that's gray. Because electronics
recycling is a real problem. I mean, there's a lot
(43:03):
of stuff that goes into electronics that is potentially environmentally
harmful also biologically harmful to people and animals and stuff.
So it's a real challenge, especially in an age where
you know, a lot of us have been conditioned to
want to replace our electronics on a fairly regular basis.
Um so yeah, that's that's admirable. I uh really enjoyed
(43:27):
looking into this, Like it's been a long time since
I've set foot in the Best Buy. There's one that's
not too far from my house, but I don't ever
go into it. I go fairly fairly often because my
husband likes to spend his reward points. Oh I just
I remember when there used to be like the big
section of music and the big section of like the
giant boxes of computer games. And obviously those industries have
(43:48):
changed dramatically too. Now we have far more digital downloads
for both games and music, so that definitely impacted Best
Buy as well, but the company has been able to
shift with the change is in the marketplace. So yeah,
it's done well. Yes, So thank you Emily and Ryan
for the suggestion. Thank you for suggesting a company that
(44:09):
did not spiral and implode to bankruptcy. Yeah, because we've
done a lot of those recently, so it's nice to
talk about the other side of it. Yeah, And if
you guys have if anybody else out there has topics
they want us to cover or companies they want us
to look into, you can email us at Feedback at
the Brink Podcast dot show yep, and you can visit
our website that's the Brink podcast dot show. You'll find
(44:32):
an archive of all of our past episodes, plus information
about your beloved hosts. That's us and we will talk
to you next time. I have been Jonathan Strickland and
I have been aerial casting. Business on the Brink is
a production of I Heart Radio and How Stuff Works.
For more podcasts for my heart Radio, visit the I
(44:53):
heart Radio app, Apple Podcasts, or wherever you listen to
your favorite shows. Two Fi
Business on the Brink News
Hosts And Creators
Jonathan Strickland
Ariel Kristen Kasten
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On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!