The lost empire: Best Buy looks to make a comeback

Thomas Lee, David Shaffer and Paul McEnroe / Star Tribune (Minneapolis) /

Published Nov 24, 2012 at 04:00AM

Allen Lenzmeier stared hard at the numbers, trying to absorb the long line of zeros.

You want $475 million in sales? In just five years? This company barely had five months left to survive, he thought.

The 39-year-old accountant had arrived in St. Paul, Minn., in 1982 to interview for a job at an electronics retailer that was literally in ruins. A tornado had destroyed the Sound of Music’s flagship store in Roseville, Minn., forcing employees to hawk turntables and speakers out of a large tent in the middle of the State Fairgrounds.

But the company’s founder, Richard Schulze, was far from calling it quits, Lenzmeier recalled. Schulze pulled out a piece of paper and described how Sound of Music, which he would later rename Best Buy, would soon dominate the world of consumer electronics.

“I thought, ‘That guy is goofy,’” Lenzmeier said.

And yet, there was something about the brash Air Force veteran — the confidence, the fierce will — that won over Lenzmeier. “You get a one-in-a-million chance to participate in something like that,” said Lenzmeier, who would rise to president and chief operating officer.

Together, Schulze, Lenzmeier and former CEO Brad Anderson would build a global retail empire that generates $50 billion in sales and has more than 100,000 employees.

But the empire is showing cracks, as Internet-focused businesses have broken through the monopoly Best Buy long enjoyed over gadget-hungry consumers.

The company’s stock price has plummeted, and its vaunted sales machine has lost steam, forcing it to shut down stores and lay off employees.

Schulze resigned from Best Buy in a leadership shakeup back in June, but like that day in 1982, he is hardly ready to give up. Within a month, Schulze is expected to offer as much as $8 billion to buy the company and restore Anderson and Lenzmeier to their old roles.

His message is simple: His team created Best Buy — and only they can save it.

Investors and analysts, however, question whether the old guard has the skill and vision to lead the company in a new digital era. Interviews with former executives, including Lenzmeier and Anderson, reveal how the Schulze team built a Fortune 500 company on guile, loyalty and the relentless pursuit of sales.

But Schulze and Anderson also created a corporate bureaucracy that suppressed innovation and failed to engage female shoppers, former executives say. Most importantly, the Schulze team could never agree on how to react as the Internet was changing the way consumers purchased their electronics, missing golden opportunities to transform itself before it had no choice.

“Schulze couldn’t see the digital age coming,” said Wade Fenn, Best Buy’s former president of new business development and strategic alliances, who worked at the company from 1980 to 2002.

Yet throughout its nearly 50-year history, Best Buy has demonstrated remarkable resilience. The company always seemed to find something new to sell, whether the latest piece of technology (smartphones, tablets) or the expertise on how to use it (Geek Squad). That sales-minded culture can drive a companywide renaissance, former executives and competitors say.

“Best Buy has always been willing to make significant changes,” said Alan Wurtzel, a former chairman and CEO of Circuit City.

Blue Shirts, Best Buy store employees long known for their royal blue tops, gritty work ethic and aggressive sales acumen, have dominated the company’s leadership. Many Best Buy executives, including former CEOs Anderson and Brian Dunn and former chief administrative officer Tim Sheehan, cut their teeth hawking VCRs, stereos and extended warranties.

The company thrived on what Anderson called a “cowboy culture,” where high energy and improvisation offset the company’s lack of experience and a clear system of control.

“It was anything goes if it works,” Anderson said. “We believed in people, and there were numbers that they were supposed to hit, and they had enormous freedom to do it.”

For example, three years after the tornado sale, Best Buy went public, hoping to raise money to fund its expansion and new superstore “big box” format. But the company ran into stiff competition, especially Highland, a Milwaukee-based electronics retailer, that was undercutting Best Buy’s prices.

“We were running into bigger, more powerful people, and we actually had to outmaneuver them in order to survive,” said Anderson, who spoke to the Star Tribune not long before he joined Schulze in his effort to reclaim the company.

But industry observers at the time speculated Best Buy’s price wars with competitors like Highland had drained the company of cash. Schulze ultimately tried to sell Best Buy in 1988 to Circuit City for $30 million in stock and cash, sources say. The company rejected the overture because it would have allowed Schulze to become the largest investor in Circuit City, said Wurtzel, who was chairman at the time.

Best Buy, though, was not afraid to copy its competitors, including Circuit City’s strategy of selling extended warranties.

For Best Buy, a warranty that cost $99 to $149 usually netted a profit of a $25 to $40, or a hefty profit margin of 25 percent. The return was intoxicating. Best Buy demanded that warranties make up 7 percent of gross VCR sales, and store employees, lured by high commissions, were only too happy to oblige.

“It was gold,” said a former advertising executive, who was promoted from the store ranks. “Sell it, and you were a rock star.”

And no one sold more warranties than Brian Dunn, who would rise to CEO. At the Minnetonka, Minn., store during the ’80s, Anderson and Dunn formed a formidable duo.

Anderson, the assistant store manager, was the strategy man, the guy who set the sales target. Dunn, who oversaw the video department, was the brash motivator who made sure employees hit those targets.

In the end, Circuit City should have bought Best Buy, said Wurtzel, who wrote a book on his time at Circuit City called “Good to Great to Gone.” Best Buy not only survived, but thrived because it was able to adapt more quickly to changes sweeping the industry during the 1980s and 1990s, he said.

To capture young customers, Best Buy stocked its stores with low-priced merchandise like CDs and games. Sales soared as the company quickly expanded its big-box format.

By the turn of the century, Schulze was ready to call it quits as Best Buy’s only CEO. Schulze had just remarried and wanted to spend more time with his family, sources said.

When Anderson was chosen to take over in 2002, he stunned the company when he immediately decided to go to Yale University for two months. The leader of the grow-at-all-costs retailer was going to do something different — think.

“Most leaders only get one shot at transformational change, and that is right when they start,” Anderson said. “So I had better get this right, or I would fail as a CEO.”

From his time at Yale, Anderson developed a strategy called “Customer Centricity,” whereby the company would use its vast consumer data to predict what customers would need and then bundle the right mix of merchandise and service for them.

Best Buy would focus on four types of consumers: Buzz, the young tech enthusiast; Jill, the suburban soccer mom; Barry, the wealthy professional guy, and Ray, the family man.

Despite his ambitions, Anderson’s approach had its weaknesses, experts and former executives say. For example, Best Buy didn’t develop advertising campaigns tailored to each customer group, said George Lopuch, a former Best Buy executive vice president of strategy.

“They were customers nobody could differentiate,” said Lopuch. “An awful lot of money, millions went down a blind alley.”

Best Buy also struggled to reach women shoppers, who, research suggests, control most household buying decisions, including electronics.

“(They) didn’t realize the power of women in the electronic market. It was the dude. ... It’s all about dude stuff,” said Flora Delaney, a retail consultant and former Best Buy executive.

Of the four customer personas Best Buy created, only one was a female — Jill, the married soccer mom. Yet young, single, professional women also buy lots of iPods, laptops and movies.

“If you look at who is eating their lunch today — Amazon, Target, Wal-Mart and Costco — who buys from those retailers? Women, women and more women,” Delaney said.

As a strategy, Customer Centricity also failed to anticipate how fast the Internet would revolutionize shopping. Best Buy would invest considerable time and money on its stores when consumers were flocking to online retailers in greater numbers.

“It was misguided,” said Carol Spieckerman, president of Newmarketbuilders, a retail consulting firm. “And if it’s misguided and you get everyone behind it, it’s a fatal distraction.”

Meanwhile, Amazon.com was rapidly expanding its merchandise from books to toys to movies. Apple CEO Steve Jobs was revolutionizing the music industry with the iTunes online music service.

Fenn said he realized that CDs, one of Best Buy’s traditional cash cows, would be obsolete after watching his teenager download music off the Internet.

“Physical media was going to change in another decade,” said Fenn, who was passed over in 2002 as CEO in favor of Anderson.

Before Fenn left Best Buy, he arranged to meet with Richard Branson, the founder of the Virgin Megastores, about collaborating on an online music store, something that could compete with Apple’s iTunes.

Ultimately, Schulze canceled the meeting, Fenn said.