Aims to Outsmart
And Coddle Big Spenders
for 'Barrys' and 'Jills'
Staff Reporter of THE WALL STREET JOURNAL
November 8, 2004; Page A1
chief executive officer of Best Buy Co.,
is embracing a heretical notion for a retailer.
He wants to separate the "angels" among his
1.5 million daily customers from the "devils."
angels are customers who boost profits at the
consumer-electronics giant by snapping up high-definition
televisions, portable electronics, and newly
released DVDs without waiting for markdowns
are its worst customers. They buy products,
apply for rebates, return the purchases, then
buy them back at returned-merchandise discounts.
They load up on "loss leaders," severely discounted
merchandise designed to boost store traffic,
then flip the goods at a profit on eBay. They
slap down rock-bottom price quotes from Web
sites and demand that Best Buy make good on
its lowest-price pledge. "They can wreak enormous
economic havoc," says Mr. Anderson.
estimates that as many as 100 million of its
500 million customer visits each year are undesirable.
And the 54-year-old chief executive wants to
be rid of these customers.
new approach upends what has long been standard
practice for mass merchants. Most chains use
their marketing budgets chiefly to maximize
customer traffic, in the belief that more visitors
will lift revenue and profit. Shunning customers
-- unprofitable or not -- is rare and risky.
says the new tack is based on a business-school
theory that advocates rating customers according
to profitability, then dumping the up to 20%
that are unprofitable. The financial-services
industry has used a variation of that approach
for years, lavishing attention on its best
customers and penalizing its unprofitable customers
with fees for using ATMs or tellers or for
obtaining bank records.
seems an unlikely candidate for a radical makeover.
With $24.5 billion in sales last year, the
Richfield, Minn., company is the nation's top
seller of consumer electronics. Its big, airy
stores and wide inventory have helped it increase
market share, even as rivals such as Circuit
City Stores Inc. and Sears, Roebuck & Co.,
have struggled. In the 2004 fiscal year that
ended in February, Best Buy reported net income
of $570 million, up from $99 million during
the year-earlier period marred by an unsuccessful
acquisition, but still below the $705 million
it earned in fiscal 2002.
Anderson spies a hurricane on the horizon. Wal-Mart
Stores Inc., the world's largest retailer,
and Dell Inc., the largest personal-computer
maker, have moved rapidly into high-definition
televisions and portable electronics, two of
Best Buy's most profitable areas. Today, they
rank respectively as the nation's second- and
fourth-largest consumer-electronics sellers.
worries that his two rivals "are larger than
us, have a lower [overhead], and are more profitable." In
five years, he fears, Best Buy could wind up
like Toys 'R' Us Inc., trapped in what
consultants call the "unprofitable middle," unable
to match Wal-Mart's sheer buying power, while
low-cost online sellers like Dell pick off
its most affluent customers. Toys 'R' Us recently
announced it was considering exiting the toy
Best Buy has rolled out its new angel-devil
strategy in about 100 of its 670 stores. It
is examining sales records and demographic
data and sleuthing through computer databases
to identify good and bad customers. To lure
the high-spenders, it is stocking more merchandise
and providing more appealing service. To deter
the undesirables, it is cutting back on promotions
and sales tactics that tend to draw them, and
culling them from marketing lists.
As he prepares
to roll out the unconventional strategy throughout
the chain, Mr. Anderson faces significant risks.
The pilot stores have proven more costly to
operate. Because different pilot stores target
different types of customers, they threaten
to scramble the chain's historic economies
of scale. The trickiest challenge may be to
deter bad customers without turning off good
I want to be very careful," says Mr. Anderson. "The
most dangerous image I can think of is a retailer
that wants to fire customers."
campaign against devil customers pits Best
Buy against an underground of bargain-hungry
shoppers intent on wringing every nickel of
savings out of big retailers. At dozens of
Web sites like FatWallet.com, SlickDeals.net
and TechBargains.com, they trade electronic
coupons and tips from former clerks and insiders,
hoping to gain extra advantages against the
whose subscribers boast about techniques for
gaining hefty discounts, a visitor recently
bragged about his practice of shopping at Best
Buy only when he thinks he can buy at below
the retailer's cost. He claimed to purchase
only steeply discounted loss leaders, except
when forcing Best Buy to match rock-bottom
prices advertised elsewhere. "I started only
shopping there if I can [price match] to where
they take a loss," he wrote, claiming he was
motivated by an unspecified bad experience
with the chain. In an e-mail exchange, he declined
to identify himself or discuss his tactics,
lest his targets be forewarned.
makeover plan began taking shape two years
ago when the company retained as a consultant
Larry Selden, a professor at Columbia University's
Graduate School of Business. Mr. Selden has
produced research tying a company's stock-market
value to its ability to identify and cater
to profitable customers better than its rivals
do. At many companies, Mr. Selden argues, losses
produced by devil customers wipe out profits
generated by angels.
troubled acquisitions of MusicLand Stores Corp.
and two other retailers had caused its share
price and price-to-earnings ratio to tumble.
Mr. Selden recalls advising Mr. Anderson: "The
best time to fix something is when you're still
making great money but your [price-to-earnings
ratio] is going down."
had never applied his angel-devil theories
to a retailer as large as Best Buy, whose executives
were skeptical that 20% of customers could
be unprofitable. In mid-2002, Mr. Selden outlined
his theories during several weekend meetings
in Mr. Anderson's Trump Tower apartment. Mr.
Anderson was intrigued by Mr. Selden's insistence
that a company should view itself as a portfolio
of customers, not product lines.
put his chief operating officer in charge of
a task force to analyze the purchasing histories
of several groups of customers, with an eye
toward identifying bad customers who purchase
loss-leading merchandise and return purchases.
The group discovered it could distinguish the
angels from the devils, and that 20% of Best
Buy's customers accounted for the bulk of profits.
2002, Mr. Anderson instructed the president
of Best Buy's U.S. stores, Michael P. Keskey,
to develop a plan to realign stores to target
distinct groups of customers rather than to
push a uniform mix of merchandise. Already
deep into a cost-cutting program involving
hundreds of employees, Mr. Keskey balked, thinking
his boss had fallen for a business-school fad.
He recalls telling Mr. Anderson, "You've lost
touch with what's happening in your business."
was furious, and Mr. Keskey says he wondered
whether it was time to leave the company. But
after meeting with the chief operating officer
and with Mr. Selden, Mr. Keskey realized there
was no turning back, he says.
concluded that its most desirable customers
fell into five distinct groups: upper-income
men, suburban mothers, small-business owners,
young family men, and technology enthusiasts.
Mr. Anderson decided that each store should
analyze the demographics of its local market,
then focus on two of these groups and stock
began working on ways to deter the customers
who drove profits down. It couldn't bar them
from its stores. But this summer it began taking
steps to put a stop to their most damaging
practices. It began enforcing a restocking
fee of 15% of the purchase price on returned
merchandise. To discourage customers who return
items with the intention of repurchasing them
at an "open-box" discount, it is experimenting
with reselling them over the Internet, so the
goods don't reappear in the store where they
were originally purchased.
cases, we can solve the problem by tightening
up procedures so people can't take advantage
of the system," explains Mr. Anderson.
Best Buy cut ties to FatWallet.com, an online "affiliate" that
had collected referral fees for delivering
customers to Best Buy's Web site. At FatWallet.com,
shoppers swap details of loss-leading merchandise
and rebate strategies. Last October, the site
posted Best Buy's secret list of planned Thanksgiving
weekend loss leaders, incurring the retailer's
ire. Timothy C. Storm, president of Roscoe,
Ill.-based FatWallet, said the information
may have leaked from someone who had an early
look at advertisements scheduled to run the
day after Thanksgiving.
In a letter
to Mr. Storm, Best Buy explained it was cutting
the online link between FatWallet and BestBuy.com
because the referrals were unprofitable. The
letter said it was terminating all sites that "consistently
and historically have put us in a negative
defends FatWallet.com's posters as savvy shoppers. "Consumers
don't set the prices. The merchants have complete
control over what their prices and policies
are," he says.
customers can be a delicate business. Two years
ago, retailer Filene's Basement was vilified
on television and in newspaper columns for
asking two Massachusetts customers not to shop
at its stores because of what it said were
frequent returns and complaints. Earlier this
year, Mr. Anderson apologized in writing to
students at a Washington, D.C., school after
employees at one store barred a group of black
students while admitting a group of white students.
says the incident in Washington was inappropriate
and not a part of any customer culling. He
maintains that Best Buy will first try to turn
its bad customers into profitable ones by inducing
them to buy warranties or more profitable services. "In
most cases, customers wouldn't recognize the
options we've tried so far," he says.
receive hours of training in identifying desirable
customers according to their shopping preferences
and behavior. High-income men, referred to
internally as Barrys, tend to be enthusiasts
of action movies and cameras. Suburban moms,
called Jills, are busy but usually willing
to talk about helping their families. Male
technology enthusiasts, nicknamed Buzzes, are
early adopters, interested in buying and showing
off the latest gadgets.
use quick interviews to pigeonhole shoppers.
A customer who says his family has a regular "movie
night," for example, is pegged a prime candidate
for home-theater equipment. Shoppers with large
families are steered toward larger appliances
and time-saving products.
hopes to lure the Barrys and Jills by helping
them save time with services like a "personal
shopper" to help them hunt for unusual items,
alert them to sales on preferred items, and
coordinate service calls.
decade-old Westminster, Calif., store is one
of 100 now using the new approach. It targets
upper-income men with an array of pricey home-theater
systems, and small-business owners with network
servers, which connect office PCs, and technical
help unavailable to other customers.
when new movie releases hit the shelves, blue-shirted
sales clerks prowl the DVD aisles looking for
promising candidates. The goal is to steer
them into a back room that showcases $12,000
high-definition home-theater systems. Unlike
the television sections at most Best Buy stores,
the room has easy chairs, a leather couch,
and a basket of popcorn to mimic the media
rooms popular with home-theater fans.
popular with young Buzzes, Best Buy is setting
up videogame areas with leather chairs and
game players hooked to mammoth, plasma-screen
televisions. The games are conveniently stacked
outside the playing area, the glitzy new TVs
a short stroll away.
says early results indicate that the pilot
stores "are clobbering" the conventional stores.
Through the quarter ended Aug. 28, sales gains
posted by pilot stores were double those of
traditional stores. In October, the company
began converting another 70 stores.
intends to customize the remainder of its stores
over the next three years. As it does, it will
lose the economies and efficiencies of look-alike
stores. With each variation, it could become
more difficult to keep the right items in stock,
a critical issue in a business where a shortage
of a hot-selling big-screen TV can wreak havoc
on sales and customer goodwill.
costs at the pilot stores have run one to two
percentage points higher than traditional stores.
Sales specialists cost more, as do periodic
design changes. Mr. Anderson says the average
cost per store should fall as stores share
winning ideas for targeting customers.
to Gary McWilliams at email@example.com