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The Lost Empire

Once Dominant, Best Buy Tries to Make a Comeback

  • Carlos Portillo, center, leads a cheer in preparing fellow employees at Best Buy's Burbank, California store for Black Friday. Gary Friedman/Los Angeles Times

    Carlos Portillo, center, leads a cheer in preparing fellow employees at Best Buy's Burbank, California store for Black Friday. Gary Friedman/Los Angeles Times

  • Jason Whitlock carries a 32" TV and an advertising supplement at a Best Buy store in Austin, Texas, shortly after it opened for Black Friday sales at midnight on Friday, November 23, 2012. (Austin American-Statesman, Jay Janner)

    Jason Whitlock carries a 32" TV and an advertising supplement at a Best Buy store in Austin, Texas, shortly after it opened for Black Friday sales at midnight on Friday, November 23, 2012. (Austin American-Statesman, Jay Janner)

  • Carlos Portillo, center, leads a cheer in preparing fellow employees at Best Buy's Burbank, California store for Black Friday. Gary Friedman/Los Angeles Times
  • Jason Whitlock carries a 32" TV and an advertising supplement at a Best Buy store in Austin, Texas, shortly after it opened for Black Friday sales at midnight on Friday, November 23, 2012. (Austin American-Statesman, Jay Janner)

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. “As the world changes, so will (Schulze).”

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 $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 mid-’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, now a partner at Retail Masters consulting firm.

“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.

It was not as if Best Buy lacked ideas — or success.

One of Anderson’s first big decisions as CEO was to purchase a little-known computer repair firm called Geek Squad. Today, Geek Squad is a profitable multibillion-dollar business that offers everything from IT support to small business to custom car installations.

Under Anderson, the company also bought the Five Star electronics chain in China and launched Best Buy Mobile, a highly profitable and fast-growing smaller store format developed by then-Best Buy International CEO Robert Willett.

But former and current executives also described a chaotic, adrift culture. The company encouraged employees to experiment but without real follow-through. Armed with waves of consultants, Best Buy indulged itself on well-meaning projects that never came to fruition.

“Best Buy dabbled in many things but did not take it past the finish line,” said Spieckerman, the retail consultant. “They let it die on the vine.”

Best Buy solidified its dominance in the U.S. market when chief rival Circuit City filed for bankruptcy in 2009. Several experts credit Anderson’s Customer Centricity strategy for Best Buy’s success. Since Anderson launched the strategy, Best Buy’s revenues had more than doubled from $19.6 billion in fiscal 2002 to $45 billion in fiscal 2008.

“It’s a key reason why (Best Buy) has survived in the tumultuous consumer-electronics marketplace, while Circuit City is gone,” said Ranjay Gulati, a business professor at Harvard University.

Other analysts say Best Buy’s victory over Circuit City had more to do with its old formula of saturating markets with big box stores. At the time it filed for bankruptcy, Circuit City operated fewer than 600 stores in the United States, compared with 1,100 for Best Buy.

Like Circuit City, Best Buy today has “all of this space that they have to do something with,” said Laura Kennedy, an analyst with Kantar Retail, a consulting firm outside of Boston. “That was going to affect Best Buy whether or not Circuit City survived.”

Wurtzel, the former Circuit City chairman, said his company failed because the retailer wanted to please Wall Street rather than spend the money to upgrade stores and catch up with Best Buy. For example, Circuit City decided to spend nearly $1 billion to repurchase stock just as the economy faltered. By the time the Great Recession struck in 2008, the retailer ran out of money and could not pay its vendors.

“The cupboard was bare,” Wurtzel said.

Circuit City’s demise may have only reinforced Best Buy’s belief in the superiority of its big box stores. Why alter a seemingly successful business model?

“Circuit City’s bankruptcy may have been the worst thing to ever happen to us. You always need an enemy,” said Willett, the former international chief who spoke to the Star Tribune just before Schulze revealed his plans to buy the company. “Competition is always healthy. Consumers always need choice.”

But Best Buy had more immediate concerns at the time: Anderson and Lenzmeier planned to retire in 2009, which meant the company’s three most senior leaders would no longer actively run Best Buy. (Schulze, though, remained chairman.)

Unlike many large corporations, Best Buy did not have a formal CEO succession plan. In truth, there was only one real candidate: Brian Dunn.

Dunn was the prototypical Blue Shirt, the kind of hard-working salesman that reminded Schulze so much of himself.

“The company wanted the business to stay with the people who grew up with it,” Willett said. “Brian was always going to be (Anderson’s) successor.”

Like Schulze, Dunn had no college education. But he did command an instinctive knack for selling things and motivating people to do the same.

At the company’s sales conventions, “Brian Dunn would come out, and it was as if he was a rock star to all these people,” the former ad executive said. “People would be out of their seats. He absolutely had this charisma. He’d be pacing the stage, talking and revving them up.”

But Wall Street analysts had doubts about Dunn, who has not responded to requests for interviews, as CEO. He seemed too attached to the “old way” of doing things when Best Buy needed a new vision and strategy.

“He was steeped in the culture of retail with no perspective of how to transform the company,” Lopuch said.

Complicating matters was the rift between Schulze and Anderson. During their 25-year partnership, they often battled over ideas, sources say. At first, Schulze supported the idea of Customer Centricity, Anderson’s signature strategy, but the two argued over how to carry it out. Anderson also fought with Schulze’s hand-picked board, whom he accused of dishonesty and undermining his authority.

“You are absolutely liars!” Anderson shouted during one particularly contentious board meeting in January 2009, according to sources.

After that meeting, the board forced Anderson, who was supposed to help Dunn ease into the position, to retire that June, six months earlier than Anderson planned, sources said.

Dunn soon made questionable decisions both large and small, sources within the company said. For example, Dunn had crews knock down the walls of Anderson’s modest office and expand it, creating a sense of entitlement to others. He frequently used the corporate plane, even though Best Buy executives usually flew commercial.

Former executives say Dunn surrounded himself with too many loyalists. He named Shari Ballard, who, like Dunn, got her start as a store employee, co-president of Best Buy’s North America’s business along with Mike Vitelli. The awkward co-presidency ended this past January when Dunn appointed Ballard international chief, a position that had been vacant for nearly two years.

Meanwhile, Best Buy’s performance in the United States and overseas began to slip. In North America, Best Buy’s sales at stores open for at least a year, a key measure for growth, have fallen two of the past three years.

Even Five Star, a popular electronics chain in China and Best Buy’s strongest international business, has faltered, leading some analysts to speculate that the company might sell it.

While global economic turmoil was at least partly to blame, Dunn appeared unwilling or unable to fully acknowledge the extent of the company’s problems. During conference calls to discuss company earnings, Dunn frequently used words like “powerful platforms” and “explosive growth,” phrases that seemed out of sync with the bottom line.

After months of rumors and speculation, Best Buy earlier this year decided to shut down its branded big box stores in Great Britain, Turkey, and China, a move that infuriated Willett, who said the company lost its nerve. It usually takes seven to 10 years to see if international stores work, he said, but Best Buy pulled out after less than two years.

Whispers about Dunn’s job security began to grow louder, but the embattled CEO retained the support of Schulze.

“Brian should have been out a long time before this,” Fenn said. “But Dick saw some of himself in Brian. Now Dick’s gotta face a couple of his own mistakes.”

In April, Dunn suddenly resigned amid allegations that he used company resources to carry on an affair with a female employee.

The news stunned analysts and former executives, who suspected some board members, unhappy with Dunn’s performance as CEO, used Dunn’s alleged misbehavior to drive him out of the company.

“Can (Dunn’s indiscretions) be used as an excuse to get rid of him because he couldn’t do the real job?” Lopuch said. “Yes.”

Schulze, who now mostly resides in Florida, is moving closer to making an offer to purchase Best Buy, sources say. If he succeeds, he will make it a privately held company, out of reach of the pressure of Wall Street investors and shareholders.

Wurtzel thinks Schulze has the right idea. The former Circuit City CEO said he wished Circuit City had gone private when it had the chance. That way, the retailer could have focused on retooling the business rather than pleasing Wall Street.

“Best Buy is more likely to survive as a privately run business,” Wurtzel said. “It’s difficult to make these massive changes as a public company.”

Either way, Best Buy needs to reclaim the sense of urgency that was so instrumental to its past success, Lenzmeier said.

“We were like a fleet of small torpedo boats,” said Lenzmeier, who spoke to the Star Tribune prior to joining Schulze’s buyout team. “We were speedy, quick and could maneuver around everyone. The others were the big tankers. Now we’ve become the tanker.

“The question is, do we still have the ability to maneuver and put a bunch of speed boats (together) again?” Lenzmeier continued. “The key is going to be the leadership.”

But those who know Schulze and Anderson wonder how well a sequel would play out.

The pair had not spoken to each other for two years before Schulze contacted him about his effort to acquire Best Buy.

Schulze needs Anderson and Lenzmeier’s support to win over bankers who might be reluctant to finance a takeover, a source close to Schulze said. Meanwhile, Schulze and Anderson continue to negotiate how they would manage Best Buy, including how much direct control, if any, Schulze would maintain, the source said.

Contacted since he agreed to work with Schulze again, Anderson declined to answer more questions. He did say that he and Schulze “see the situation the same way.”

“For some challenges, our point of view is pretty close,” Anderson said. “I wouldn’t participate in (the buyout) if it weren’t.”

Besides, Anderson said, he and Schulze firmly agree on the most critical point - Best Buy needs help now.

“There are too many people, too much of ourselves invested in this.”