Why Best Buy Failed in the UK: Risks of Global Expansion
By Patrick O'Brien
Best Buy's attempt to cross the Atlantic and deliver US-style retailing to British consumers has failed miserably, with the retailer planning to close all of its big box stores in the UK. It may have suffered from bad timing, but its retreat shows that even the most successful retail formats can fail if they do not adapt to changes in their target markets.
US electronics retailer Best Buy has signaled its brand's retreat from the UK, just 18 months after it opened its first big box store. By the time it closes all of its stores at the end of 2011, its joint venture with UK mobile retailer Carphone Warehouse will have burned through almost £200 million (approximately $318 million), having opened only 11 of its original store target of 200, becoming a textbook case of how not to expand into new territories. Best Buy will still have a financial interest in the UK as it will still own half of Wireless World, which has 142 stores across the country, and has the option to buy the other half from Carphone Warehouse in 2015.
Best Buy's big box proposition was, on the face of it, compelling. It planned to shake up the UK electronics market with a strong emphasis on US-style customer service combined with low prices. Having examined the UK industry for years, during which time it considered making a major acquisition to propel its launch, it procrastinated right up until the UK was in worst economic decline for decades.
Bad luck perhaps, but Best Buy proved unable to adapt its strategy once it became clear that its choice of large outlets in out-of-town (and out of the way) locations was not working. Being an unknown entity in the UK, it needed a much larger marketing push to get people to make the trip to its stores. It would have been better served by investing in some flagship locations in busy shopping areas as part of its introduction into the minds of UK consumers. Instead, it simply cut plans to open further stores, hoping for the economic clouds to pass.
In the meantime, UK customers changed their shopping habits. As an increasing amount of electronics spending moved online, UK customers became less interested in making long journeys just to buy an electrical item, given the demand for convenience and the increased cost of fuel. Electricals spending also increasingly moved to smartphones and tablets, which consumers have tended to buy from phone operators/specialists and Apple, respectively. Furthermore, grocers have also taken market share from the electronics specialists.
If you were looking to enter a retail market in 2008, with the benefit of hindsight you would want to avoid Europe, electronics and out-of-town locations. Best Buy combined all three, and so its fate was sealed. The failure of Best Buy was followed almost immediately by the sale of another UK electronics chain, Comet, for just £2 ($3) to private equity owners who are likely to consider shutting many of its 250 stores.
The future of electronics retailing in the UK may now be down to the manufacturers — they still need places to demonstrate and showcase the quality of their products, especially on premium-priced products. Manufacturers need physical places to convince consumers to upgrade to products such as large screen 3D TVs or premium priced hi-fis, as without experiencing the benefits consumers will be more likely to go for cheaper options.
If the number of third-party retail locations drops further, it may be that manufacturers such as Samsung will have to consider opening retail stores like Sony and Apple, the latter of which has been enormously successful in using shops not only to sell its products but also to engage with its customers.
Patrick O'Brien is principal retail analyst with Verdict Research.