Today Best Buy’s [NYSE:BBY] CEO, Brian Dunn, stepped down and resigned from his position after working 28 years at the company. Brian Dunn’s resignation was not seen by many as necessary nor as an expected departure. Best Buy will now be headed by current board member and former CFO of UnitedHealthcare, Mike Mikan.

Best Buy’s Former CEO Brian Dunn   

Brian Dunn has been portrayed as the fearless leader of the company and has been seen for many years as the reason for the company’s success. Even though Brian Dunn had been CEO for only 3 years (since 2009), he has been with the company for 28 years and replaced the long time CEO Brad Anderson who had been the righthand man of the original founder of Best Buy, Richard Schulze, since 1981.

Mike Mikan has a history of helping companies grow as he helped take UnitedHealthcare from a $17B a year company to an over $100B a year company in a very short time span in his position as head of M&A (mergers and acquisitions) having overseen 100 such transactions. One problem, though, is that Mike Mikan’s experience is primarily from being in healthcare and not in consumer electronics and the things that would necessarily work in the enterprise world of healthcare would not necessarily translate into consumer.

The real truth about this move is that Best Buy has been in a steady decline for many years and only in the past year or two has really seen themselves understanding what they can be profitable at and focus on those profitable aspects. Having experienced the internal workings of Best Buy, it really has been astonishing to see where the company really makes money and where it doesn’t and how inept some stores really are at accomplishing those things.                                                              

Best Buy has reduced itself into an extremely segmented business with departments of the company that are consistently losing money or not producing enough revenue for the company. Most of the profit that Best Buy makes nowadays is actually in their mobile department. Best Buy earns a huge fee from carriers when they sign up customers as the carrier gives them a fee for signing up customers on a plan with that carrier. These fees do range from carrier to carrier but generally run in the hundreds of dollars. The biggest profit for most stores generally lies in selling broadband cards. In the past, Best Buy would also give laptop customers $100 off of their laptops if they signed up for a 2 year agreement on an embedded broadband card or purchased a broadband card with a 2 year agreement and data plan.

So, based on this premise, Best Buy wants to be able to increase this profitable part of their stores and create more standalone Best Buy mobile stores. This is both good and bad because it will allow customers to come in to one store and be able to compare all four different carriers, but at the same time it will also deem their current stores less relevant.

Another large profitable part of the stores is in their Geek Squad services department where they generally charge extremely high prices for services that people deem they cannot do themselves. Best Buy’s Geek Squad also has absorbed the responsibility of representing the Best Buy ‘protection plans’. These are just a re-brand of the extended warranty model which has existed for ever and now is more integrated into Best Buy’s Geek Squad purely because Best Buy sees their Geek Squad brand as a trusted and knowledgeable brand (HIGHLY QUESTIONABLE).

You’ll notice that we haven’t really talked about Best Buy’s computer sales department. That is because Best Buy does not really make money off of their computer sales themselves like other retails do. Best Buy’s current model of selling computers is that they will try to sell you the computer you want at the best price that you can find it and then bundle as many services and accessories as humanly possible, including a protection plan. Some of Best Buy’s competitor’s like Fry’s have shied away from this model and have focused on making more profit off of the computer sale alone and then attempting to add services and accessories. Best Buy’s strategy is a risky one because they recognize the fact that they must be closer to online prices, but they also need to be profitable. If Best Buy wants to be profitable in this department, they must improve their ability to recommend the right computer and not focus as much on price, which can be assisted by more customers qualifying for financing.

The only computers that Best Buy really makes serious profit on are Apple’s computers. The problem with this is that not all Best Buy stores can or do sell Apple computers and in many cases they are competing against the Apple store for selling the exact same products at the exact same prices. The attractive aspect of buying from Best Buy are their financing options and ability to tack on Best Buy’s protection plans which are slightly more useful than Apple’s Apple Care, but also much more expensive when you factor in the accidental plan, which Apple doesn’t offer. Selling Apple products is not a bad strategy, but the real problem is that Apple can cut them off at any time as they have with other retailers and if that happens Best Buy stands to lose a lot of money. Relying on Apple is extremely short-sighted and will only last for a few years until Apple decides to cut off their 3rd party resellers.

In most stores, these two products are pushed the most across different departments with the broadband/mobile services being mostly sold in their PC Home and Office department as well as their Best Buy Mobile department. In addition to those two things, Best Buy has recently shown a renewed focus on financing. Best Buy’s management perceives that if they are able to increase the amount of customers they sign up for Best Buy cards they will be able to get them to spend more. This is a very good strategy, but the problem with this strategy is that it comes at the wrong time, a bit too late. With the financial recession that we have been experiencing and the endless foreclosures and hits to people’s credit there have been a lot of potential customers of Best Buy’s who are no longer able to qualify for Best Buy credit. Generally speaking, the middle to lower classes are going to be the most likely to purchase things from Best Buy purely because of their lack of technology access to begin with.

If Best Buy wants to remain profitable, they need to completely remove their appliance and media businesses as those generally waste the most space and generate the least amount of revenue per day. They recently purchased Pacific Sales on the west coast, which is a large upscale appliance sales company with some high-end electronics sales as well. The best thing Best Buy can do is actually expand their Pacific Sales business and get rid of their appliance departments in their stores. The original plan Best Buy had was actually the inverse, to close their Pacific Sales stores and integrate them into their Best Buy stores to save money. The best thing Best Buy can do is to actually shrink their electronics stores by removing their appliance departments and shift that business to their Pacific Sales stores so that people have more selection to view and more knowledgeable people helping them. Too many stores are understaffed in their appliance divisions due to their weak revenue and as a result people that know nothing about appliances end up having to assist customers about appliances.

With TV’s Best Buy needs to find ways to entice customers (like through financing) to stay in the store and buy the TV they see in front of them rather than see the TV and then go buy it at Walmart or Amazon. Currently, Amazon and Walmart are Best Buy’s two biggest competitors when it comes to TVs, which have traditionally been one of Best Buy’s biggest drivers of revenue and profit outside of mobile. Best Buy needs to improve their customer experience in their TV departments and allow their TV demonstrations to speak for themselves. They need to become a wealth of information that you can only get if you go to Best Buy. That would allow them to have an upper hand over Amazon and allow customers to build a real relationship with their store and sales associate.

So, from what we’ve seen from Best Buy in this past year or two, there have definitely been some bright spots for the company, but there are also some spots that are weak where they have traditionally been strong. Best Buy needs to reduce the size of their stores (as they’re already planning on doing), and they also need to put a bigger focus on expertise and building real relationships with customers. Watching some of their training videos, they are on the right track, but a lot of what their management has demanded from their associates has been unrealistic and generally driven sales associates away from building those relationships. Best Buy’s management needs to understand that if they have unrealistic expectations they are going to drive their managers and sales associates to participate in shady sales simply to achieve the numbers they are expected to attain. None of this really builds a rapport with the consumer and further drives them towards the online purchasing model.

After the announcement, Best Buy was initially up, but is now down 5 percent in heavy trading as some institution punish the company for the sudden decision. We wish the best to everyone at Best Buy and that the company has a healthy recovery in their next quarter after losing $1.7 Billion last quarter.