SCDigest editorial staff

The News: Electronics retailer Best Buy reported another quarter of strong financial results this morning, citing supply chain-related efforts as a key element of that performance. Still, there are reports CEO Brad Anderson thinks costs are rising too quickly and has ordered a broad-based effort to rein in hundreds of millions in costs.

The Impact: Some analysts have questioned whether the cost reductions will slow or hamper the “Customer Centricity” program Best Buy has been rolling out across its retail network.

The Story: Minneapolis-based electronics retail giant Best Buy reported outstanding financial results for the fourth quarter this morning, with earnings from continuing operations up 24%. The company predicted earnings growth of 20% for the next fiscal year, and cited several areas of supply chain performance as contributing strongly to those results.

At the same time, the Minneapolis Star Tribune reported this week that CEO Brad Anderson believes it’s necessary to “trim some fat” – a lot of fat – from company operations, especially at the store level. The Star Tribune says this “could mark a fundamental shift in the way Best Buy does business, according to analysts and people inside the company,” and has left some wondering if it will slow or constrain the chain’s bold “Customer Centricity” program.

Commenting on the strong financial results, Best Buy said it stemmed in part from “progress in the company's supply chain transformation, improvements from price optimization, increase in private-label product sales, and better product transition management."

Best Buy has had a number of supply chain related initiatives, including improved visibility and supply chain event management, use of pricing optimization tools, and aggressive investigation of the potential for RFID in its supply chain.

Despite strong top line and earnings numbers, however, some Wall Street analysts have said the company is not doing enough to keep operating costs under control. In December, the company announced sales and administrative expenses rose 22 percent in the third quarter, double the company's revenue growth. Best Buy's stock fell 12 percent on this news.

Speculation is that the preponderance of the cuts – with an estimated target of $300 in the next year – will come from store operations.  The question is how this will impact Best Buys’ “Customer Centricity” strategy, which as Supply Chain Digest reported last year (see Best Buy Moves to “Customer-Facing” Supply Chain) involves in part allowing individual stores to adjust layout, merchandising and inventory to meet the needs of its dominant customer demographics. Best Buy has identified eight core consumer segments that it serves (family men, suburban moms, affluent professionals, younger males, etc.), and tailored the layout and product assortment of individual stores to the most appropriate demographic.

Fewer than 300 of Best Buy's 741 U.S. stores have been fully converted to the Customer Centricity model.

As the Star Tribune reports, “By slashing expenses while the Customer Centricity strategy remains in its beginning stages, Best Buy runs the risk of hurting employee morale and leaving stores with too few people to carry out the initiative correctly.”

"It's going to be interesting to see how they cut back costs without impairing the Customer Centricity efforts," said Joseph Beaulieu, a retail analyst with Morningstar.

For example, Best Buy typically has much higher store staffing levels than competitors such as Circuit City, in part to support the customer-centric approach. One year ago, Best Buy employed an average of 120 full- and part-time employees per store. Circuit City averages about 60 workers per store.

If Best Buy reduces story level associates, it may run into some conflicts with the new strategy.

Best Buys’ supply chain is obviously bringing results – what do you like about what they are doing? Do you believe there will be issues between reining in store costs and the Customer Centricity strategy? Let us know your thoughts.