Best Buy’s European Exit: Thoughts on What Scales Well

Yesterday Best Buy announced they were exiting Europe through the sale of the 50 percent stake in their European joint venture to their partner in the JV – Carphone Warehouse. The deal totals roughly $775M – 573M in cash at closing, $124M in common stock of Carphone Warehouse with a 1-yr lockup period, $39M in cash plus 2.5% interest paid on the first anniversary, and $39M in cash plus 2.5% interest paid on the second anniversary.

In November 2012 Best Buy held an Analyst and Investor Day I attended in New York City. When asked about International expansion, Hubert Joly had a very insightful response.  The typical mantra is international is where the growth is so if you want to grow you have to be growing into international markets and especially emerging markets. But Joly suggested instead one has to think deeply about what elements of retailing scale well and what elements don’t scale well.  I think he is exactly right.

Specific to BBY, Best Buy Europe was a net drag on annual earnings.  In FY11 the business lost $101M. But more generally, efforts like international expansion require focus and inevitably reduce focus on other elements of the business.  In retailing, international expansions don’t scale well. They have to be run essentially as entirely different companies.  That aspect has been a struggle for many retailers as they initially sought to open and expand their online business units. When they first entered the world of online retailing they treated online as a separate business than their core brick and mortar business.  Today retailers are beginning to think differently.  They are beginning to think about omni-channel approaches which should ultimately help them achieve greater scalability.  Some recent stats related to this from BBY:

• 70% of BBY customers do research on bestbuy.com before buying in stores
• 40% of bestbuy.com orders are picked up in stores

There is clearly a close relationship between what is happening online and what is happening within the confines of a brick and mortar store.  A similar relationship probably exists for most retailers. Consumers don’t differentiate and while there might be operational differences, retailers should also seek to minimize the differences they create between their different channels.  Digital generally scales well.

Retailers need to think more deeply about what scales well and what doesn’t scale well.