In-Depth

Best Buy's Small Business Offensive

In a move that's making some Microsoft partners jittery, the retail giant plans to double the number of stores targeting SMBs this year.

• By Scott Bekker
• June 01, 2006

In a presentation at a Bear Stearns retail conference in New York a few months ago, Tom Healy summed up Best Buy Co. Inc.'s grand ambition in a single sentence.

"We'd like to change the way that small businesses buy IT," said Healy, the executive vice president of Best Buy for Business, the electronics retailer's SMB division.

Those Microsoft partners who sell Windows and other software to small businesses -- especially those who provide simple servers, e-mail and networks to very small companies -- may not be aware that this consumer giant has designs on its market segment. But Best Buy is well aware of the Microsoft SMB partner community and its massive customer base.

Asked during that same March presentation which major competitors Best Buy planned to wrest market share from, Healy replied: "The only ones offering a real service offering or a complete solution are … value-added resellers. There are some 90,000 of them throughout the United States. It's about as fragmented as any market can become, particularly with the size revenue market it is."

Best Buy clearly isn't aiming to put VARs out of business. Instead, the goal appears to be helping the company sustain the kind of growth Wall Street demands. Being aware of those plans can help small business resellers and solution providers to adjust, partner or fight for turf.

Best Buy for Business has been a pilot program for the last few years, but now the company is aggressively rolling out a full-scale initiative. Currently, about 115 of Best Buy's stores offer the SMB services program, and Best Buy plans to double that number this year. Eventually, the company hopes to run the program in every store. Meanwhile, the company continues on an expansion tear that has it approaching the 1,000-store mark.

Many SMB-focused Microsoft partners are already aware of Best Buy's plans, and their responses vary. Some see opportunity, while others see trouble, says Harry Brelsford, a Bainbridge Island, Wash.-based author and consultant who runs the SMB Nation conference series, targeted primarily to Microsoft partners. Says Brelsford: "We are a divided community."

Best Buy Gets the Gold
While Best Buy's been working on the Best Buy for Business initiative for a few years, the Richfield, Minn.-based company really cranked up its PR efforts in March. In addition to the Bear Stearns presentation and details in an earnings call with financial analysts, Best Buy and Microsoft jointly announced that Best Buy had become the first national retailer to achieve Microsoft Gold Certified Partner status.

Sensitive to those unusual circumstances, Microsoft officials are quick to point out that the Microsoft Partner Program wasn't modified to allow Best Buy to earn the top-tier ranking. "Best Buy embraced our partner program like many other large partners. We did not create a special program for them," says Cindy Bates, Microsoft General Manager for Small Business.

Bates presents the retailer's move, which includes the staffing of every Best Buy for Business location with at least one Microsoft Small Business Specialist, as a significant advantage for customers. (For more on the SBS designation, see the January 2006 story, "Microsoft's Small Business Specialist Designation: What's in It for You?")

Having such specialists available at the point of sale means that small-business customers "can ask specific questions on the technology they're looking for and be confident that they're receiving educated answers before they make the decision to purchase," Bates says. "This helps the customer easily and accurately identify exactly what they need to help their business grow and thrive."

"We think that right now there doesn't exist anyone [else] that can be a single point of contact for small business to obtain, to even be aware of, technology solutions that can improve their business." -- Tom Healy, Executive Vice President, Best Buy for Business

The Big Picture
The Best Buy for Business initiative wasn't hatched in a vacuum. It's part of a three-year-old effort to transform the company from its product-oriented focus of the 1980s and 1990s, when Best Buy was the place to find "all the cool stuff," to an organization focused on employees meeting customers' needs. Referring to that transition, CEO and Vice Chairman Brad Anderson said in March that "we called fiscal 2006 our tipping point."

Major investments in services, for both home PCs through the acquisition and rapid expansion of the Geek Squad and in-home theater installations, were a big part of the customer-focused initiative for the company's fiscal 2006, which ended on Feb. 25. There's no question that the company's commitment to its Best Buy for Business expansion also fits neatly into the customer-oriented strategy.

Best Buy for Business is also among the next big steps in that framework for Best Buy's fiscal 2007. When Best Buy laid out its six goals for the year for investors in March, building that division's capabilities and presence ranked as No. 5. "We've announced plans to add enhanced small business capabilities to more than 120 additional stores in the country," Brian Dunn, president and chief operating officer, said in the earnings call. "We'll offer an expanded Geek Squad presence, small business products, help from business pros and kiosks with additional solutions."

In recent quarters, Best Buy took nearly half its revenue from consumer electronics, about a third from home offices and most of the rest from entertainment software and appliances. When the company went looking for adjacent pools of customers it could serve, small business seemed to offer the biggest potential.

The federal government defines SMBs as companies with fewer than 1,000 employees. Healy points out that those businesses spent $350 billion last year on IT services and IT products. How much of a cut of that is Best Buy eyeing? Estimates seem to vary depending on the audience. At Bear Stearns, Healy said Best Buy expects to target the small end of that range -- companies with 100 or fewer employees. "This represents an $80 billion addressable opportunity for Best Buy," he said.

However, Brelsford says Best Buy representatives tell him the sweet spot is companies with one to five employees. In an interview with Redmond Channel Partner, Healy put the initial market at 10 and under. In all those cases, though, Best Buy expresses willingness to move up the size chart when the opportunity presents itself.

There's no ambiguity about one thing: Best Buy finds the revenues associated with server and network work very attractive. "When you install a server, you tend to have a much longer-term relationship than if you sell a typical computer in our store," Healy said during the recent earnings call. Providing a complete solution -- including the network, the server, services and maintenance -- "makes it a much stickier sale and a much longer-term opportunity with those customers."

The Best Buy for Business Proposition
To hear Best Buy executives tell it, the retailer doesn't need to steal the SMB market from anyone. It's simply that no one else can address that audience's needs.

"So what does Best Buy bring to the table here?" Healy asks during the interview. He ticks off answers: "Nine hundred-plus retail stores; Geek Squad agents; product and service expertise; multiple brands, multiple products across multi-channels. And an existing relationship with the customer that's very strong."

Compare that to the competition. "Right now, our competition is fragmented. Not only in terms of geography, there's no national player, but also in terms of what they offer. So nobody's offering multiple brands, multiple products with services face-to-face in a local location. We're the only ones that can do that," Healy says. His conclusion: "We think that right now there doesn't exist anyone [else] that can be a single point of contact for small business to obtain, to even be aware of, technology solutions that can improve their business."

The model Best Buy for Business location consists of a beefed-up computer section in a regular Best Buy store. Physically, there's a kiosk, which allows customers to order server components -- blades, networking gear, business software -- that the store won't necessarily stock. A few high-turnover products may be kept on-site, but most will come from distributors. Floating around the computer section are Business Technology Specialists, typically dressed more formally than the usual blue-shirted Best Buy employee. Best Buy for Business locations also include a Business Technology Consultant, who spends more time at customer sites. In addition, there's a special Best Buy for Business public Web site, a direct-sales group based in Montreal and some overlap with the Geek Squad (see "What Is Best Buy for Business?").

What Is Best Buy for Business? Best Buy for Business operates through a number of channels: In the Store: The most visible components of the SMB push are the kiosks and the extra staffers, known as Business Technology Specialists, in the computer department of Best Buy retail stores. Stores will carry some limited extra inventory of high-turnover products, but most will be ordered direct and installed by Best Buy for Business' services arm. Plans call for having Best Buy for Business in 240 stores by February 2007 and eventually expanding the program to all of Best Buy's 900-plus locations. Mobile Consultants: Business Technology Consultants fulfill a sales engineering role and spend most of their time outside the retail stores. The Best Buy Geek Squad supports them in actual implementations. BestBuyforBusiness.com: A public Internet site linked to the main Bestbuy.com Web site provides another channel for sales. Direct Sales: In a model similar to those used by Dell and CDW, Best Buy for Business also employs 100 Montreal-based sales agents who call directly into businesses. Commercial Sales Group: This group, not limited to IT, handles sales of furniture, televisions and other merchandise to companies. The group differs from the IT group in that it focuses on businesses of all sizes. Best Buy for Business also includes employees who work with customers in government agencies and educational institutions. -- S.B.

"The investment this year will be in adding the head count as well as adding training and support capabilities for those folks," Healy says. By using Microsoft's certification infrastructure, Best Buy can get a handle on its daunting training task, according to Microsoft's Bates. "Our certification programs help Best Buy apply an industry-recognized standard for measuring quality and capability in their employees," she says, noting that such evaluations represent "a formidable job" for any large employer. Best Buy executives say they're also taking advantage of other vendor certifications, such as the Cisco Certified Network Associate designation.

Healy believes Best Buy's employee pool and economies of scale give the company a unique capability for churning out trained workers. "We think that through scale, you just end up with a more efficient model," he said at the Bear Stearns event. "I don't know anybody else who can create a technician as efficiently as we can and then deploy them with Volkswagen Beetles. It's the lowest cost operating model you can probably get."

Meanwhile, one of the most powerful tools available to Best Buy for Business stems from the chain's existing customer relationships. It takes the form of the retailing giant's database of 80 million unique customers, which the company can slice and dice to cross-sell its small business offerings. The company also plans to do list-based direct marketing for specific solutions.

Where Microsoft Software Fits In
Multi-platform support is key to Best Buy for Business, but even so, Microsoft software is a critical competency for anyone aiming to serve small business. Best Buy for Business sells Windows Small Business Server and Microsoft Point of Sale and the retail chain is looking for a boost in revenue when Windows Vista ships, as well.

"By year end, we plan to have trained more than 900 Microsoft Certified Professionals, giving us further authority to serve these customers," Dunn said on the earnings call.

For Microsoft, which has identified small business as a key metric for its own growth, Best Buy's success has the potential for a large positive impact on its own revenues.

Microsoft's Bates emphasizes that the Best Buy opportunity doesn't compromise its efforts with other partners of all types and sizes. "Microsoft will continue to reach customers via a broad variety of channels. We know that customers prefer to purchase their solutions in a variety of ways," she says.

Bring out the Geeks Between acquisitions, new division launches and hiring sprees, Best Buy suddenly has an array of IT services people on its shop floors and on the street. There are two main tests for telling the major players apart: what they wear and what they drive. What They Wear Blue Shirts: While "Daily Show" comedian contributor Demetri Martin was uncharitable in his characterization that the requirement for earning a Best Buy blue polo shirt is "a torso," it's fair to say that Best Buy's 100,000 blue shirts have the least technical training of its employee groups. Best Buy looks to this pool of employees for promotion into the other areas. Shirts and Ties: The first line in the Best Buy for Business employee chain are the Business Technology Specialists. These employees, who will be a bit more dressed up than cashiers and salespeople, are generally found in the computer section of the retail stores, near the Best Buy for Business kiosks. What They Drive VW Beetle: The standard-issue vehicle of the Geek Squad employee is the black and white Volkswagon Beetle with the orange logo on the side. Best Buy hired 5,000 new Geeks in the last year, bringing the total to about 12,000. But expansion is largely over. While the Geeks are primarily for home computer maintenance and installation, they'll also provide support services for Best Buy's increasing small-business installation and maintenance work. So look for the VW bugs in company parking lots as well as in residential driveways. Honda Element: In blue, this will be the standard-issue vehicle for Business Technology Consultants, the other main group of employees in the Best Buy for Business operation. Acting as sales engineers, the BTCs will spend most of their time at customer sites. -- S.B.

Partner Reaction
SMB Nation's Brelsford says a vocal portion of the Microsoft SBS community has serious concerns about Best Buy's forays into the small business market. "I would say a third of the people don't like that message and view Best Buy as a competitor," Brelsford says, basing his estimate on evaluation forms submitted by partners attending his conferences.

Some partners, especially those whose practices consist of setting up basic or wireless networks and configuring e-mail, see a straightforward financial threat to their practices from the entrée of a major national retailer with foot traffic and a large database of customers to draw upon.

Cynthia Slade, founder of the Chicago Small Business Server User Group, doesn't anticipate her clients going to Best Buy for their networking needs, but she does worry about the potential devaluing of the Microsoft certification and the Small Business Specialist designation. "I don't want to be considered like a used car salesman," says Slade, owner of Shalli, an IT consulting firm for small business and a Microsoft Registered Partner.

"What frightens me is the possibility of Best Buy sending someone who doesn't have the experience that most people who have this certification have, and a customer gets something that's not what they should have gotten. They get bad advice from someone who just knows what SBS is but they don't know what should or shouldn't be implemented," Slade says.

She's particularly concerned about the retail industry's typical high turnover rate.

"Let's say they have a young kid and he takes the test," she says. "He works there for two months and he leaves. Now there's nobody there who is actually certified."

Best Buy is no stranger to the turnover issue. During the March earnings call, for example, Anderson noted that boosting employee retention was among the company's strategic goals for fiscal 2006. The numbers are impressive by retail standards: During that year, employee turnover decreased by 15 percent, going from 81 percent to 69 percent. On the other hand, turnover rates like that are alarming when you're talking about skilled positions. In discussing those retention rates, Best Buy didn't break out the figures for its more specialized employees, which are almost surely much lower. And priorities have turned to other areas for 2007: Retention wasn't among the major goals listed for the current year.

Slade will be keeping a close eye on the value of the SBS designation as Best Buy for Business expands. "I put on my [business] card that I'm a Small Business Specialist," she says. "If the word has gotten around how bad that service is, from Best Buy, I'm going to take that certification off my card."

Not a Slam Dunk Best Buy has a lot of advantages, but its SMB success is far from guaranteed. The company has stumbled before in rolling out new business models. Company officials acknowledge that they struggled last fall in an aggressive project to convert 154 stores in one financial quarter to the broader customer-centric operating model. Same-store growth, the key retail metric, was sluggish, and Best Buy's stock took a beating. On the other hand, the incident showed a company capable of brushing itself off and trying again. Best Buy restarted the effort of converting stores to the customer-centric model in March, and the company's stock is up again. An open question is whether even loyal customers will look to Best Buy for their business needs. At the Bear Stearns event, Healy shared a story that neatly summarizes the company's challenge. During one of dozens of focus groups the company held while formulating its plans, panelists shared extremely positive impressions of the Best Buy brand compared to other electronics retailers, Healy said. But when participants were told that a major retailer would begin offering business products and asked whether they thought the mystery company was Best Buy, the typical response was: "[It's] not going to be them. They're into entertainment." Said Healy, "We've got a lot of work to do in terms of shifting the image of that brand to be able to address customers' problems." Microsoft partners are not the only ones concerned about the impact of Best Buy for Business on their sales. Lenovo, the Chinese computer-maker that bought IBM's PC business last year, recently got into a public spat with the ASCII Group, a VAR organization, over a deal to sell ThinkPad, ThinkCentre and Lenovo 3000 systems through Best Buy for Business. -- S.B.

Partner Options
However, the Best Buy initiative doesn't just spell doom and gloom for Microsoft's SMB-focused partners.

Brelsford, who gives Best Buy credit for taking the high road by achieving Microsoft certification, believes there's an upside for partners even if the retailer ends up botching implementations. "I get most of my business as the second consultant in, [after the] first one comes in and screws it up," he notes. "If the market grows, there's always going to be more rebound opportunities."

Best Buy, which acquired its way into the IT services market by buying the Geek Squad in 2002, isn't ruling out further acquisitions. "We don't have a particular plan for it. You know, we're open to that sort of thing," Healy told analysts.

A more likely route is that Best Buy and Microsoft partners will find new ways to work together.

"I can tell you, those folks who add value will continue to add value," Healy says "They have a certain vertical expertise that we may never have. So we may well just partner with them as well." Those best positioned, in his view, are partners with deep knowledge of the legal, medical and other professions.

Brelsford agrees that Best Buy is better off teaming with consultancies in many areas. For instance, "Best Buy isn't really prepared to deal with CRM 3.0," Brelsford notes. "On the other hand, Best Buy, first and foremost, is really good at selling licenses. Our people are not especially good at selling licenses."

As is the case in partnering with any giant in the market (think Microsoft), the challenge for smaller partners is simply getting noticed. Brelsford recommends doing that by reaching out to the competition. "I would be taking those Best Buy Geek Squad people to a baseball game and buying them hot dogs," he says. "Then they'll be calling you, 'Hey man, we've got a law firm [with an IT problem] that we just can't handle.'"