Best Buy is bringing in French turnaround expert Hubert Jolie to revive its ailing business. Can Best Buy avoid being the next Circuit City?
Leading consumer electronics retailer Best Buy has announced that it is hiring Hubert Joly as CEO. Joly most recently headed up restaurant and hotel operator Carlson Co. The Frenchman is expected to take over as Best Buy CEO next month once his visa is secured; in the meantime, Best Buy board member Mike Mikan will continue to serve as interim CEO.
Bringing Joly on board may help the retailer focus on the future rather muddling through the chaos left behind in the wake of former CEO Brain Dunn’s scandalous departure. But public perception is not Best Buy’s only problem: How can Joly — who has no retail experience — hope to prevent the company from becoming another Circuit City?
Who is Hubert Joly?
Herbert Joly comes to Best Buy by way of Carlson Co., which is not exactly a household name, but it’s the parent company behind plenty of them. The Minneapolis-based firm runs more than 900 restaurants (including T.G.I. Friday’s) and more than 1,000 hotels (including Radisson, park Plaza, and Country Inns & Suites) in 150 countries around the world. The Carlson Companies are closely held, but are generally well-regarded by its employees, especially in terms of supporting workplace diversity.
Joly became Carlson’s CEO in 2008; before that he was the head of Carson Wagonlit Travel (CWT), a partnership Carlson formed with Paris-based Wagonlit Travel. CWT is one of the world’s largest business travel management firms. At the helm, Joly headed a turnaround that saw a nearly three-fold increase in sales and strongly improved profit margins.
These credentials may illustrate Joly’s ability to lead a large corporation and instigate financial turnarounds, but experience in travel, hotels, and restaurants doesn’t seem to have any bearing on consumer electronics, technology, or new media. For that, Best Buy is digging back further into Joly’s career: Before CWT, he served briefly as Vivendi Universal’s CIO, and had overseen the integration of Vivendi and Universal’s assets in the United States. Starting back in 1999, Joly played a major role in restructuring Vivendi’s video game business — at the time, that included the development and expansion of its still-active Diablo and World of Warcraft franchises.
Further back, Joly has additional tech cred: From 1996 to 1999 he was a major player in turning around Electronic Data Systems (EDS) in France. EDS was the technology services company founded by former U.S. presidential candidate H. Ross Perot; it offered data processing, personnel management, and services like claims processing for a variety of companies, as well as the U.S. federal government. Hewlett-Packard acquired it back in 2009, and it now forms much of HP’s Enterprise Services division.
Joly is largely viewed as a turnaround-expert for hire: Companies hire him to come in, initiate forceful turnaround plans, and put the company on firmer business ground. Once that’s done, Joly transitions to another company in need of his skills. Joly’s track record is about as good as they come — and there’s no doubt that Best Buy needs some serious help.
Best Buy’s situation
Best Buy is the United State’s leading consumer electronics retailer, with more than 1,400 retail locations, more than $50 billion in business, and more than 160,000 employees. By any measure, Best Buy seems to be a roaring success, clinching its hold on the consumer electronics space while competitors like CompUSA and Circuit City withdrew from the market or closed up altogether.
But it’s not easy being king. In its most recent fiscal year, Best Buy reported a loss of $1.2 billion — that compares with a profit of $1.3 billion the previous year. Numbers like that make investors and partners very nervous, as the company sees in-store sales declining as customers ship to online retailers like Amazon.com that can often offer better prices (and free shipping) on the exact same products. Increasingly, Best Buy’s expensive-to-operate retail stores are functioning as showrooms for consumers, who may go into a Best Buy location to check out new products, but then purchase the products online at a lower price after they leave. The situation can be exasperated by instances of questionable sales tactics, with stories of customers being pressured to purchase things like (highly profitable) extended warranties, or even preying on seniors and other customers who may not have a strong understanding of products into buying things they may not want or need. (It’s certainly not a universal experience, but with social media even a single negative instance can be substantially magnified.)
Some of Best Buy’s injuries are self-inflicted. A good portion of the company’s loss in its most recent fiscal year stemmed from buying out Carphone Warehouse’s share of Best Buy Mobile and writing down Best Buy Europe goodwill: Best Buy might be the leading electronics retailer in the U.S., but its plans to expand into Europe fizzled out, in part due to the worldwide economic downturn. The costly gambit didn’t work out. Similarly, the company’s plans to turn into a digital media giant with services like Napster and CinemaNow failed to resonate with consumers. Best Buy also inked a deal with LightSquared to bring 4G LTE to its Best Buy Connect offerings — that sure worked out well.
Challenges like these are more-or-less part and parcel of being a massive brick-and-mortar business these days. However, Best Buy truly stepped in it with the abrupt resignation of CEO Brian Dunn in April. Best Buy was very clear it had no problems with Dunn’s operational or financial decision-making. Instead, the “mutual” decision that he should depart stemmed from an inappropriate “extremely close” relationship with a 29-year-old female employee. It’s one thing for a corporate leader to announce a round of belt-tightening in a tough business — as Dunn did when he announced the closure of 50 U.S. Best Buy locations. It’s another thing to have a philanderer in the top chair.
Since then, Best Buy has been struggling for direction. Best Buy founder Richard Schulze resigned as chairman of the company in June, in part for helping keep Dunn’s shenanigans a secret. However, Schulze remained a force to be reckoned with, since he still owned more than 20 percent of the company. Schulze has since engaged in an almost guerrilla campaign to make a $10 billion offer to take Best Buy private. Schulze would cut costs, slash prices, and improve customer service — and, perhaps most importantly, streamline corporate governance into a kind of benign dictatorship that would make the company more nimble. In the meantime, Best Buy announced it was laying off some 600 of its Geek Squad employees and 1,800 additional store personnel to cut costs.
In hiring Joly as CEO, Best Buy’s board is essentially telling Schulze to go packing. Best Buy says it offered to take Schulze’s offer seriously and give him time and flexibility to line up financing, but claimed Schulze’s offer contained “insufficient information.” Schulze describes Best Buy’s actions as an “abrupt public termination” of negotiations. However, Schulze still has his 20 percent stake in the company — and Best Buy hasn’t yet made arrangements with him for a standstill period wherein he won’t take his takeover offer directly to shareholders. Schulze could still try to stage a rebellion.
Can Best Buy avoid being the next Circuit City?
Hubert Joly certainly has his work cut out for him: Best Buy’s stock is down 13 percent this year, and the company is facing continuing losses due to strong competition from online retailers. Moreover, by bringing Joly on board, Best Buy is essentially signaling to investors that they won’t see details of a turnaround plan until 2013: It is going to take some time for Joly to come on board, get his feet wet, and formulate a strategy.
On Joly’s side, Best Buy is probably the most-recognized electronics retailing brand in the United States, and the company has had some success transitioning business towards highly profitable products like mobile phones. Best Buy is also working to compete with Amazon directly as an online retailer. After all, Best Buy already has enormous inventory management and customer fulfillment systems. It could conceivably focus on offering a premier consumer electronics online shopping experience that would contrast with Amazon’s catch-all online shopping strategy, which has spilled over into everything from tools to groceries to perhaps igloos.
However, regardless of Joly’s successful track record turning around businesses, investors and industry-watchers would be much happier if Best Buy had settled on a new CEO who actually has significant experience in retailing, rather than coming to Best Buy from restaurants and hospitality. But, if Joly really is the turnaround rockstar Best Buy thinks he is, maybe a lack of retail experience will enable some outside-the-big-box thinking that could re-invigorate Best Buy.
