Minding the Store - Minding the Store Analyzing Customers...

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1 Minding the Store: Analyzing Customers, Best Buy Decides Not All Are Welcome --- Retailer Aims to Outsmart Dogged Bargain-Hunters, And Coddle Big Spenders --- Looking for `Barrys' and `Jills' By Gary McWilliams 8 November 2004, The Wall Street Journal, A1 Brad Anderson, chief executive officer of Best Buy Co., is embracing a heretical notion for a retailer. He wants to separate the "angels" among his 1.5 million daily customers from the "devils." Best Buy's angels are customers who boost profits at the consumer-electronics giant by snapping up high-definition televisions, portable electronics, and newly released DVDs without waiting for markdowns or rebates. The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on "loss leaders," severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes from Web sites and demand that Best Buy make good on its lowest-price pledge. "They can wreak enormous economic havoc," says Mr. Anderson. Best Buy estimates that as many as 100 million of its 500 million customer visits each year are undesirable. And the 54-year-old chief executive wants to be rid of these customers. Mr. Anderson's new approach upends what has long been standard practice for mass merchants. Most chains use their marketing budgets chiefly to maximize customer traffic, in the belief that more visitors will lift revenue and profit. Shunning customers -- unprofitable or not -- is rare and risky. Mr. Anderson says the new tack is based on a business-school theory that advocates rating customers according to profitability, then dumping the up to 20% that are unprofitable. The financial-services industry has used a variation of that approach for years, lavishing attention on its best customers and penalizing its unprofitable customers with fees for using ATMs or tellers or for obtaining bank records. Best Buy seems an unlikely candidate for a radical makeover. With $24.5 billion in sales last year, the Richfield, Minn., company is the nation's top seller of consumer electronics. Its big, airy stores and wide inventory have helped it increase market share, even as rivals such as Circuit City Stores Inc. and Sears, Roebuck & Co., have struggled. In the 2004 fiscal year that ended in February, Best Buy reported net income of $570 million, up from $99 million during the year-earlier period marred by an unsuccessful acquisition, but still below the $705 million it earned in fiscal 2002. But Mr. Anderson spies a hurricane on the horizon. Wal-Mart Stores Inc., the world's largest retailer, and Dell Inc., the largest personal-computer maker, have moved rapidly into high-
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2 definition televisions and portable electronics, two of Best Buy's most profitable areas. Today, they rank respectively as the nation's second- and fourth-largest consumer-electronics sellers.
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