Best Buy Lures Small Business

The $30 billion retailer noted for staging midnight sales of Xbox 360 video games and “Star Wars” DVDs now has small-business customers squarely in its sights.

To date, it has opened Best Buy for Business operations in more than 100 Best Buy retail stores to serve the technology needs of small businesses. The mission: to leverage its consumer brand to identify and attract business customers to existing locations and make buying technology more enjoyable.

The Minneapolis-based company plans another 120 locations by the end of fiscal 2007, ending Feb. 25, 2007, according to information from a presentation that Best Buy made at a Bear Stearns investors conference in March.

Whether this game plan translates into competition or opportunity for traditional solution providers depends on where you are located and your core value proposition, according to channel executives.

“Some level of our services could be commoditized. They’ll grab some of it. We’ll have to build more value on. We have to keep on chasing more value,” said Joe Toste, vice president of marketing at Equus Computer Systems, a Minneapolis-based system builder.

According to the Bear Stearns presentation, Best Buy is counting on selling products and services to small-business customers as a key growth driver over the next five years. It plans to add about 600 trained business professionals to penetrate what it estimates is an $80 billion opportunity in small businesses. “These customers already shop at Best Buy for personal needs,” stated a slide from the Bear Stearns presentation.

The Best Buy for Business catalog pitches small businesses on anything from free on-site IT assessments for network installations to other services that leverage—at least partially—its Geek Squad technicians, who offer 24-hour on-site and remote services such as wireless network setup for $159 or data backup onto a DVD for $89.

Best Buy executives declined to comment, but sources with knowledge of the strategy said the retailer likely will engage a multitiered channel, using its own hired technicians for lower-end projects and contracting with third-party service providers, including VARs, for more complex work. Best Buy would not detail its partnering strategy, but the sources said it will need solution providers to hit all the geographic and technological areas it plans to cover across the United States.

The Best Buy for Business catalog reveals that the company already is selling higher-end business products typically not available to consumers at its retail stores—for example, a Belkin 42U rack enclosure for $1,100, according to the catalog. Moreover, vendors including Microsoft and Lenovo have struck special accords with Best Buy covering their products (see sidebar).

Sources said Best Buy is even exploring a deal to represent the NetSuite ERP managed service—ironic, since the software doesn’t even come in a shrink-wrapped box appropriate for retail. NetSuite has denied that a deal is in the works.

The Best Buy plan is mainly being leveled at Dell, not SMB solution providers, said one source familiar with the strategy. “Dell is the monster,” the source said. Moreover, Best Buy views its own Geek Squad technical talent as a big competitive advantage since Dell relies on third-party service providers, he said.

Dell, for its part, last week said it is opening two full-size retail stores as part of a pilot program. Dell, Round Rock, Texas, said the stores will only carry display models and customers will still have to order online or by phone. As for competition from Best Buy, some solution providers said its strategy could find traction in larger metropolitan areas, where its advertising could undercut pricing. But the retail world’s historic personnel turnover rates could make it difficult to attract, train and retain skilled technical services personnel.

“There will be some competition for businesses that shop on price. But for someone to come in and do pure consulting on business practices, to show you how to use technology for your business, I think you’ll find that competition is not there,” said Jay Tipton, president of Technology Specialists, a Fort Wayne, Ind., solution provider.

In addition, it will be difficult for Best Buy to match the vertical market expertise that distinguishes many solution providers, he said. “It would cost them too much. I also see huge inconsistencies across different geographic areas. Even though they’re hiring local people, the technology [skill] levels will be all over the place,” Tipton said.

As far as local touch, Best Buy plans to engage with local chambers of commerce to win business with civic leaders, one source said. “That helps build rapport and relationships with customers to drive forward the business model,” the source said.

Leads generated by Best Buy’s technology consultants through chambers of commerce connections already are resulting in more complex jobs—including intense database programming and Web site development—for local VARs, sources said.

Most Best Buy for Business jobs cover basic network installation and infrastructure setup for small businesses with fewer than 25 employees performed by the Geek Squad, according to one source, who added the average project brings in $8,000 in revenue, with about 20 percent to 25 percent coming from services. Like traditional VARs, Best Buy is eyeing the higher profitability in the services portion of the deal, he said.

Best Buy for Business is also offering product drop-shipping direct to business clients through its relationships with large broadline distributors including Ingram Micro. “This truly is a VAR model,” the source said.

Some Best Buy value propositions include in-store business professionals available to customers; an expanded assortment of products; Geek Squad support; community networking to establish customer relationships; and a Reward Zone rebate program for frequent buyers. Nationwide coverage and 24x7 support are also key selling points, the source said.

One distribution executive who counts Best Buy as a customer said he is confident the retailer will be successful. “It’s a constantly changing landscape out there,” he said. “They’ll find their niche and be successful. They will definitely provide competition for some VARs.” He said the key to success for VARs will be “specialization and personalization.”

The ASCII Group, which represents more than 2,000 VARs, initially was upset with Microsoft’s and Lenovo’s decision to support Best Buy for Business, said Alan Weinberger, ASCII chairman and CEO. That changed after conversations with each vendor, he said. Now ASCII sees potential partnerships.

“Initially, it looked like the major vendors would undersell on price what the VARs were also doing. Executives assured us that [VARs] would be treated equally and fairly,” he said. ASCII has talked with the vendors, as well as with Best Buy competitors CDW and CompUSA, about fulfilling services for small-business customers that purchase products through those companies.

“Our people, the small VARs, don’t feel much of a competitive threat,” Weinberger said. “But there is some of the FUD factor: fear, uncertainty, doubt. It’s similar to the threat of Dell and other big players. That’s good news. The reason [Dell] is losing customers is that price is not the end game. If VARs service their customers well, the [customers] won’t switch.”

One distribution executive who recently investigated the concept while in a Best Buy store said it could impact SMB solution providers, but more likely the effect will be on larger players.

“I see it much like CDW and other DMR-type customers today. I don’t think they’re providing as much of a services offering as solution providers,” said the executive, who asked not to be named. “It’s potentially [competitive], but I think someone like CDW would be more concerned about it than the average VAR. I think some VARs could be impacted, if customers can acquire product at a cheaper level, by all means, there is the potential to lose business.”

Best Buy for Business’ physical retail presence could be a differentiator vs. CDW and Dell, the executive said. “The brick-and-mortar presence is a huge advantage. CDW has feet on the street now, but not to this extent,” the executive said.

Physically, the Best Buy for Business areas are singled out only by a large sign. None of the high-end business-class products—Cisco Catalyst Express switches, Symantec Gateway Security appliances, Hewlett-Packard ProLiant or Acer Altos servers—are displayed. Best Buy appears to have embraced its retail heritage by not setting its business store apart with a glassed-in or walled-off area.

One long-term ramification to competition from Best Buy—successful or not—is the continued drag on product margins, said John Kunzer, president of MCC Technology, St. Charles, Ill.

“We’re concerned about it, but primarily because these things tend to be short-lived projects. When they don’t meet expectations, like other projects in the past, it ruins the market for dealers,” Kunzer said. “The pricing model can’t go backward. Once someone perceives a value in the marketplace, that [price] becomes the standard. It’s difficult to go back from that.”

Steve Smith, owner of Softech, a Woodbury, Vt., solution provider that is expanding into digital home integration, said he is not concerned since the nearest Best Buy is 45 minutes away. Besides, he said, Softech has spent years developing tight local ties with businesses.

“I wouldn’t risk my reputation by working with a Best Buy, CompUSA or Dell,” he said. “It all comes down to my reputation.”

Equus’ Toste said Best Buy’s activities could actually convince small businesses they need a solution provider.

“You always look at these things purely competitively,” he said. “So, they’re not going to fail competitively. But the majority of small businesses don’t have a VAR. … So if they can talk about more service and market more service to small businesses, they make the pie bigger. And that gives the small business more visibility that they need someone like me. That’s good.”

HEATHER CLANCY contributed to this story.