Best Buy does not manufacture any of the products it sells and thus does not occupy one specific place in the general life cycle of products. The market for electronics goods is mature and also growing. There are many products that Best Buy sells that are in the maturity stage of their life cycle, CRT televisions, home stereo, and washers and dryers. But as with all technology, many of their other products are new to the world ideas or improvements on older products. MP3 players, computers, and plasma televisions are just a few of the products marketed by Best Buy that are in the introduction or growth stages of their life cycles.
As technology is continuously evolving, Best Buy devotes a large budget to monitoring emerging market trends and products, in order to stay on top of new market conditions. By constantly updating inventory, the company can ensure customers that they have come to the right place to purchase their electronic devices. Technology in general, can also be in mature and growth stages as there are many different types of products. The technology sector, as with Best Buy, does not occupy a single position in its life cycle.
Many technologies are always being improved upon, invented, or becoming obsolete. The electronics market in general is the same way. There will always be demand for many electronics products. However, their sales are contingent upon economic factors. During times of recession, consumers do not spend as much on luxury goods. There can also be new technologies that come along and disrupt the climate of the market, such as the plasma TV. But when these innovations arise Best Buy is ready and simply integrates them into their product offering. Best Buy is currently growing at a phenomenal rate.
With hopes of adding more than 100 stores over the next two years and sustained 36% annual growth over the past ten years, Best Buy is solidifying its position as the market leader in the electronics and household goods industry. In addition to expanding into new markets, a 10. 2% yoy growth in revenues is a strong sign of continued success. More than 80% of the products that Best Buy sells are manufactured in various Asian countries, including China. China looks to become an attractive trading partner in the near future as they are turning to a more capitalistic economy.
This will offer many benefits to electronics marketers as they will now be able to achieve more competitive prices from China’s assembly plants. Best Buy will in turn be able to purchase products from their suppliers at a lower cost and will be able to achieve higher margins. In the past, Best Buy’s pricing structure has been relatively consistent. They hold a great amount of power in their supply chain and can negotiate the best possible contract conditions. Best Buy generates more sales than other competitors and can achieve greater economies of scale in their operations, resulting in stable sales, pricing, and profits.
The primary factor affecting prices is industry competition. Best Buy generally offers the lowest prices and as a result may realize lower returns. Economic conditions do have some effect on products however. As more and more technological advances occur, the prices of existing technologies are drastically reduced. This can be observed in the pricing of plasma TVs. Five years ago, there were no plasma screens for less that $10,000. Today, they are selling good quality units for less than $3,000. However, inflation is a factor as with all goods. A 1-3% price increase for similar goods, utilizing the latest technology can be expected.
Also during times of crisis, such as after Katrina and Rita when oil and transportation costs increase, prices may reflect as such. 35% of Best Buy’s operating profit goes toward tax expense. In FY 2005, Best Buy paid $509 million in taxes on $1,443 million in profit from continuing operations. This is the typical tax bracket for a corporation of this size. Best Buy’s domestic competition consists of any avenue of purchasing consumer electronics. The primary competition consists of Circuit City, Radio Shack, Wal-Mart, Dell, Sears, and Ultimate Electronics, and as of late American.
Best Buy also views home improvement stores, video wholesale clubs and rental stores, mass merchants and other small specialty retailers as competition as they all compete for consumers’ discretionary income. Exhibit 1 below shows market share, comparing Best Buy to Circuit City and Radio Shack. Wal-Mart, Sears and Dell were excluded because there are no figures indicating what portion of their business comes from electronics products, and what portion of Best Buy’s revenue comes from computers. The threat of new entrants into the electronics industry can be considered medium.
New businesses are opening at a rate of more than one every day in this industry, but the threat of them taking any significant sales from Best Buy is low. The capital requirements, relationships, and industry knowledge to succeed as Best Buy has, create high barriers to entry in the market and thus have helped Best Buy to entrench its position. Foreign competition could become a threat in the future, in the U. S. Best Buy operates primarily in the U. S. with some stores opening in Canada. There is little to stop a foreign competitor except for Best Buy’s brand equity.
Best Buy can leverage its familiar name through advertising and this alone can discourage many competitors from entering the market. Best Buy has recently shown its superiority by opening locations within a half-mile of Circuit City locations and far outperforming this competitor. There have been several instances in the past 3 years that the Circuit City location has closed down. It is difficult for any competitor, foreign or domestic to compete with Best Buy’s market expertise. Below is an analysis of market share and product groups contributing to revenue.
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