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John Noble, Best Buy International

How the CFO navigates two brands and two business cultures from his Vancouver office.
Tom Leander, CFO Asia
March 22, 2007

Relaxed is the corporate mode of Best Buy, the U.S. electronics retail giant with U.S.$11 billion in sales and 940 stores in North America. John Noble is no exception. Dressed in a yellow turtleneck sweater, jeans, and sneakers, the CFO of Best Buy's new international division exudes a stately calm as he works out of boxes in a bustling office. Noble, 48, a veteran of Bristol-Myers Squibb and Pillsbury before he joined the retailer, makes his home in Vancouver but flies frequently to Shanghai, where he's organizing the company's push into China.

The Pudong office has the feel of a staging post. Sheets torn from a notepad hang from corner office doors to identify who lays claim to the space for the day. Windows command a high-up view westward over Suzhou Creek to the plains of the Yangtze River and beyond — sales territory ever fertile in the dreams of foreign retailers. Never mind that this market is already crowded with powerful Chinese electronics retailers like Gome and Suning, currently in a pitched battle to steal each other's customers.

Best Buy entered this fray in early 2006 with the purchase of Jiangsu Five Star Appliance Co. (Five Star), the fourth-largest electronics retailer with 136 stores in seven of China's 34 provinces. Best Buy gained a majority stake with a U.S.$180 million investment and then injected an additional U.S.$122 million into the business. That deal closed in June, and in December Best Buy opened a flagship store in Shanghai and announced plans to roll out Best Buy shops in China's affluent east coast cities beginning in 2007. A similar dual-brand strategy has garnered Best Buy a 34 percent market share in Canada. Will it work in China's crowded, hyper-competitive electronics retail market? Noble explains how his company is placing its bets.

You're the first CFO of Best Buy International, which itself is a recent outgrowth of Best Buy U.S. How did your job develop?
Our first success outside the U.S. was in Canada, where we launched a dual-market strategy. We bought Future Shop, an electronics retailer, in 2001 and it has grown in tandem with our Best Buy stores. They target different consumers. The combined stores have a 34 percent market share. In the U.S., by comparison, our market share is about 18 percent.

When you say that you cater to different types of customers in the stores, what does that mean?
Future Shops are smaller, and the customers tend to be a bit more tech savvy. They also like to negotiate on price. Best Buy has wide aisles, and the service there is upon request — no high-pressure, commission-based sales. Best Buy, for example, has a higher success rate with female consumers.

So with Five Star and Best Buy you're trying the same dual-brand approach in China.
Absolutely. Best Buy will target the higher-end consumers in the more affluent east coast, or top-tier, cities. Five Star is focused on the less-developed areas of China. It already operates in seven provinces and it has added 60 new stores since 2005; most of these are in second-tier cities throughout China. It's the number one electronics retailer in Jiangsu province. One of the advantages of the dual-brand strategy is that having two approaches give us more leeway to learn and adapt. We can translate lessons learned at Five Star about the specific wants and needs of Chinese consumers to Best Buy — and vice versa.

How did the company first get to China?
We started to utilize global sourcing from China, first in Shanghai. But then sourcing also provided a window into the market. It became clear after several years of this that once we launched our global expansion, we have to be here as a business.

So you see Chinese consumers as different from North American ones?
There are some differences. We won't sell DVDs, because there are some regulatory hurdles here we can't overcome. And we have a huge mobile phone section, which reflects the great interest in mobile communications in China. We also sell a lot more basic appliances, such as cooking hotpots and smaller household items such as irons. Best Buy has a more upscale component that Five Star doesn't. There's a lot of money in Shanghai and the first-tier cities. At our flagship — and this will eventually be offered in all our stores — we're featuring our 'Magnolia' service plan, which offers the sale of home theater systems. This is the same as the U.S. We also have a separate room in which we show U.S.$70,000 systems: people have this kind of money to spend in Shanghai these days. Another service that we think is smart for China is our Geek Squad, which has proved successful in the U.S. We actually have a team of technicians to help set up computers, either for in-store advice or in customers' homes. Computer equipment is becoming so complex that customers are grateful for the service.

Are you worried about competition in China?
You'd be crazy if you weren't thinking about competition. Our biggest challengers are Gome, with the top market share, and Suning Appliance Co. Gome just recently bought the number three electronics retailer, China Paradise, but I don't think the acquisition integration is going to be easy. There's too much duplication. We're trying to understand China in our own way, and offer an entirely different experience. Our decision to buy Five Star was more about culture and a sensible entry into this market than a grab for market share. I came to China a year ago, when we first planned our expansion here, and said to senior management when I returned: We've got to get this right. We have to figure this market out, and even if that means some faulty calls, so be it.


What problems have you run into at Five Star?
Ways to track performance just weren't there. For one, they didn't do comp-store sales, a basic way to look at performance. [Comp-store sales, or same-store sales, are sales dollars generated by those stores that have been open more than a year and have historical data to compare this year's sales to the same time frame in the previous year.] What we found is that there's a mentality in China in which management pays all its attention to opening new stores, but tends to lose interest in the performance of stores that are already opened.

In the short time we've owned Five Star, we've introduced comp-store sales as an internal discipline. There's been an improvement already: throughout Five Star, comp-store sales was minus 10 when we made the acquisition, versus plus 18 today. It's becoming part of management thinking. At a recent meeting, a store manager rose and apologized to his peers because his comp-store sales were underperforming. We anticipate that the comp-store sales approach will help overcome this mentality of opening up a store for the sake of opening up a store. There may be some critical mass issues in the more remote cities that Five Star has been operating in. We've been challenging the managers directly about long-term viability of a store's location. We actually exited a province because of this.

You're a CFO, and yet it seems you're spending most of your time on expansion strategy.
I would classify what I'm doing as operationalizing our businesses, support functions, and finance. We face a challenge doing this as we grow internationally, and what I bring to the table is a different perspective due to my background. I spent a lot of time in my early career seeking as much experience as possible in line businesses rather than at the corporate level. Later, when I got to corporate, I sensed the greatest contribution I could make was to bring working knowledge of business planning, manufacturing, capital resources, and all types of analysis to the staff level. I also don't have a background in accounting, so that makes me different.

Has your lack of accounting been good or bad for your career?
I actually think it's helped me. I've had enough accounting assignments that I know my way around. What I bring to the accounting is common sense. I understand enough to ask the right questions. I also challenge the accountants, asking: does the accounting treatment make sense? Sometimes I'll see something and it intuitively doesn't make sense. I often push our accounting folks. Accounting people want to think there's a black and white, but there's a lot of gray. And sometimes the accounting rules don't make sense to me, even when I know what they're trying to do.

Can you give an example?
In Canada, we were moving from one provider for our warranty program to another. I was on the phone with the accountants for days discussing this. The cash we'd get for these programs would be sitting with the warranty provider and we'd be earning interest on it. I thought we should recognize the interest income over time and fit it into the accounting treatment, but the accountants were more conservative and didn't want to. I didn't really get to where I wanted to, but we did end up with a compromise. But we were in that gray zone where you had leeway to argue different points of view.

What are the financial challenges confronting you in China?
We're a cash-rich company and we injected cash into Five Star when we established the joint venture. Because of boundaries to cash management within China, we're still learning how to manage capital between two separate business entities. It's very different than in Canada or the U.S. We have a global relationship with one major financial institution, but we've opted for a different provider here. I believe in diversity in banking relationships and with all vendors, actually. You don't want one particular provider to take you for granted. I want them to compete for our business.

So you're convinced the dual-brand strategy is a world beater?
Not necessarily. Our acquisition of Five Star has gone well, but we're evaluating whether to do it the same way as we continue opening in overseas markets. We're examining Turkey and Mexico. In Turkey, for example, the dual-brand strategy might not make sense, because we can't see anything we'd like to buy there. For us, it's not just a matter of market share. It has to make sense on many levels. One of the reasons we liked Five Star was that they thought about the soft stuff — people skills, support, and creativity — in much the way we do. So there has to be a cultural fit. That said, we're open to acquisitions everywhere, and even open to a dual-brand strategy in the U.S.

Speaking of knowing the culture — how can you run such an important operation from Vancouver?
I'm certainly hoping to move to Shanghai — no firm plans yet.




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