Best Buy 2002 Annual Report Download - page 11

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In its first full year of operation within Best Buy,
Musicland stores achieved their performance
goals. Expense reductions enabled the busi-
ness to post a modest operating profit,
despite the national recession and a decline
in mall traffic.
One reason we acquired Musicland was to
attract a differentiated customer of technology
and entertainment products, including more
young people and the rural consumer. The
convenience-based strategy also presents a
shopping alternative to Best Buy stores, which
offer a destination shopping experience. Our
intention was to transform the Musicland
business, improve the customer experience,
diversify the revenue mix and thereby boost
sales productivity and profitability. We also
viewed the small-market stores as an attractive
growth opportunity.
Diversifying the Product Mix
Sales of prerecorded music remained soft
during the year, reflecting file sharing, Internet
downloading and slower sales of top hits.
We are working on a strategy to reverse the
trend, including enhancing our own Internet
entertainment site and exploring subscription-
based models. Yet sales of prerecorded music
are expected to remain soft for the coming
year as well, so our emphasis at Musicland
stores – and at Best Buy stores -- will be on
increasing sales of other entertainment
software, particularly DVD movies and
video gaming.
Our first objective was to launch a new mix of
products at our mall-based Sam Goody
stores, which sell entertainment products and
services to young, fun entertainment consumers.
Today we operate 615 Sam Goody stores,
which average 4,800 square feet.
We doubled the assortment of DVD movies
and introduced video gaming, categories
which carry lower margins but are growing
at triple-digit rates. We also introduced
hardware products that play music and
movies, a natural extension of the product
mix. As a result, increased sales from these
categories offset expected declines in sales of
prerecorded music.
Extending our Leadership
with New Customers
Business Review: Musicland 9