Best Buy Barges into Europe

The U.S. electronics giant will get 50% of Carphone Warehouse's retail business, which has stores in nine countries. But the British tieup comes at a risky time

by Mark Scott

The first lesson in Investing 101: Buy when the market is low. European consumer spending is starting to slow, and consumer confidence is fading. Yet U.S. consumer electronics retailer Best Buy (BBY) has chosen this moment for a long-anticipated expansion into Europe through a joint venture with Britain's Carphone Warehouse (CPW.L).

Under the agreement, announced on May 8, Best Buy will pay $2.1 billion for a 50% stake in Carphone Warehouse's bricks-and-mortar retail business, which includes more than 2,400 stores in nine European countries, as well as Carphone's Internet-based sales operations and a preexisting joint venture between the two firms in the U.S. (BusinessWeek.com, 4/04/08). The deal doesn't include Carphone's thriving services businesses, through which it sells fixed and mobile phone plans and broadband Internet access.

The move comes at an especially risky time: Some of Europe's largest consumer electronics retailers, including Britain's DSG International (DSGI.L), Germany's Metro (MEOG.DE), and France's PPR (PRTP.PA), already are suffering from falling demand for the latest gadgets. Partly as a result, the market reaction to the Best Buy Carphone deal was mildly negative. Carphone's shares fell 3.4% in London trading on May 8 on fears that the joint venture would dilute the company's earning per share by 10% to 15% this year. Best Buy fell 2.7% in New York by early afternoon on investor concerns over the European expansion.

One Step at a Time

Best Buy is paying six times the current operating profit of Carphone's retail division in its bid for European glory. The plan is to keep Carphone's current stores under their existing names, which also include The Phone House on the Continent. These stores will keep doing what they do best: selling mobile handsets and service plans from many providers while also offering Carphone's own cellular and broadband service. Best Buy, meanwhile, will team up with Carphone to roll out new Best Buy stores offering a full range of electronics and appliances across Europe (Carphone will operate its own Carphone boutiques inside the bigger Best Buy stores).

Best Buy is taking things slowly. The company's chief executive officer, Brad Anderson, says the first step will be to open a few stores in Britain in 2009 and then look at ways to expand into other countries. While he won't confirm a specific number of outlets, Anderson says Best Buy will use a plan similar to the one it followed in China. There, an initial store opened last year will be followed by a second Best Buy store and later 20 to 25 outlets operating under the company's Five Star brand. "We have to feel our way into Europe," he says.

While the European economy is showing signs of weakness, Best Buy has a strong partner in Carphone Warehouse. Started in 1989 by Charles Dunstone, then 25, with $12,000 of his own savings, the company now dominates Britain's cell-phone market by offering a high level of customer service that lets consumers compare prices and service plans from many providers. Carphone also has launched its own name-brand telecom services, including fixed-line, mobile, and broadband access, and has rolled out training programs that help consumers get up to speed quickly on new gadgets.

This experience makes the British retailer an innovator in the cutthroat consumer electronics market and will provide Best Buy with much-needed knowhow if it is to cement its place across Europe. To meet the demands of European consumers, the companies say they will offer a range of different stores—everything from large mega-outlets to smaller town-center locations—as well as tailor their services to local needs. Ever the optimist, Carphone's Dunstone says the recent economic downturn could even help the new joint venture: "It's the easiest time to get hold of space in retail parks in the last 15 years," he observes.

Uphill Battle

Analysts caution, though, that the planned expansion could be harder than first thought. Europeans on average buy fewer electronics, and less frequently, than their U.S. counterparts. Any prolonged fears over economic growth will only exacerbate these trends, although to date Europe's economy has held up better than America's.

Sam Hart, an analyst at brokerage Charles Stanley (CAY.L) in London, also reckons Carphone's background in the mobile phone business may not translate into more mainstream retailing. Selling washing machines and TVs presents supply-chain and marketing challenges that cell phones don't. "There's intense competition and rapid price reductions," he says. "Carphone doesn't have a track record in [diversified] consumer retailing."

That's where Best Buy's years of retail experience could make a difference. Despite the U.S. economic slowdown, the company reported revenues of $40 billion for the fiscal year ended Mar. 1, up 11.4%, and earnings up 2.2%, to $1.4 billion. The electronics retailer is banking on its $2.1 billion investment to pay big dividends when the global economy starts to recover. But with forecasts predicting Europe's economies probably won't perk up before until 2009, the payback could be a while in coming.

Scott is a reporter in BusinessWeek's London bureau .