Bloomberg News

Best Buy Leadership Vacuum Seen Amid Amazon Threat

April 16, 2012

Brian Dunn, seen here as chief executive officer of Best Buy Co. Photographer: Denis Doyle/Bloomberg

Brian Dunn, seen here as chief executive officer of Best Buy Co. Photographer: Denis Doyle/Bloomberg

Best Buy Co. (BBY:US) has a leadership vacuum at the top at the very time it’s struggling to find a way to compete against online retailers.

Directors at the world’s largest electronics retailer are searching for a new chief executive officer after Brian Dunn resigned last week amid a board probe into his “personal conduct.” With few internal candidates prepared to take the job, the board placed one of its own, four-year director G. Mike Mikan, as interim CEO. While Mikan, a former finance executive in health care, is keen to take the job, some board members want an outsider with online-retail experience, said a person familiar with the search.

With Dunn gone, Richfield, Minnesota-based Best Buy has a chance to alter its reliance on leaders versed in its traditional big-box store business and tap someone able to compete against digital rivals such as Amazon.com Inc. (AMZN:US) and Apple Inc. (AAPL:US), which are becoming dominant.

“The board would be short-sighted not to see this as an opportunity to go in a different direction,” said Bryan Gildenberg, an analyst with London-based research firm Kantar Retail. “They need someone from Google or Amazon, who are changing the world. There’s an ecosystem to the digital world that you can’t understand unless you have competed in it.”

Dunn resigned amid an investigation that he may have misused company resources while having an inappropriate relationship with a 29-year-old female subordinate, said two people familiar with the matter. The board last week hired Washington law firm WilmerHale to oversee its investigation, with former U.S. Securities and Exchange Commission Director of Enforcement William R. McLucas and former U.S. Attorney for the District of Colorado Thomas Strickland assigned to the case.

Nine-Month Search

Best Buy director Kathy J. Higgins Victor will oversee the board’s global CEO search, which will take six to nine months, the company said in a statement last week.

Chairman and founder Richard Schulze may prefer an insider as the next CEO because he believes in grooming executives through the ranks who know the company’s culture, according to a person familiar with the search. Other directors want an outsider with more online experience, said the person, who asked to be named because the matter is private. Looking outside of its headquarters would be a first for Best Buy, whose only CEOs after Schulze -- Bradbury Anderson and Dunn -- were company lifers.

Schulze and other directors, through Ron Hutcheson, a spokesman for the board who works for Hill & Knowlton Strategies in Washington, have declined to comment about the CEO search or Dunn’s departure.

Operating Performance

Best Buy said Dunn’s departure wasn’t over any disagreements on the company’s operating strategy. On March 29, Best Buy reported a $1.7 billion fourth-quarter loss (BBY:US) and announced the closing of 50 big-box stores. The company also said it would speed up the openings of smaller stores that focus on mobile-phone sales and services. The company’s operating margin (BBY:US) narrowed to 4.6 percent for the 2012 fiscal year, which ended March 3, from 5.6 percent five years ago.

The company has said Mikan will be considered for the permanent CEO spot. He previously served as chief financial officer of UnitedHealth Group Inc. (UNH:US) and CEO of Optum, a UnitedHealth affiliate in health-care services. He has no retail store or digital experience.

Dunn also lacked digital experience. He started as an electronics salesman in one of the company’s stores, became a store manager and worked his way up the corporate ladder.

Trailing Amazon

He became CEO in June 2009 and company sales stagnated. While Seattle-based Amazon’s sales (AMZN:US) have soared about 40 percent in each of the past two years, Best Buy’s sales of $50.7 billion last year are just 13 percent higher than they were the year before Dunn took over.

In that time, Cupertino, California-based Apple also has expanded its retail presence to 361 stores that $6.1 billion in sales in the quarter ended Dec. 31, up 59 percent from the same period a year earlier.

For this year, analysts (BBY:US) project Best Buy’s sales will fall to $50.2 billion, the average of 18 estimates compiled by Bloomberg. The shares declined 27 percent in the 12 months before today, compared with a 17 percent gain for the Standard & Poor’s 500 Retailing Index. (S5RETL)

While Dunn was active on social-networking sites Facebook and Twitter, many of his posts were about sports or his personal life. For all of his online networking, Dunn didn’t find a way to battle back against companies like Amazon and Apple’s iTunes, which have been raiding Best Buy’s customer base, said Michael Fertik, CEO of Reputation.com Inc., a Redwood City, California- based company that monitors online postings for companies.

Professional Persona

“Like a lot of guys who are enraptured with social media but don’t fully understand it, this is an example of someone who embraced it but may not be able to actually point to anything that it did for him,” Fertik said in a telephone interview. “Part of that arises from the fact that he merged his personal and professional personas. A lot of his tweets are about sports.”

The appointment of Mikan as interim CEO is a sign the company lacks a senior executive prepared to take charge and create change, said Kantar Retail’s Gildenberg.

“Best Buy’s operating culture is a little insular,” he said. “Management and the board don’t have anyone who has deep digital experience.”

Of its top executives, only Stephen Gillett, president of Best Buy’s digital and global business services, has digital experience, Gildenberg said. He was hired from Seattle-based Starbucks Corp. (SBUX:US) last month.

Hiring Outside

That’s why the board is likely to go outside to find someone new, said former Best Buy CEO Anderson, who held the job prior to Dunn.

“I expect the board will look outside,” Anderson said in a phone interview last week. “The organization does need some significant change, and I would expect they are going to look for someone who can lead that kind of change.”

Anderson said the big-box model can still work. The company can use the stores for both sales and to offer consumers expertise in electronics and sell services. The new CEO, though, will have to come up with a vision that reaches consumers who are going elsewhere, he said.

“It’s what we’re trying to do with technology in our lives that the company has to focus on,” he said.

To contact the reporters on this story: David Welch in Detroit at dwelch12@bloomberg.net; Chris Burritt in Greensboro at cburritt@bloomberg.net; Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net

To contact the editor responsible for this story: Kevin Orland at korland@bloomberg.net


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Companies Mentioned

  • BBY
    (Best Buy Co Inc)
    • $38.89 USD
    • -0.80
    • -2.06%
  • AMZN
    (Amazon.com Inc)
    • $303.03 USD
    • -3.25
    • -1.07%
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