Best Buy's CEO led the retailer in an incredible turnaround — here's how the company is defying the retail apocalypse (BBY)

• Hubert Joly was appointed CEO of Best Buy in 2012, when the company was faced with what he calls an "all-you-can-eat menu of challenges."
• Joly executed a successful turnaround by slashing prices, growing online sales, and improving customer service.
• One of Joly's biggest accomplishments was cutting employee turnover, which he says he managed to do with a new approach to leadership at the company.
• While Best Buy recently closed 250 small stores in malls and is continuing to tweak its store count, Joly says the company is overall happy with its location count.
• Joly embraces competition with traditional retailers and e-commerce giants like Amazon. He says capitalism "is about the best companies winning."

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When Hubert Joly was named CEO of Best Buy in 2012, he was presented with what he calls an "all-you-can-eat menu of challenges."

Best Buy's sales were plummeting. The retailer couldn't compete on e-commerce. The previous CEO had left amid scandal, and the company's founder was fighting an open battle to take Best Buy private.

To make matters worse, analysts were suspicious of Joly's abilities, with shares dropping 10.3% in reaction to the news he had been appointed CEO. At the time, the Wedbush Securities analyst Michael Pachter told The Wall Street Journal that Joly was "completely unqualified" and expressed shock with the decision.

Since then, Joly has handily proved critics wrong. Since he joined Best Buy, the company's share price has increased 271%. Best Buy reported that comparable sales grew 5.6% in its 2018 fiscal year.

Business Insider sat down with Joly earlier in March to discuss Best Buy's turnaround, the retail apocalypse, and how competition and capitalism make companies better.

The following was edited for length and clarity.

Demolishing an 'all-you-can-eat menu of challenges'

Hubert Joly: What I’d like to do, if you allow me, is tell you a little story.

It's easier for me to talk about Best Buy than all of retail, because all of retail is vast. But I'll tell you what has happened in the last five years, briefly.

I joined the company five years ago. At the time, yes, it was the all-you-can-eat menu of challenges. Operational challenges, frankly, the quality of services in our stores was not so good. Leadership challenges, with my predecessor being fired, and shareholder challenges, with our share price in the toilet and our founder planning to take the company private. All-you-can-eat menu of challenges.

So on the left-hand side, there's some simple facts. Domestic comparable sales increased over the last five years, including last year, where we did about +5.6% in the flat market. The operating income rate — that improved from a low 3.1% to 4.8%, so that's about a 30% increase. EPS grew at 12% per year, the RIC doubled from the total sale to returns standpoint, we're in the top 10% of the S&P 500, and then the stock prices increased 43% per year for the past five years. So these are good numbers.

What did we do? At the end of the day, pretty simple. A handful of things — one, we decided we were gonna be price-competitive and that we were going to match online prices. We took price off the table. We had all these customers coming to us, towards our site — I thought these were well-intentioned people — and if they are not buying, and they're not buying online because of price, I could take care of that. If you're asked in your reporting job, "Who has killed showrooming?" I plead guilty — we've killed showrooming by taking price off the table.

The second thing we did: We invested in the online shopping experience. Online is where the shopping generally starts. Anything that's above $100, the shopping generally starts online because there's so much research to be done. Your website has got to be impeccable, whether or not the transaction is completed online. So we improved our search, we improved the browse, we improved the product reviews, images, information, we improved checkout, and we improved speed of shipping. We now ship same-day in 40 markets, leveraging ship from store. We ship in two days across the country.

Third, we improved the shopping experience in the stores. We've improved the proficiency and the engagement — and we'll talk about this a lot — of the associates. We've actually increased the quantity and quality of labor in the stores, and the feedback from the customers is very, very positive on that.

Building the Best Buy of the future

Joly: So, a year ago, with the board, we said, "Turnaround is over." We've saved the company — nobody is saying the company is not going to make it.

So let's talk about: "What kind of company do we want to build for the future? What should we look like a few years out? How do we build a company that has gone from 'customers don't like us anymore' to now we would like them to love us?"

That's when we introduced, a year ago on the earnings call, "Best Buy 2020: building the new blue." The turnaround was "Renew blue." Now it's "Building the new blue."

Sometimes the analysts say, "Yeah, Best Buy grew last quarter or last year because there was a technology cycle, we don't see anything coming, so therefore it's doom and gloom." While it's true that there's some technology cycle — tablets go up and go down, for example — in aggregate, actually, it's very flat. So the market is flat, and it's not decreasing because there's a lot of innovation.

The second thing is, a lot of customers need help. Because this proliferation of technology can be overwhelming. "What should I buy? Which one of them should I buy? How does it all work to get the connectivity and compatibility issues in context of IOT, smart home, connected home, and so forth? How do I implement it in an integrated fashion? How do I keep it going?" These are big needs for customers.

These two things combined are a huge opportunity for us. There's no home in America that is mono-brand. Even Tim Cook's brand. Tim Cook's house is not mono-brand.

And so we're the place where people are going to find the whole range of brands and technologies, where we can integrate.

We are the place where everything is available, and we can be your adviser.

We've listened to Larry Fink. I think he's got a great point that, you know, that strategy starts with purpose, or Simon Sinek, strategy starts with why. Why do we exist? We don't exist to sell TVs or computers — we exist to enrich people's life with technology. Addressing their underlying need, and then matching solutions with their needs. And that's the angle we have, which we think is very unique.

The smart home to connected home is a huge opportunity for us. Total tech support is a great service need; we've been in the service business for a long time with Geek Squad. It was mainly focused on break-fix and singular products. Increasingly, in the home, everything works together. So if Netflix is not working tonight, is it because of Netflix? The Wi-Fi? The TV? The streaming device? What is it? "Honey, can you please help me?" and we're honey. Because we cover all of these brands, all of these technologies.

And so, whether or not you buy it at Best Buy, we're going to help you with that.

Why are we still alive? Because we play a unique role, an invaluable role, for shareholders and for customers. In most industries, you know, there's rarely alternatives for mediocrity. Sure, you know, businesses, executives, but if what you do is mediocre, you're not going to make it, right? But if you do something that's unique, that's very valuable, then you can win.

Business Insider: Do you think that the future for Best Buy is online? How do you connect all of these different things?

Joly: We're completely agnostic in terms of how the customer wants to buy. He wants to buy online, he wants to buy in the stores — have at it. We've worked so that the economics of the two channels are actually the same. And of course, you know, we separate them, but they're actually not that separate. You guys start a shopping journey online, maybe then go to the store to finish your order. Or, complete your transaction online — half of the online orders are either picked up in the store or shipped from the store. Whatever the customer wants to do, we are very happy with this. This is good growth, right, going from $2.5 billion to $6 billion, and we think it's going to continue to grow.

We're going to grow the two channels as fast as possible. When we did the strategy, we didn't think of ourselves as a retailer. We didn't think of ourselves as a brick-and-mortar retailer. We thought of ourselves as a company that can help customers.

Reducing turnover

BI: In retail, there's a lot of turnover. How did you boost morale at the company?

Joly: Glassdoor does a good job tracking employee satisfaction. In all of retail, we're now number two, second to Costco. That's a massive improvement. Turnover has decreased massively in the stores. People are engaged, and so they're motivated to do a great job.

We do see turnover as a key thing, because we've done a survey among customers. We asked them, "Would you like to speak, preferably, to the brand-new associate, you know, the one that has not yet done training?" Zero percent. We've reduced turnover, yes, but we're not done.

The churn with the store general managers, which includes their moving from one store to the other, is now 20% per year. That means, on average, they stay at the same store for five years. We've all read about Jim Collins and the 10,000-hour theory — you know, it takes 10,000 hours to really master something. Well, that's exactly five years. And so that made a big difference.

How did we do this? Of course you have to pay people, and we've invested in labor rates. Because we're building a specialty sales force, you know, we're making sure we're paying people appropriately, and they have bonuses. That's only a small piece. In general, if you just pay people, it doesn't suffice.

Most people, most of us, want to do something meaningful. We want to live a purposeful life, where you do things that make sense, that [are] helpful to others. And you want to live in an environment that has good values, and where you feel supported, and where you feel respected for who you are. And that's the kind of environment that we're building.

We believe that any organization is made of individuals, and that each individual needs to feel that they belong here, and that we're investing in them. Inclusion starts with "I" — so each one of us. That means the training, the coaching.

There's a daily, individual coaching session for each associate in the stores. So you check in, you meet with your sales supervisor, and then you're going to review your performance over several days, what you're working on, because everybody's working on something, getting better at something. Maybe you're working in the appliance department, you're trying to get better at selling the full kitchen, because you want the colors to match. And so, maybe, yesterday, your supervisor asks you to go talk to Mary, who is really good at this. You're going to do a role play, and then at the end of the day, we're going to check how it's going, and how your results are.

That is very meaningful, because I'm paying attention to you.

The five 'be's

BI: What are the qualities that you look for?

Joly: I've spelled out the five "be"s of leadership. I think it resonates with what we're trying to do.

The first "be" is to be a purposeful leader. Be clear about your purpose in life, what drives you, and make sure it's connected with the purpose of the company. Is what drives you making money? Or your career advancement? Are you ready to walk on dead bodies to go up? So be a purposeful leader.

Be clear about your role as a leader. Do you believe your role as leaders is to be the smartest person in the room, and make sure everybody knows that? Or is it to create an environment in which others can be successful and, you know, blossom and flourish and so forth.

Be clear about who you're serving. If you believe you're serving your boss, that's wrong. Be polite to the customer. There are different ways to be polite to the customer. If you believe you're serving the servants, meaning people on the front line, and your role is to help them be successful, then you've got it.

Then be a values-driven leader. Integrity is really important and is what people look at.

And then, be an authentic leader. Be yourself. People talk about work-life balance. You know, life out of work is important, but work-life balance almost has the connotation that your work is not part of your life. So you can be an a--, the most terrible person at work, and then you can be the most wonderful person outside — it makes no sense. Be the full version of yourself, and that's going to make sure that you're happier.

So these kinds of principles — it's a very human environment. That sounds soft, and like propaganda. It's not propaganda ... these numbers, with turnover and employee satisfaction, really would not happen if we're just going to tell people, "Be happy."

Surviving the retail apocalypse

BI: So how do you feel about the number of stores that Best Buy has right now?

Joly: We feel really good, talking about the big-box stores.

You've seen that ... we decided to close the Best Buy mobile stores. You know, we had opened them about 12 years ago, at a time when the penetration of smartphones was very low, so this was a great growth opportunity. The margins in smartphones were very good. This was a way for us to go after a different type of customer. Fast forward to 2018, smartphone penetration is a very mature industry.

We feel it's best for us to invest in our big-box stores where we're providing a better experience because there’s more space ... In business, you have to constantly optimize what you do.

It's a very small part of our business, about 1% of the square feet and 1% of the revenue, so it's not a big deal. But if you don't optimize, you're stuck. Our VCR department, for example, is not doing so well anymore.

Now, as this relates to the big-box stores in the US, we have slightly more than 1,000. We typically get two questions from the investors. One, are they the right size? So we typically have 30,000-, 45,000-square-foot stores. They're the right size. A few years ago, we had a few 50,000, 60,000 square feet — that was a bit too big. We have a few at 20,000 — it's tight. But 30,000, or 45,000, they really feel good because we have so much stuff to show, and the economics work from these two types of stores.

In terms of the number of stores, every month, every year, there are 100 to 150 leases that expire. And so every month, we review these leases, and we make very rigorous decisions around [whether we should] renew. "Should we move the store? Or should we close the store?" And we're very rigorous around this. It takes a real-estate team that knows each of these markets extremely well. And, when we launched the strategy five years ago, we said that every year, we're going to gradually optimize the store footprint.

On average, we've closed 10, 15 stores per year in the US. So that is about 1, 1.5% of the stores. Many retailers were probably late in the cycle before the recession, and there was a diversification strategy, so we probably built a few too many stores. That's why we're optimizing gradually.

But we don't have, as a structural problem, too many stores. And of course, the more successful we are, the more revenue there is per store, and so we're tuning this.

But the short answer is: We have the right-size stores, they're in great locations, they're a great asset for us, and every year, we're going to tweak the margin, because things evolve, and so forth. But it's not a structural issue.

BI: How much of your revenue comes from services like Geek Squad or in-home advisers?

Joly: So, they're different types of services, and I'm going to break this down for you.

In-home adviser, well it's a service-like approach, there is no service revenue attached to these. I will come for free to your house, because I want to have a conversation with you. And so the revenue that's attached to this is product, some services in terms of installation and so forth, but it's not a service business per se. It's a way for us to have a better conversation and to build a relationship. So we build a relationship, and that's good.

Total tech support, which is a Geek Squad service, we certainly hope that it's going to grow. It's a service line — we're early in the rollout. We started at 200 stores in September, so that's early, but I think that's going to be a very promising piece, and also contribute to building that relationship, because you know where to find me now.

Extended warranties and other Geek Squad services — we actually report this every quarter and so forth — that's about 6% of revenue on an annual basis. That's relatively small. Will services revenue grow over time at the company? Probably. But it's not going to be 50% or anything like that.

BI: How much do you think your success is from all of this, and how much is from the fact that Circuit City went out of business and there's maybe room for one major, national retailer?

Joly: So Circuit City went out of business in '08.

BI: Wow, it was that long ago?

Joly: Oh, yes. And I didn't kill it. I would never kill it! I have an alibi.

The news of the death was more around 2012 [when Circuit City's online presence was shut down]. And so we were already the only national player at the time, so the recovery has nothing to do with Circuit City.

Becoming what we should have been, becoming the best version of ourselves — being alone is helpful. In particular when vis-a-vis the vendors. Because we make it easy. I don't like to say they don't have a choice, it's that we're a great opportunity for them, and we can concentrate their effort on one retailer instead of spreading it among several. So that's actually helpful. That part is really helpful. So it's a great asset that I had when I started.

Undercover boss

BI: Do you ever go into your stores incognito, just go in and observe?

Joly: So I've spent quite a bit of time in stores. Sometimes they're planned visits, because I do a market visit, or there's a purpose for it. Or when I'm at CES, they know I'm there visiting the stores in the biggest market. Sometimes, I'm not announced. Particularly when I travel, I always try to take time to visit the stores in that particular area.

And so I walk into a store incognito — it usually takes between one and five nanoseconds before I'm recognized, but it doesn't matter because it is what it is. Because you see, and then you have a good discussion.

The reason why it's so important to me to be in the stores — it's not so much necessarily to inspect, because we have an entire management team to do this, but still, it is to inspect.

In my office I just look at reports and spreadsheets — they don't tell the story. And so if you're in the store, you really see what's happening, you see the engagement. And then you hear feedback about what's working, what's not working.

A lot of what we've done the last five years is fix what was broken. And people in the stores know what's broken because they have to serve the customers every day.

I'm using a bit of an excuse to be able to buy everything we sell! Because that's the way you experience what the customers experience. Similarly, when I have a service issue at home, I don't ask my admin, "Can you get somebody to fix this?" No, I actually behave as a regular customer. That's one of the great things about this business — you can actually, truly, personally experience what that customer is experiencing. The fact that they recognize me doesn't change if they don't know how to take measurements for an appliance delivery. You know, if anything, they'll panic because it's me.

BI: Have there been things that you've changed because of those drop-ins and because of those experiences?

Joly: Yes, absolutely.

BI: Like what?

Joly: On a Saturday, about five years ago, I had a networking issue at home. It was intermittent failures, as is often the case with networking issues. So I called 1-800-geeksquad, and that was very early on in my tenure, and the fact that — instead of recognizing me not as the CEO of the company, but as a customer — based on some number, like my phone number, or my account number, they had to ask for my information. Then after taking all of my information, including my credit card, they said, "Somebody will call you back." I said, "Really? What are you talking about?"

They didn't have the tool to know how long the wait time was to get a specialist for my issue. These were well-intentioned people, but we ended up giving them the tool. So a lot of what we've had to do is give people the tool. It's what Churchill wrote to Roosevelt in 1941. "Give us the tools, and we will finish the job." He was asking for destroyers, and planes, and so forth. Here it was tools, systems, so that people could have the information to do a great job. It's this kind of thing. And once you alert these people, they pay attention.

The next generation

BI: We had millennials, they're over. We have Gen Z now. It's all about Gen Z. What do they want?

Joly: The Gen Z are still a bit young. They don't really spend their money themselves. But one of the things that people didn't know and were concerned about — five years ago, some people thought we were going to be a grandfather's brand.

Our market share with millennials is higher than with boomers. That's pretty cool. I have a 31-year-old son and a 27-year-old daughter, and they love all this stuff, and we have a lot of the cool stuff.

Immediate gratification is important, so stores are a good thing, as well as online. Again, we don't think of ourselves as a brick-and-mortar retailer. In fact, we don't think of ourselves as a retailer. We think of ourselves as a company that tries to do amazing things for customers.

In our target segment, which we call the high-touch tech fans, in the US population, half of them are millennials. So we're really targeting everyone, and that's a good thing. Millennials are finally, you know, leaving their parents' house. But that means buying appliances, buying all sorts of cool stuff. And so that's a great thing.

BI: How much does instant gratification matter?

Joly: So there's all sorts of buying occasions. But it's a pretty big deal.

It's also the confidence in your decision. If you take a TV, picture quality would be an important buying factor in a TV, can we agree? The only place in the whole world that you can see the quality of the picture for a TV is in the real world. You cannot see it online. Reviews don't do it.

Similarly, audio. The only place in the world where you can test the quality of the sound, whether you like it or not, is in the real world. You cannot hear it online.

And so, this ability to touch, feel, experience, get every question answered in the stores — for a big chunk of your purchases, it's very meaningful. And then you can grab it and immediately get it. That's really cool.

In some other cases, like you're on the road, and you forgot your phone charger, instant gratification is really important. You can pick it up in your store in minutes.

It's really an exciting time. We've moved past the turnaround, which was hard work, but now it's about imagining the possible, inspiring the customers to do great things with technology, and knowing that we perform a meaningful role in the world. It's making it real, and therefore investing in the technology, in the tools, in the capabilities, so that you can actually make it happen, and we can fulfill the promise of who we can be. So it's a pretty exciting time.

BI: Would you say that Amazon has pushed retailers like yours to get better?

Joly: Of course, of course. And that's what I like about the space we're in. We get to compete with some of the foremost companies ... We compete with Amazon. We compete with Costco. We compete with Target. We compete with Walmart. We compete with Home Depot. These are amazing companies. And so, you have no choice.

And capitalism is about this — it's about the best companies winning. And the customers are pushing us, but if there is no competition, then they don't even know what's possible. And so I love it that the bar is being raised, because I have so much confidence in our company, that we can be among those who raise the bar, and are not afraid of being bold and playing to win, so on and so forth. It's the customer experience, and it's the differentiating customer experience — it's being unique in what you do. Finding a group of customers for what you're doing is very special and very meaningful, as opposed to "Let's see who can have the best customer experience," and everybody is competing head to head.

It's the differentiated customer experience, I think, that's the key piece. And it's hard to do, which we love, because it means it's hard to replicate.

SEE ALSO: Best Buy's CEO says he uses 5 criteria to decide whether someone's a leader

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