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  • CFO Asia

John Noble, Best Buy International

How the CFO navigates two brands and two business cultures from his Vancouver office.

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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