Rude awakening from Best Buy's big dream

The US electricals giant is closing 11 UK stores after being hit by a lethal combination of tough conditions and poor timing

The world's biggest electricals retailer Best Buy landed on these shores all guns blazing in May 2008 by signing a £1.1bn joint venture with Carphone Warehouse. The US giant vowed to open 100 "big box" stores by 2013, parking its tanks on the lawn of Dixons Retail's Currys and PC World, as well as Kesa Electrical's Comet. Best Buy believed it could blitz the £26bn UK market and its rivals by providing a superior customer service, product offer and pricing.

But yesterday those tanks came to a juddering halt after Best Buy UK said it would close its 11 big box stores before the end of December. This followed dire losses of £46.7m for the half-year to 30 September. Andrew Harrison, the chief executive of Best Buy Europe, the partnership with Carphone Warehouse, said the "substantial change" in the technology market since 2008 – towards smartphones, tablet devices and apps – had convinced the group to focus on a single brand for its 800-plus stores in the UK. "It was the technology cycle that spurred us to do something. There is a nice saying in America: 'Skate where the puck is going to be – not where it is at the moment'," he said.

But the end of Best Buy UK's big box dream brings down the curtain on one of the most calamitous launches in modern retail history. Industry experts say that Best Buy was undone by a combination of "naivety", "arrogance", the lack of a differentiated offer and advertising, and a launch into the teeth of a brutal consumer recession.

It was also hit by a series of departures among executives not long after it first store opened in Thurrock, Essex, in May 2010. The retail analyst Neil Saunders said: "They opened at the worst possible time with the market in quite a steep decline and with consumers not buying in the way they had the previous decade."

He added: "There was an arrogance that they thought they could take the market by storm." But Mr Harrison hit back. "Far from being arrogant, one of Best Buy's values is humility, in terms of changing your strategy, in knowing you can do things differently. Arrogant organisations don't do that."

In background briefings before its launch, Best Buy's executives were bullish. In short, they believed the overall UK electricals market was more than 20 per cent underdeveloped, as the customer service at the incumbent chains was so dreadful.

Robert Clark, a director at Retail Week Knowledge Bank, said: "There was an element of naivety in that I think they underestimated the established order of things. They [Best Buy] should have done it in the 1990s."

Best Buy also suffered from a lack of recognition among UK consumers and Mr Saunders believes this was not simply due to its low numbers of stores.

Mr Saunders says: "They are differentiated on service. If you go into one of their stores, the service is good and better than what you traditionally got in Currys and Comet. But they did not communicate their point of difference well enough."

Another view is that Best Buy did not live up to its hype on pricing. Mr Clark said: "They did not persist with their promotions and their prices were not as exciting as they promised."

The lag between Best Buy's joint venture with Carphone Warehouse and opening stores also gave rivals a major opportunity to up their game. Mr Clark says: "The most important thing was that [Dixons Retail's] Currys and PC Word got their act together."

Mr Saunders agrees that the launch of Best Buy UK was ultimately a "blessing in disguise for Dixons because it made them pull up their socks". He adds: "It has renovated stores, put in extra training and extra service levels for customers." In Best Buy's defence, its rivals have also been struggling in one of the worst markets for consumer electricals in the UK in living memory.

Dixons Retail, which has more than 1,200 stores across Europe, suffered a 10 per cent fall in UK sales for the 12 weeks to 23 July. Meanwhile, Kesa Electricals is trying to offload Comet, which could suffer losses of about £20m this year. Mr Saunders painted a bleak picture for the UK consumer electricals market. He said: "It just shows there is no growth and we have got too many retailers and too many stores."

A key focus for Best Buy Europe – which has 2,453 stores in nine European countries – will now be selling more wireless devices, smartphones and peripherals at its 150 larger Carphone Warehouse shops in the UK.

But retail historians will not look back favourably on Best Buy's ill-fated big box experiment. Mr Clark says: "They should have had everything going for them. The UK market was dominated by an unpopular Currys."

Charles Dunstone: a win-win situation

There was a marked contrast yesterday between the fortunes of Charles Dunstone, the founder of Carphone Warehouse, and those of Best Buy UK's 1,100 staff.

Mr Dunstone is set for a windfall of £243m after Carphone Warehouse unveiled the disposal of its interest in Best Buy Mobile US and Canada profit share agreement to the electricals giant for £838min cash.

The outlook is less rosy for Best Buy UK's employees after its decision to close its 11 fledgling stores before the end of the year. But a spokesman said it was "absolutely confident that we will be able to redeploy a large majority of the employees". There are no such worries for Mr Dunstone, who has a 29 per cent shareholding in Carphone Warehouse.

The group intends to return up to £813m of cash to shareholders via a B share scheme – which will give shareholders the choice of receiving income or capital. Annual consulting payments of £5m spread over the next five years will account for the remainder. Following the demerger between Carphone Warehouse and its Talk Talk telecoms unit in 2010, Mr Dunstone's fortune was £1bn, according to the Sunday Times Rich List in May.

Not bad for a lad, who now chairs both businesses, and set up Carphone Warehouse with £6,000 of his savings in 1989.