Best Buy Turning Returns Processing into Profit Center

by RLM Staff Contributor

Reverse Logistics Magazine, Edition 15

When Best Buy created a business unit last summer to focus on developing sales of consumer electronics into the secondary markets, it opened a new era of reverse logistics. No longer was the handling of customer returns, return to vendor and overstock a cost center sitting in a dark corner, but now it was transformed into a profit center.

To lead this new unit, Best Buy looked beyond the traditional service and logistics professionals and selected Kevin Winneroski from the merchant and retail sales side of the business. Formerly VP for Digital Imaging, Winneroski brought to the business not just a fresh viewpoint but a merchant’s focus on the customer as well as the product.

“As a business unit we are still getting organized,” Winneroski said in a recent interview, “and I am still learning this side of the business.”

“However,” he continued, “several things are becoming clear. One of them is that we have not, historically, maximized the profit on products when they hit the reverse logistics supply chain, and we have to change that, and I am still adjusting to the fact that Best Buy’s reverse logistics process is now my forward supply chain for our retail business.”

At Best Buy, maximizing profit in the reverse logistics business is involving partnerships with both new and existing customers as well as manufacturers and third party service providers (3PSPs). According to Winneroski, Best Buy is moving towards providing its customers full lifecycle management of the products it sells, and for its vendors, partnerships that focus on lifecycle profitability.

What the Best Buy customer is seeing now and will see even more of in the future includes:

• knowledgeable sales staff that can direct the customer to the most appropriate product
• before and after sales service support for setup, installation, repair
• solid warranty programs
• programs that will cover all phases of a product’s lifecycle, including guaranteed buy-back pricing, trade-in programs for products that still have economic value when the customer is ready to replace them, the ability to choose to buy refurbished or used products in an auction and easy to use recycling programs for products that no longer have value or don’t work.

For manufacturers the future holds:

• changing the relationship from “Us” versus “Them” to “We” is helping the customer
• bringing more than buyers and sellers to the table – finance, service, customer support – on both the vendor and retailer side, all need to bring their collective wisdom and experience to the partnership
• Moving from fixed prices and allowances to variable rates depending upon actual product experience over time rather than just historical rates, and providing timely and accurate information to support decisions.
• When returns, overstock and trade-ins hit the reverse logistics stream there is an opportunity to work together to maximize the economic value that can be gained in the secondary market.

Objectives of the Reverse Logistics Markets team include:

• Online stores & Auctions – with product testing, inventory management, listing, payment collection and order fulfillment, Best Buy has built an integrated supply chain to take returned product from the stores and resell it to its value-seeking customers through eBay, a private online store and other online channels. Best Buy recently acquired Dealtree, its provider of these services.
• Trade-in, an online program was launched in 2007, offering customers a fast and easy alternative to selling online themselves, or just letting working products sit in a drawer. It allows customers to recapture economic value, and through the Dealtree technology, Best Buy has instant access to current market value of products.
• Refurbishment – working with a variety of 3PSPs,, Best Buy has been integrating refurbished products into its warranty replacement program and selling direct to consumers.
• Recycling – in 2008, Best Buy began testing offering free recycling in several markets. They have been building up a network of local certified recyclers and plan to roll nationwide in 2009.

“The parts are fitting together nicely for us so that we now have the framework for developing the services to support many of our vendors through the complete lifecycle of their products,” Winneroski continued. “If it is a return, we can take care of it, if it needs to be refurbished we can take care of that too, and, of course we can sell it through our secondary market channels to consumers. Some of our vendors can get out of reverse logistics all together.”

For Best Buy, the journey is far from complete. “We have the platform in place and have started working to fit each service solution together,” said John Slothower, Manager-Innovation with Secondary Markets. “We look at our customer and vendor needs and ask ourselves things like ‘if vendor A needs warranty replacement parts, and we happen to have the right item in our system, why can’t we direct that item to the vendor’s repair center?”

“The recent acquisition of Dealtree was a key step in building an integrated end-to-end solution,” said Slothower. “We have been working with them for more than four years as we learned what was possible in selling at-risk inventory to consumers. They opened our eyes as to what was possible and kept begging us to use more of their capability – now we are.”

Larry Kerr, Director of Returns & Recovery, who has managed the liquidation operation for years, commented “One of the biggest leaps for our group was to change our mind set from being junk dealers selling in bulk to being merchants selling to a retail customer. Having a merchant [Winneroski] heading up our new business unit is a big move in the right direction.”

“We are now approaching our secondary market customer with the same focus and concentration that we historically used for our bricks and mortar customers,” added Winneroski. “We are learning everything we can about these buyers, who they are, their buying behaviors, and their preferences.”

“One of the surprises,” Winneroski added, “was discovering that some of our top customers of our new products were also buying from us on eBay. We finally figured out that someone might drop $10,000 on a home theater system, but want to get a bargain on a flat screen TV for their cabin. We are now there for them.”

Making this model work will require manufacturers and retailers to work together in different ways according to Winneroski. ”The traditional manufacturer position has been to take back 100% of the returns that come to our store so that these products can be refurbished and sold by the manufacturer into other channels. There is a reluctance to allow the retailer to refurbish and resell these goods out of concern for channel conflict and harvesting/cannibalization of “A” good products in our stores. We will need to partner closely with our manufacturers to develop models that maximize economic returns for both parties, while minimizing to the highest degree possible any opportunities for channel conflict or cannibalization in sales. We believe it is possible to find this balance."What we are hoping for is that we can change the retailer – manufacturer relationship from us versus them, to we,” Winneroski continued. “We are going to have to be able to build trust, be more open about our costs and margins and look at the profitability of a product from the time it is manufactured until it is broken down by the recycler. There is potential to share in the profits all the way through this lifecycle, and by working together it is likely we can increase the total profit.”

“It took us three years to get the point where we were ready to get started,” Winneroski says, “and now we are getting serious about our ability as a retailer to serve a new retail market and use the same capabilities to create new value propositions for both our customers and our vendors. We still have a lot of educating to do, both internally and externally, but we think it is a message that will be well received.”

RLM