Future Shop Ltd. Business Information, Profile, and History

Company Perspectives:

As part of its overall strategy, Future Shop offers its products at the lowest price in Canada ... provides customers with a well-trained sales staff; generates and maintains a high level of consumer awareness through extensive advertising and frequent promotional sales events; offers a full-service, discount style store format, featuring easy to locate display groupings and a wide selection of name brand products; offers a wide range of price points in each product category, with the greatest selection in moderately priced products; offers customers both manufacturers' and extended warranty protection for most of its products and after sales service at over 250 locations throughout Canada; controls operating and overhead costs in various ways, including through the use of fully integrated point-of-sale and advanced management information systems; and cooperates with its suppliers in various initiatives to generate greater sales.

History of Future Shop Ltd.

Future Shop Ltd. is Canada's largest retailer of consumer electronics, with more than 100 superstores selling computers, televisions, home audio equipment, home office equipment, major appliances, and cellular phones. In 2001 the company was purchased by American retailer Best Buy, which has maintained the Future Shop brand with great success.

Founding and Early Success: 1982-93

Future Shop was founded in 1982 by Iranian entrepreneur Hassan Khosrowshahi, who left Iran to settle in Vancouver. Khosrowshahi, who had graduated from the University of Tehran with a degree in law and economics, was a member of the family that owned the Minoo Industrial Group, a large Iranian manufacturer of pharmaceuticals, cosmetics, and food products. Described by industry observers as "driven," Khosrowshahi recognized the potential of consumer electronics and set out to create a chain that would dominate the Canadian market. His longtime associate Mohammad Kiabakhsh took on the role of president and CEO of the company, while Khosrowshahi himself served as chairman.

By the end of 1983 Future Shop had opened three retail outlets in British Columbia selling computers, software, games, videocassette recorders, audio equipment, and other items. Two of these emulated the superstore concept popularized in the United States, carrying a huge range of products and stacking boxes of merchandise in a warehouse atmosphere. Brand names including Panasonic, Atari, Sanyo, Mitsubishi, and RCA provided customers with enough choices to discourage comparison shopping elsewhere. The company discounted its products heavily and spent aggressively on advertising. As Marketing Director Bill Jamieson told the Vancouver Sun, "We spend, in proportion to sales, double what our nearest competitor does. And the reason we do that is because the market is growing so fast and we're out to grab market share." He added: "We will not be undersold."

In December 1983, the first month that all three stores were in operation, Future Shop's revenues reached $2.8 million. Ten years later, Future Shop was Canada's largest retailer of computers and consumer electronics, with 38 stores and revenues of $334 million--in the midst of an economic recession that had devastated other retailers. Sales per square foot surpassed $1,000, considered exceptional by industry analysts, and net earnings reached $5 million.

Going Public in 1993

In August 1993 Future Shop went public on the Toronto Stock Exchange, raising $30 million (at $11.25 per share) to be used for expansion and to pay down long-term debt. Khosrowshahi--who was extremely media-shy and refused interviews--maintained a controlling interest. Sales boomed, with six-month revenues up 65 percent over the previous year. Only two months after its initial public offering, Future Shop's share price had doubled to $22, and the company forecast sales of $500 million for fiscal 1994.

In the fiercely competitive field of electronics retailing, Future Shop had a principal Canadian rival in A&B Sound. Both chains purchased in volume at low prices, offered deep discounts (sometimes below cost), and advertised aggressively in a competition that frequently turned ugly. A&B disputed Future Shop's claim that it offered "Canada's lowest prices," running an ad that featured a man with a six-inch Pinocchio nose and the headline "We'd like to point out a few things about Future Shop." Future Shop sued to protect its good name, and A&B countersued in an attempt to end the advertising claims. The feud dragged on for several years, as A&B alleged that Future Shop employees bought out A&B's loss-leader stock during sales, wasted their employees' time, and otherwise sought to disrupt business--and Future Shop threw the same allegations back at A&B. In an out-of-court settlement, Future Shop ultimately amended its low-price claim (offering a guarantee that it would match any competitor's price), while A&B agreed to stop running the Pinocchio ad. Both parties agreed that disruptive practices would cease.

Financial Challenges in the Mid-1990s

Commentators noted that the fierce competition between the two chains and other rivals hinged on the issue of volume purchasing, and that the chain that expanded the fastest would be able to secure the best deals on merchandise, offer the lowest prices, and ensure further growth. Profit margins were slim across the industry, and retailers bolstered their bottom lines by selling such higher-margin services as extended warranties and credit plans. By 1995 Future Shop's sales had reached the $1 billion mark, but increases were attributable solely to aggressive expansion, while sales at the chain's established stores began to plateau and even decline. The Globe & Mail wrote that Future Shop, "appears to have hit a brick wall." Future Shop's share price dropped to $16.

Analysts predicted that the coming of Incredible Universe megastores to Toronto would provide stiff competition and further impede sales at Future Shop. Analyst John Williams told the Globe & Mail, "This industry is brutally competitive, and this certainly raises the bar at least another notch," while analyst George Hartman voiced concern that Future Shop was "intent on the all-out pursuit of market share, sometimes at the expense" of profit. By 1996, Future Shop shares had dropped to $11.37 and analysts began removing their "buy" recommendations. The drop was attributed to a drop in demand for personal computers, declining overall sales at the chain's stores, and strong competition from U.S. retailers like Circuit City Stores. At the same time, Future Shop was expanding aggressively into the northwestern United States, opening eight stores in 1996 (for a total of 22) and laying plans for 15 more in the next few years.

Early in 1997 Future Shop announced a change in upper management, with Mohammad Kiabakhsh leaving the company. Khosrowshahi took on the roles of president and CEO in addition to serving as chairman. A number of other management executives were dismissed shortly afterward. "The intent is to evolve into a more professionally managed organization," said CFO Gary Patterson.

Future Shop began to show signs of a rebound. At the end of the fiscal year in March, Future Shop's Canadian operations had produced record sales and earnings; however, the company's net earnings were down 20 percent from the previous year, in part due to losses suffered by its U.S. outlets. Patterson announced that Future Shop would not expand further in the United States until the existing U.S. stores improved their performance, but that Future Shop would open 25 to 40 new stores in Canada.

Focus on Core Markets in the Late 1990s

In 1998 Future shop purchased seven Computer City stores for an undisclosed amount, only three months after the entire Computer City franchise had been purchased by CompUSA from Tandy Corporation. Within 18 months two of the outlets--deemed hopelessly unprofitable--had been shuttered. South of the border, the U.S. arm of Future Shop was suffering, with $53 million in losses over two years, and another $30 million in losses projected for 1999. In March 1999 the company announced that it would discontinue U.S. operations, leaving it with 81 stores in Canada. Analysts applauded the move, maintaining that Future Shop was wise to concentrate on its core market. Phil Boname told the Vancouver Sun that the divestiture would make Future Shop "lean and mean." He added: "Other retailers are going to have a real tiger to contend with as the company tries to make up for lost U.S. business at home." Future Shop's share price jumped on the news, to $14.50.

By 2000, Future Shop owned 83 Future Shop stores and five Computer City outlets. In January Kevin Layden, COO, was appointed president and CEO, and in June Future Shop announced plans to open flagship stores in downtown Vancouver, Toronto, and Montreal. Patterson told the Vancouver Sun: "Vancouver, Toronto and Montreal are all vibrant, downtown cities with large populations living in the downtown area. We always felt we could better serve those downtown cores, so we decided to take this step."

At the end of the fiscal year in March, Future Shop reported net earnings of $23.7 million, realizing a strong recovery from the $82.2 million loss the previous year. CEO Kevin Layden attributed the improvement to a new focus on Canadian markets, store renovations, and a booming retail market with strong demand for digital products. Future Shop's most popular products included digital cameras, DVD players, and wireless Internet devices. When U.S. giant Best Buy Company Inc. announced its intention to move into Canada, analysts predicted a huge battle for market share. "Future Shop has basically had something of a monopoly on these kinds of stores until now, but that is going to change," said retail consultant Blake Hudema in an interview with the Vancouver Sun. Future Shop claimed to welcome Best Buy, maintaining that competition would serve a positive purpose by expanding the market for consumer elec- tronics. Said Layden to the Sun, "We see being face to face with a national player on a big scale as a good thing." Nevertheless, in December Future Shop sued Best Buy for stealing trade secrets by hiring away a Future Shop senior executive and the company's real estate brokerage firm. Future Shop sought an injunction to prevent the broker, Northwest Atlantic, from working for Best Buy. The courts, however, held that Future Shop was unable to prove that a breach of confidence had occurred.

2001 and Beyond

In February 2001 Future Shop announced the closing of its five remaining Computer City stores, noting that the increasingly competitive retail market for computer equipment had taken its toll on profit margins. The company took a $4 million charge against earnings, which was more than offset by a $7.8 million fee received following an unsuccessful bid to take over the Chapters Inc. bookstore chain. Future Shop accelerated its expansion plans, aiming for 120 stores by 2005, and announced plans to relocate or completely renovate at least half of its existing stores during this period. The average Future Shop store was 27,000 square feet, but the chain operated four distinct store sizes from 18,000 to 32,000 square feet depending on the location.

By March 2001, Future Shop had posted double digit sales growth for 15 consecutive months and was exuding confidence it could face down any competition from Best Buy. Instead, the two chains announced in September that Best Buy had agreed to purchase Future Shop, for $387 million in cash. The company was to be run as a wholly owned subsidiary, and while Khosrowshahi would step down, Layden and other executives would remain in place. Best Buy COO Brad Anderson noted the value of the "added human capital," stating that the knowledgeable management team would be an asset both in Canada and as the chain expanded globally. The initial takeover plan stipulated that Future Shop would eventually take on the name of its larger parent; however, as time passed, Best Buy concluded that continuing to operate Future Shop as a distinct brand would the most profitable course. Tom Healey, president of Best Buy International, said, "The customers love Future Shop. Shutting it down would be a loss of brand equity." Furthermore, noted Layden, fewer than half of Future Shop stores were large enough to justify the cost of converting them to the Best Buy format, which was estimated at $3.5 million per store. He added, "We believe there is room in the market for two national players." The two brands set a goal of commanding 30 to 35 percent of the Canadian market for consumer electronics. The goal did not seem unreasonable, as sales for Future Shop alone had surpassed $2 billion.

Principal Competitors: Sears Canada Inc.; InterTAN, Inc.; Amazon.com Inc.; Staples, Inc.

Chronology

• Key Dates:
• 1982: Future Shop is launched in Vancouver, B.C.
• 1993: The company goes public.
• 1998: Computer City stores are acquired.
• 1999: Future Shop's U.S. stores are closed.
• 2001: Future Shop is acquired by Best Buy.