Discount turns up the volume

PC comeback, ipod popularity add edge: discount turns up the volume

Laura Heller

Consumer electronics is something of a celebrity among merchandise categories: While not young, it is considered sexy, with nearly everyone looking to cozy up next to it. And why not? With $97 billion in sales last year, the Consumer Electronics Show boasting the title of largest trade show in North America and digital devices topping consumer’s wish lists, it pays to sell CE.

Or does it? With an increasing number of retail outlets participating in the category, competition is fierce and getting fiercer with each quarter. Dropping prices and margin erosion are making the category less profitable and the presence of online retailers and warehouse clubs only serve to muddy the waters even more.

“It’s hard [to make money] and the reason for that is increased competition from new channels, or ones that are now coming in strong, such as Wal-Mart,” said Sean Wargo, director of industry analysis for the Consumer Electronics Association (CEA). “You have a very price-conscious consumer looking for the best deal whether it’s a specialty retailer, online or mass merchant. That puts pressure on margins.”

Wholesale prices declined more than 5% in 2003. In spite of this, CE manufacturers managed a 2.3% increase in revenues this year. Sales for the industry grew 3% in 2003 and should increase another 4% this year, according to the CEA.

Specialty retailers have been having a difficult time finding profit in the category, with one notable exception, Best Buy. The retailer has not only been increasing sales and profits, but continues to grab market share at the expense of its direct competitors.

Circuit City, while being the second-largest specialty chain, has floundered for the past two years. It did manage to narrow losses in 2003, but is saddled with a prolonged store remodeling program. A tentative shift toward sales of private label products are current focuses meant to lilt margins, although this takes Circuit City into more direct competition with RadioShack, master of the private label parts and accessories business and itself seeking sales lifts from an expansion of newer digital products.

Circuit City’s quest for this part of the market prompted the purchase of InterTAN, once RadioShack’s Canadian business. According to Circuit City chairman and ceo, Alan McCollough, the acquisition will allow the chain to better compete with Best Buy–already in Canada with both Best Buy and Future Shop stores–but apply the synergies of InterTAN’s proprietary parts business and sourcing to U.S. Circuit City stores.

Regional chains are having an even more difficult time of it. Tweeter and Ultimate Electronics are struggling through intended turnarounds, while the Good Guys threw in the towel and was acquired by CompUSA, as the computer chain seeks to reposition itself as a more inclusive electronics retailer.

PC’s are staging a comeback in terms of sales and consumer popularity. Dell’s strength and sales continue to grow even as it expands into more CE categories, including mobile audio and video displays.

But it’s Apple that may be the one to watch in the category, sales through Apple’s retail stores were up 119% for fiscal year 2003 ended in September 2003 and now boasts 76 locations.

But it’s the discount department stores that are giving everyone in the category a run for their money. Wal-Mart and Target continue to expand their presence in these categories. Target’s newest P2004 prototype shifts CE and home entertainment to the rear of the store, allocating increased space and with room to grow on either side. Expanded exclusive partnerships with Sony-, Eddie Bauer- and Disney-branded products are prominent and the retailer is clearly making a bid to be dominant in mobile audio, selling Apple’s iPods and iTunes gilt cards.

In the CE category, Wal-Mart looks decidedly progressive with rows of flat panel displays, new merchandising packages and expanded space devoted to higher-end product including satellite TV and radio services. And lest anyone doubt that consumers would buy such big-ticket items at Wal-Mart, one only has to look at the graveyard of specialty retailers in other categories that also held that belief.

A consumer’s willingness to shop CE based solely on price allows Costco to list the category as an important part of its business, in spite of a largely opportunistic selection: products and brands based on vendor overstocks and availability.

Hoping to escape the intense promotional environment, leading retailers are attempting to differentiate. For example, Best Buy with its customer centricity program is taking the focus off selling product and onto managing the customer; Circuit City with its foray into proprietary product; CompUSA with a focus on services; Target with fashionable exclusive lines; while Wal-Mart, as always, remains focused on price.

Top Volume Leaders

CE & Entertainment

CHAIN 2003 2002 % CHG

Best Buy (1) $22,225 $19,303 15.14%

Wal-Mart (2) 17,280 15,639 10.49

Circuit City 9,745 9,954 (2.10)

Dell 6,715 5,653 18.79

Target 5,375 4,810 11.75

U.S. SALES, IN MILLIONS, OF CE AND ENTERTAINMENT SOFTWARE

( ): Decline or loss

Source: Company reports, analysts’ estimates

and DSN Retailing Today research.

(1) Domestic sales, including Musicland division

(2) Defined as “Electronics” at the Wal-Mart Stores division

Top Specialists

CE & Entertainment

CHAIN 2003 2002 % CHG

Best Buy $24,193 $19,219 25.88%

Circuit City 9,745 9,954 (2.10)

Radio Shack 4,649 4,577 1.57

CompUSA (1) 4,050 4,000 1.25

Gateway Inc. 1,743 2,387 (26.98)

U.S. SALES IN MILLIONS

( ): Decline or loss

Source: Company reports, analysts’ estimates

and DSN Retailing Today research.

(1) Division of Grupo Sanborns; sales

reflect acquisition of Good Guys 10/03

COPYRIGHT 2004 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2004 Gale Group