High-tech goes low price: mass contributes to commoditization - Annual Industry Report Top 150: CE & Entertainment

DSN Retailing Today, July 7, 2003 by Laura Heller

Consumer Electronics is one of the top growth categories in retailing and one that retailers of all types are hungry to be a part of--which should come as no surprise given the total sales for the category. According to the Consumer Electronics Association, products shipped within the category totaled $96.2 billion in 2002 and are projected to continue growing at the current 3% to 4% annual rate, reaching nearly $100 billion this year.

It's also a category that generates significant consumer interest, with hot digital technology capturing much public attention. Add in promotions and the entertainment value that electronics, music and movies bring to the shopping environment and the category does more than increase the average shopping basket with relatively big-ticket purchases.

It's a point not lost on club stores, home centers and discount department stores--all of which are increasingly aggressive in this category.

But club stores are largely opportumstic in the goods they carry and many shoppers are wary of spending money in this channel on items that might require complex installation or future servicing. Home centers are pursuing the appliance category and continue to add in more electronics-type products but without dedicated departments.

Sears continues to build its hard lines division as it tries to stem lost market share in its core categories. But the biggest competition to the specialty stores continues to come from discount department stores in general and WalMartin particular, which moves the second-highest volume of products in the category after specialist Best Buy.

Circuit City chairman and ceo Alan McCollough addressed the issue at the company's annual shareholder meeting last month, asking, "Who would have thought that five years ago when DVD was introduced at $600 [a player], that today the market share leader would be Wal-Mart? Because a DVD player is now $39 and you can throw it in a cart."

The rapid commoditization of product has long been a trend in this channel and allowed discounters to become a considerable force in the industry. Target has also taken an aggressive stance in CE, continuing to expand product categories with a focus on exclusive merchandise programs and fashionably designed product, consistent with the rest of the store. But Target shies away from higher priced, popular items such as larger screen TVs and home theater systems, restricting its volume here and keeping it ranked below even regional specialists such as Tweeter, Ultimate Electronics, CompUSA and even office supply stores that move large amounts of computer and related equipment.

Wal-Mart's rapid rise as a retailer of import continues to send ripples through the CE specialty industry. Although the ever-growing digital product cycle is presenting retailers with high category growth and a burgeoning product pipeline, rapidly declining prices and eroding gross margin is, in turn, causing turmoil for the CE specialty chains as they continue to battle both each other and the discounters for the consumer.

Best Buy is clearly the winner here as it continues to take market share from its chief rival, Circuit City. The retailer surpassed Circuit City as the top specialty chain several years ago and set a pace that has been hard to keep up with. Circuit City has made many changes in its operating model in an effort to remain competitive, including reducing cost structure, replacing commissioned sales personnel with hourly rate pay and expanding its selection of entertainment products such as movies, music and video games.

But the moves came a bit late and Circuit City's biggest challenge has been its aging store base. In spite of efforts to update and relocate stores, the chain continues to play catch-up as Best Buy continues to cut costs, increase efficiencies and explore new services that will help it compete with Wal-Mart.

There may be limits to how extensive Wal-Mart can go in this category. Big screen, high-priced digital products may prove to be outside the retailer's grasp and home installation services too expensive to operate in its low-cost environment. But given the company's recent declaration that it is not a retailer, but a distributor, another possibility arises: Wal-Mart might not be able to effectively sell the entire spectrum of CE product, but it could supply it to a network of smaller, regional specialty retailers.

Like most channels, CE specialty has undergone tremendous consolidation leaving few smaller chains. But if high-end sellers have access to a more efficient distribution system, these players could more effectively compete with the Best Buys and Circuit Citys of the nation, leading to a new era in CE retailing. Speculation for sure, but it could happen.

Top Volume Leaders

CE & Entertainment

CHAIN              2002     2001   % CHG

Best Buy (1)    $18,018  $16,265   10.77%
Wal-Mart (2)     15,639   13,919   12.36
Circuit City      9,954    9,518    4.58
Target            4,810    4,287   12.20
RadioShack (3)    4,421    4,567   (3.20)

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 Magnolia and "discontinued" Musicland
division

(2)Defined as "Electronics" at the Wal-Mart Stores division; includes an
approximation of $1.5 bil, in CE sales at Sam's Clubs

(3)Excludes service and repair revenue

Top Specialists

Retailers

CHAIN               2002     2001    % CHG

Best Buy           $19,219  $15,825  21.45%
Circuit City         9,954    9,518   4.58
RadioShack           4,577    4,775  (4.15)
CompUSA (1)          4,000    4,100  (2.44)
Micro Electronics      817      724  12.85

SALES IN MILLIONS

( ): Decline or loss

Source: Company reports, analysts' estimates and DSN Retailing Today
research.

(1)Division of Grupo Sanborns