CE differentiation is no longer about price - Market Basket Study - consumer electronics - Illustration

DSN Retailing Today, Sept 8, 2003 by Laura Heller

DENVER -- The consumer electronics industry is predicted to hit $100 billion in sales this year. That may be just one-fourth of what the grocery industry sold lost year, but consumers don't need CE products to survive--at least not technically.

But consumers increasingly consider electronic items critical to life in the modern world. As a result, the traditional CE specialty retailers that comprise this category are under attack by chains the likes of Wal-Mart. Best Buy recently presented a new long-term strategy meant to help it compete in this expanded marketplace, and Circuit City continues searching for a way to match specialty competitors and mass merchants.

With this in mind and the holiday season approaching (CE being a favorite among gift categories), DSN Retailing Today partnered with McMillan/Doolittle consulting and headed out to do a pricing survey on some typical CE items, including hot products and staple items. Aurora, Colo., proved to be fertile ground as it hosted both national leaders and a Wal-Mart, while also being the home market to Ultimate Electronics, which operates stores under the SoundTrack name in the Denver area.

The results only served to illustrate one of the largest challenges facing the industry: Price no longer offers a means of differentiation. Chains came within pennies of each other on key items such as game consoles, handheld devices and DVD players.

So how to succeed in a category when price is removed as a competitive and even top brands are available at Wal-Mart?

Price matching across retailers only works on products with relatively short life cycles. A PlayStation2 and Palm Zire are popular releases under specific model numbers, but try duplicating a 27-inch TV across stores and pricing is much more difficult to compare (see Cost Comparison chart), leading to greater differentials and opportunities for retailers.

Hot new technology offers a point of differentiation and here is where stores like Ultimate Electronics can excel. The retailer carries a smaller selection of commodity items but goes deeper into home theater than many specialty retailers. But while plasma and other flat-panel technology are hot at the moment, relying on such complex purchases requires a constant stream of new product, points out McMillan/Doolittle's Neil Stern. "A format like Ultimate's is very dependent on the product cycle," he said. "And at the rate of commoditization, the pricing structure doesn't hold up long enough provide that kind of service."

Entertainment products, including media, are often used as traffic builders by specialty and discount stores alike. Pricing is incredibly competitive on popular releases, but since Ultimate doesn't carry prerecorded media or video game consoles beyond Sony's PlayStation2, it has clearly chosen to bring customers in with the promise of good service and cutting-edge product.

Best Buy, on the other hand, delivers on its promise to supply consumers with all their entertainment needs.

Stuck in the middle is Circuit City. "They're not really differentiating on the high end and not participating in the traffic categories like a Best Buy," said Stern. "[The Aurora store] was a very good store experience, but the chain doesn't own anything in the consumer's mind."

In the CE category--where price is now uniform--perception is very important. Wal-Mart is hardly category dominant, nor does it want to be as margin is lower in CE than other categories. It does, however, want to create the perception that it has all the products a customer needs. In reality, selection is limited in hard goods due to space and limited in entertainment items due to company policies monitoring content. The retailer does use the Internet to offer a wider selection of CE items, but in stores the category is largely one of convenience.

Best Buy has built a reputation on good prices in a fun environment. And although Circuit City matched prices item for item, it still struggles with the perception of higher prices without the entertainment edge. This pricing survey found that reputation to be undeserved.

"This pricing survey says that on the products we could compare, the differences were meaningless," said Stern. "But the customer would play back a different story on the perception of pricing and the perception of service."

Top brands may be easily found in multiple channels, but vendor support can play a role in differentiation as well. Only Best Buy and Circuit City carried popular PC models from HP and Compaq. Both offered manufacturer rebates, but on a Compaq Presario Notebook computer, Best Buy featured a $250 rebate, Circuit City just $100.

1 Consumer Electronics Basket--by brand

                                                CIRCUIT       BEST
ITEM                                              CITY        BUY

Windows XP Professional by Microsoft            $299.99     $299.99
Palm Zire 71 Handheld Organizer (1)              299.95      294.99
Sony 3.2 Megapixel Digital Camera (2)            279.99      229.99
TIVo Series 2 Digital TV Recorder
  (40 Hour Capacity) (3)                         249.99      236.99
Sony CLIE Handheld PDA (4)                       199.99      179.99
Nike Sports 128 MB MP3 Player by Phillips        179.99      179.99
Microsoft Xbox with S-Controller                 179.99      179.99
Sony PlayStation 2                               179.99      179.99
Panasonic 5 Disc Progressive Scan
  DVD Changer w/Component Output                 129.99      122.99
Sony single-tray DVD Player                       99.99       94.99
Sony 5-Disc CD Changer                            99.99       89.99
RCA Lyra 128MB Pocket MP3 Player                  99.99        NA
Sonic Blue Rio 64 MB Portable MP3 Player          79.99       99.99
Nintendo Game Boy Advance (5)                     69.99       69.99
V-Tech 2.4GHz Cordless Phone
  with Digital Answering Systems (6)              49.99       49.99
Sony PS One, Brand/Model: SON 94015               49.99       49.99
Norton AntiVirus 2003 by Semantec                 49.99       79.99
Magnavox Shock Proof CD Player                    39.99       39.99
PlayStation 2 NCAA College Basketball
  2K3 Game                                        29.99       29.99
Xbox James Bond 007: Night Fire Game              29.99       19.99
Gangs of New York DVD                             19.99       19.99
How to Lose a Guy ln 10 Days DVD                  19.99       19.99
Old School DVD                                    19.99       19.99
Die Another Day DVD                               19.99       19.99
50 Cent CD-Get Rich or Die Tryin'                 13.99       14.99
Jack Johnson CD-On and On                         13.99       13.99
Charlie's Angels-Full Throttle Soundtrack CD      12.99       13.99

                                                ULTIMATE
ITEM                                           ELETRONICS   WAL-MART

Windows XP Professional by Microsoft               NA          NA
Palm Zire 71 Handheld Organizer (1)              299.95        NA
Sony 3.2 Megapixel Digital Camera (2)            229.99      277.32
TIVo Series 2 Digital TV Recorder
  (40 Hour Capacity) (3)                         249.95        NA
Sony CLIE Handheld PDA (4)                       179.95        NA
Nike Sports 128 MB MP3 Player by Phillips        179.95        NA
Microsoft Xbox with S-Controller                   NA        179.94
Sony PlayStation 2                               179.99      179.79
Panasonic 5 Disc Progressive Scan
  DVD Changer w/Component Output                 134.95      129.99
Sony single-tray DVD Player                       99.99       99.99
Sony 5-Disc CD Changer                            99.95        NA
RCA Lyra 128MB Pocket MP3 Player                  99.95       99.96
Sonic Blue Rio 64 MB Portable MP3 Player          89.95        NA
Nintendo Game Boy Advance (5)                      NA         69.88
V-Tech 2.4GHz Cordless Phone
  with Digital Answering Systems (6)              49.95       48.72
Sony PS One, Brand/Model: SON 94015                NA         49.94
Norton AntiVirus 2003 by Semantec                  NA         39.96
Magnavox Shock Proof CD Player                    39.95        NA
PlayStation 2 NCAA College Basketball
  2K3 Game                                         NA         29.94
Xbox James Bond 007: Night Fire Game               NA         29.96
Gangs of New York DVD                              NA         18.98
How to Lose a Guy ln 10 Days DVD                   NA         19.94
Old School DVD                                     NA         19.82
Die Another Day DVD                                NA         19.94
50 Cent CD-Get Rich or Die Tryin'                  NA          NA
Jack Johnson CD-On and On                          NA          NA
Charlie's Angels-Full Throttle Soundtrack CD       NA         13.88

FOOTNOTES
(1) Brand/Model: USR P80720US

(2) 2x optical zoom/3.2x digital smart zoom

(3) Included accessories: power cord, 25'
phone cord, phone line splitter, serial data control
cable, IR control cable, composite AV cables,
RF coaxial cable

(4) Brand/Model: SON PEGSJ22

(5) Brand/Model: NIN AGBSMBA

(6) Brand/Model: VTC T2451

(2) Consumer Electronics Basket--by feature set

ITEM                    DESCRIPTION

27" Flat Screen TV      Flat Screen, 3-line digital comb filter,
                        velocity scan modulation, A/V inputs
                        (1 front/ 1 rear), 1 rear standard component
                        input, 1 rear S-Video input, 1 RF input,
                        monitor out, new side speaker design, cabinet
                        color: Silver

20" Flat Screen TV      Flat Screen, front A/V input, 1 RF jack,
                        headphone jack, digital comb filter,
                        Smart Sound[TM], Closed Caption, cabinet
                        color: Silver

27" Digital TV          1 S-Video input, 3 rear AV inputs, 1 rear AV
                        output, 3 picture modes (normal, theater,
                        personal), 181 channel tuner, trilingual OSD
                        (English, Spanish, French), closed caption
                        display, V-Chip, sleep timer, auto off,
                        recall, channel scan, parental control

13" TV                  1 front A/V input, sleep timer, earphone
                        jack, antenna, 181 channels, V-Chip program

                        lockout, remote control, sleep timer, 3
                        languages, cabinet color: dark gray

Cassette Player with    Lowest cost item available
Digital AM/FM Radio

Portable CD Player      Lowest cost item available

                        CIRCUIT     BEST       ULTIMATE
ITEM                     CITY        BUY      ELECTRONICS    WAL-MART

27" Flat Screen TV      $379.99    $425.99       $439.96     $368.00 *

20" Flat Screen TV       199.99     279.99         214.95       148.72

27" Digital TV           179.99     299.99         178.95       177.86

13" TV                    99.95      79.99          88.96        69.88

Cassette Player with      29.99      29.99          39.95        39.96
Digital AM/FM Radio

Portable CD Player        17.99      14.99          24.95        14.24