Price wars rage in Georgia; Best Buy battles Circuit City for CE dominance - consumer electronics

Discount Store News, Nov 15, 1993 by Pete Hisey

Best Buy Battles Circuit City for CE Dominance

ATLANTA -- Best Buy's recent entry into the thriving Atlanta market may set off a price war with local competitors and Circuit City, the market leader, and result in a reconfiguration of the entire consumer electronics industry.

If a true war develops, a win could catapult Best Buy to the top of the consumer electronics world as an international, low-cost provider. A loss, however, could dry up investment money and stall Best Buy's repaid expansion.

With last month's opening of five stores in Atlanta, the Minneapolis-based retailer established the cosmopolitan Georgia city as a launching point for what will almost certainly become an aggressive invasion of the Southeast. Three of the five stores, which opened Oct. 29, were the company's new 45,000-sq.-ft. megastore format. At least two more units and a 400,000-sq.ft. distribution center will open soon. The openings bring the chain's store count to 142, nearly all of them reflecting the Concept II power format.

Best Buy faces competition from: Circuit City, which has seven stores in the market with a new megastore under construction; Roberds, the five-store furniture and electronics retailer; and HiFi Buys, the 12-unit speciality retailer. In addition, Service Merchandise debuted its new prototype with an expanded CE department the day before Best Buy's opening, and Atlanta Braves centerfielder Otis Nixon premiered his first Ozone Hi-Tech Electronics mall store, featuring high-end goods, a week earlier. On the music software end, Media Play, the megastore concept from Musicland, will debut shortly in nearby Stone Mountain.

Best Buy's entrance will probably affect Circuit City most, because the local chains generally have adjusted their mix to center on Best Buy's perceived weaknesses (mainly, high-end brand names) or have other means of staying price-competitive. Roberds, for example, generates most of tis volume from high-margin furniture and mattresses, and can presumably stay with Best Buy's prices on items both chain's carry without affecting profitability.

A quick look at the map confirms that Circuit City is Best Buy's main target. Its locations match up almost exactly witht he nation's No. 1 electronics specialty retailer, sometimes directly across the street. Both chains are skewed toward the booming northern suburbs, with token representation in the older, less affluent southern area. And, apart from a few brand names (like Onkyo) which won't sell to Best Buy, the two chain's product lines match up, although Best Buy tends to be deeper in most key areas (like computers, video games and entertainment software), partly due to larger selling floors.

This is the second time in less than a decade that the Atlanta market has undergone an invasion. Last time, in 1985, Circuit City swept into town and quickly became the top CE player.

According to a study conducted by Babson College's Retailing Research Group and C/J Research of Arlington Heights, Ill., Circuit City's share of the home entertaniment electronics market went from 0% in 1985 shortly before it entered the market, to 33% in 1993. Wal-Mart, which also entered the market in the late '80s, saw its share rise from nothing to 11%, while Rich's, a local department store, saw its share plummet, from 21% in 1985 to 5% this year. Sears' share declined from 29% in 1984 to 21% in 1985 and 16% in 1993.

This time around, the invasion might be even more disruptive. Best Buy is more agressive on price than Circuit City, so much so that initially competitors, including Circuit City, met Best Buy's advertising not with heavy price cuts, but general sales of selected merchandise with very attractive financing. Best Buy also couples traditional CE with one of the most extensive lines o computers and computing products in the industry, and a music software selection -- 65,000 CDs and 15,000 cassettes -- that blows away most music superstores. Its pricing is about 20% or more below most competitor's everyday prices.

The synergy created can be awesome, as the early results in Detroit and Chicago indicate. Analysts say Best Buy is already the dominant CE retailer in Detroit just two months after opening its doors. And in Chicago, two competitors exited the market when Best Buy entered. One of the major problems facing specialty retailers is attracting shoppers more often than once or twice a year. Music tends to draw core consumers every week or so, giving Best Buy 15 or 20 more chances a year to sell them more costly goods.

Beyond this battle for the consumer's heart and mind, however, is a more significant one, analysts and competitors say: the battle for return on investment. Until recently, Best Buys profitability has been suspect. it exploded in the most recent quarter and has been on the rise for the past year. In contrast, Circuit City, despite lackluster same store sales results of 5% or so, has remained solidly profitable, with profits on the rise.

It would appear to make no sense for either Best Buy or Circuit City to set off a price war; the two battered each other in St. Louis, with no clear winner, and the same is happening in Texas, where Best Buy seems to be getting the better of the situation.