CE At A Crossroads: When Worlds Collide

LAS VEGAS— As anyone who walked the halls of last month's Consumer Electronics Show (CES) knows, the long vaunted melding of IT and home entertainment has finally arrived. This convergence of PC and A/V is presenting itself on two planes: the product side, where media servers are taking their place as household hubs, and the retail scene, where traditional computer players are joining the CE fray.

Two of the latter's leading lights, CompUSA and Gateway, joined TWICE's annual Retail Roundtable during CES, and the electricity they generated with their A/V counterparts could drive a home theater system. What sparked the debate, and other hot-button discussions, appears on the following pages of edited remarks.

TWICE: The entry of PC retailers and vendors into the traditional A/V arena has transformed the CE playing field. Why did Gateway and CompUSA decide to expand their horizons, and why should shoppers buy big-screen TVs at your stores?

Bill Parker, Gateway: Where we have a store, our direct businesses — phone- and Web-based — do much better. Where we do not have a store, they do not. The reason why is that if the customer starts by talking to us on the phone, or visiting us on the Web, and then goes to the store, he may also begin thinking about integrated solutions. That's where we can try to sell him the media center and the TV, as well as a connected DVD. He wants to touch it, feel it and experience it overall.

I've spent a small fortune educating our folks on how to sell that stuff. We want to build trust with our customers based on our reliability and competency. We want to be able to educate them on what the technological solutions will do to help them at home. And you have to make it simple for folks so that they don't go home and wonder what they should do with all that stuff.

TWICE: Does that mean you will be opening more stores?

Parker: Our penetration in the top markets in the country is nowhere near what it could be. Some folks are going to be 60 percent to 70 percent penetrated in the top 20 markets in the country. We are nowhere near those numbers, because when the company was formed, the PC business was going through the roof, and you could put a store anyplace and do zillions of dollars.

Once that stopped, there was no reason to continue, and if you aren't placed in the high-destination areas, you're hurt. The Web and phone sends folks to the stores, which really helps us move our business. Our thought is, what are the markets that we aren't penetrated in? How do we position ourselves in the marketplace to be successful, so that all three channels survive and thrive?

TWICE: How has CE been performing for Gateway?

Parker: Those businesses are kind of new for us. We don't have the depth, breadth and scale that some sitting at the table do. I've been at the company a year, and PC has gone from 80 percent of our business to about 55 percent of our business. If you look at those things from a retail perspective, it's big for us. The margins are on the other side of the world in that sense. As we start to become more efficient in understanding consumer electronics and the digital imaging business, we can get a little bit more scale. Right now, though, in our first year of business, we are still learning, to be perfectly frank.

But our camera business was through the roof, because we introduced a lot of our own Gateway cameras. That's where the strength of our business was. We also did a fairly strong business in, believe it or not, the service area. We increased the education and learning part of our business dramatically, because that's where the margins are.

TWICE: Your chairman Ted Waitt has made no bones about wanting to be a disruptive force in the marketplace. Do you think that kind of take-no-prisoners pricing could eventually come back to haunt you?

Parker: I would call it "selective disruption." You cannot price your whole line that way, because if Best Buy gets mad, there's no way in the world I'm going to survive. I can't play in that game overall. I may be disruptive because of my locations and whatnot, with a customer using us as a destination center. My sense, though, is that you can't price your whole line disruptively. Where do you go from there if you want to promote? There's no margin. You do a television, a couple of cameras and a DVD player. That gives you that halo effect.

In our stores, we realize that our price points or ranges are the highest in the company, compared to the phone and the Web. We are still selling more high-priced goods. We are going to be disruptive in certain categories where we need to be, but Ted [Waitt] wants to be innovative, creative, and have lots of new products on the shelf, and we are starting to get a lot more into cycle and trend merchandising. That's becoming a lot more important than it ever was in this business. My background has been in apparel. I know in two weekends if that shirt is going to make it or not. In two weekends, if it doesn't, it has to go, because you have to turn it into cash.

That's a new phenomenon at our company. It used to be that it had to stay on the shelf another six or seven months — not anymore. It has to move. We are differentiating ourselves. There are a couple of ways to look at us. We can have competitive assortments. We can have differentiated assortments. We can have opportunistic buy assortments.

On the other hand, I don't see us all of a sudden having five days of door-busters, as in my old Kmart days, with $29 for this, or $59 for that. That's not the game that we're going to play. We are about innovation, creativity, new product introductions and selective disruptive pricing.

TWICE: CompUSA has completed the first phase of its A/V shop rollout. How are the shops performing, and what kind of tinkering are you doing?

Larry Mondry, CompUSA: We've tinkered for a long time. I think we'll continue to do so, but we've played with this for about a year and a half. We have rolled this out in substantially all of our stores now. They're in about 185 to 190 of the 230 stores. In some of the stores, we just don't have the space.

We're very pleased with how we started off. We have very modest ambitions. I think a little bit differently than Bill [Parker], in terms of the movement of the percentages of the business, and so on. We have to recognize that even though we have never looked at ourselves as a "consumer electronics" retailer, the reality is that we have always had a lot of that product.

Some CE products clearly started off as IT products. Some were created subsequent to the genesis of both of those categories. Look at a digital camera. Is that a CE product, or an IT product? I'm not sure. But we've been in it since they started making them — same thing with a PDA. Those areas have been a big part of our business, because we tend to do very well with sunrise businesses.

We're very pleased with how it's gone. Certainly we would always like it to be bigger, but we've been exceeding our expectations pretty nicely. We're learning our way a little bit on the CompUSA side about the need to plan out really well with vendors, in terms of the hot TVs. We were shocked at the numbers we were capable of selling in plasma, LCD and DLP. We hope that will continue. We expect it will, as the vendors frankly become more comfortable with us.

TWICE: Is there room in the marketplace for everybody?

Mike Linton, Best Buy: I don't think so. There's going to have to be some sort of shakeout.

Noah Herschman, Tweeter: There are just too many players, and you have to differentiate yourself, to be meaningful within your segment, and to appeal to the customer you think you'll appeal to. You can't be a "tweener." I think we'll see some of the "tweeners" fall out.

I also think you're going to have to be a seller of all these IT-based technologies, along with traditional audio-video technology. What's really happening is that this is the final stage [of convergence]. What we've been dreaming about for the last 10 years is finally happening.

What's interesting is that everyone keeps complaining about his or her audio business going down, but there's never been a better time to listen to music anywhere in your life than right now. I hope that will mean better things for audio. It may be a very different audio than what Ultimate Electronics and Tweeter are used to selling. But there's a lot of opportunity in terms of where things are going, especially for the consumer.

Neal Bobrick, Ultimate Electronics: More important than being a seller of all the technologies or categories, I think we're going to have to focus on providing an experience for all electronics. We used to be able to hang our hats on the fact that we would have exclusive brands, or that we would have new technologies that hung around awhile and gave people a reason to come into our stores. That's obviously gone. It's changing faster and faster, with products becoming commodities faster and faster.

To be successful, we have to provide an experience that's above and beyond. That's how we will be successful: to provide an experience for the customer that creates word-of-mouth advertising that brings them back into our stores.

Andy Berman, RadioShack: I think consolidation is inevitable. I also believe that the convergence of technologies will drive some consolidation as well. RadioShack is unique in that we have convenience, and we're leveraging those 7,000 points of presence with teachers. I believe, and the company believes, that the consumer is driving toward this. [RadioShack isn't] a self-serve environment, and we're seeing consumers come in and really look for education and how-to in what convergence is. We bring content to unique, salable devices that are wireless. They are clearly our strength, but I think convergence will drive consolidation as well. I just think it's inevitable.

Frank Sadowski, Amazon.com: This is an industry where growth is in the moderate single digits at best. And it's obvious and logical that if you add a whole bunch more retailers, someone will fall out the other side. That's unfortunate, but those are the numbers.

More important, is there new opportunity for the industry from this development? I really think there is. What the computer-direct people have done over the last six or seven years is to take a business that was really struggling with profitability at retail, and turn it into a more profitable business by learning how to manage the manufacturing process in the supply chain. They said, "Okay, let's just admit this is not going to be a particularly profitable business if we run it through the traditional retail store model. Let's find a different way to do it by managing supply chain better, by controlling the manufacturing processes at a more detailed level, and make that business profitable."

Obviously, if low pricing leads to no one making money, and everyone going out of business, that's certainly a bad thing. But lower prices to consumers, in and of themselves, are a good thing. It spurs interest, and brings more people into the market that would otherwise not be there.

We can all learn from what the office superstores, the direct-computer guys and the more successful Internet people have done, and learn a margin lesson from them. We do need to change the way we do business as retailers, and become more efficient, or we will have a problem. The people that don't do that will be the ones who fall out the back of the line.