CE Pricing: An Open Letter To The Industry
The last thing this industry needs is a “price war” right about now. But that’s what may be happening if you believe all the industry chatter in recent weeks.Accusations from both suppliers and retailers that predatory pricing may be the rule in flat-panel TVs and other key categories this holiday season are the talk of the industry.
The culprits in this battle are, allegedly, the industry’s two top retailers, Best Buy and Wal-Mart.
They are supposedly pressing their suppliers to the limit to gain a competitive advantage this holiday season. Retailers and suppliers - whether they participate or not in this race to the bottom - will be hurt. None of that is new.
What is new is that since the economy is reeling from the ill effects of the worst recession since World War II, a price war would seriously impact the entire industry’s profitability, a fragile creature in the best of times.
When contacted by TWICE this week, neither Best Buy nor Wal-Mart had much to say about this, citing their policies and competitive reasons. Names of suppliers that have dropped prices on specific model numbers to major retailers are either non-existent or not verifiable.
Maybe these are just rumors stoked by the weariness of living through this recession? Maybe suppliers and competing retailers are just pointing fingers away from themselves to avoid blame?
When it comes to price cutting in the CE business, facts are always hard to come by, which is why this is written as an opinion piece, rather than a news story. But based on my experience, some of the allegations being made are probably true.
Wal-Mart did reiterate its philosophy in its response to TWICE’s request for information on these rumors: “Providing customers the best value on their purchases at Walmart is not anything new to our business, our reputation or our focus … [and] we have continued to grow our offerings of great CE brands and assortment.”
For Best Buy’s competitive thinking at the moment, check the comments by CEO Brian Dunn earlier this week. He highlighted the chain’s market share gains in its fiscal second quarter. Circuit City’s closing “created an opportunity for customer acquisition.” And Dunn added that Best Buy “will always be there on price,” but that this situation enables it “to connect price to service. Over time we will take share and build loyalty.”
Circuit City’s end may have ushered in the beginning of a new era where CE will be controlled by its two biggest retailers. Maybe, but I’ve heard about a few “eras” in CE retailing from years ago and lived though a couple more, and I’d venture to say that many of today’s best retailers, both large and small, will survive and thrive.
For instance, Jim Ristow, general manager of HES, said at CEDIA that his members are entrepreneurs, adapting and changing their business models. They have been looking at CE categories other than audio/video, and outside of the CE industry altogether for increased profits. They have now intensified those efforts.
HTSA, PRO, Nationwide and NATM are saying the same thing. Even Office Depot has decided to cut back on relying on CE products to increase its profits. That’s not good news for the industry.
Low prices and profit margins is this industry’s longest and oldest storyline. There is plenty of blame - or credit if you are a consumer - to go around among current and departed manufacturers and retailers for this industry legacy.
This year many top manufacturers are either just scraping by or posting losses, and it isn’t all due to the recession. Years of shaving profit margins to chase market share have hit home.
If this trend continues, long-term R&D will have to be cut and innovation will lag. Some manufacturers, as we have already seen, may drop key categories or exit CE altogether.
If you are in the industry for the long haul, the era of relying on strategies like taking market share by cutting profits should be reconsidered, at least for the time being. New long-term business strategies that generate profitability and innovation are vital.
Technically we are supposed to be coming out of the recession now. But it will take a couple of years for the U.S. economy to regain the jobs it lost in the past year. It may take even longer for the industry to enjoy the record annual growth rates of this decade.
Let’s not cry for manufacturers, but little or no profitability for them means less innovation for the CE industry, which will result in fewer exciting and useful products for retailers to sell, and sell profitably.
That’s bad news for everyone - manufacturers, retailers and, ultimately, consumers.
ZoetMB commented:
I disagree with David’s comments. The music industry did not face a “race to the bottom” in terms of pricing. Although the reality of music pricing is that music is less expensive if you factor inflation than 30 years ago, most consumers perceive music as too expensive, especially in comparison to DVDs after initial window. The primary issue facing the music industry is the change from album oriented sales to single oriented sales.
When consumers perceive a product as a “must have”, they will pay almost any price. Look at the recent sellout of the Beatles remastered boxes as an example.
I also disagree with his assertion that products are not complex and therefore, service cannot be a differentiator. While that is true for many consumer products, just look at the average DSLR menu, home theater receiver or HDTV that’s going to be hooked up to more than a cable box. I’m an ex-recording engineer and even I find these things extremely complicated. The rear of a typical HT receiver has 90 jacks!
What the retail industry has not accomplished is convincing the consumer that there is value add in what they provide (largely because they haven’t provided it.)
I was recently in a retail store that could not demonstrate any HT equipment. In one demo room, the switching board was broken. In another, only one receiver was hooked up to speakers. That is no way to survive e-commerce.
While there is always the risk that consumers will educate themselves from a service-oriented retailer and then order from a low-price retailer over the web, IMO, the physical retailers don’t have a chance to survive if they don’t offer these services.
It’s also a myth that the big box stores have low prices. It may be a consumer perception, but it’s still a myth. Large local stores in New York City for example, such as B&H and J&R, are almost always less expensive than any big box you can name.
The problem for retail is that because they haven’t provided value-add, consumers are shopping only on the basis of price, frequently choosing even inconsequential price diferences. Consumers need to be re-educated on the advantages of shopping in physical retail, but that’s only going to happen if physical retail starts providing the kinds of services that can’t be accomplished online.
David commented:
The CE Insdustry, manufacturers and retailers alike, need to look no further than the pre-recorded music industry to see how fast the bottom can be reached in pricing and then, in effect the shrinking of the size of the pie.
If manufacturers/vendors and the very retailers they have nurtured to be the market leaders fail to collaborate (and they likely won’t) then Wal-Mart will own market share on unit volume.
I hear about service being a ‘differentiator’ but believe that the products are not as complex as they would like us to believe. The products are simply rushed to market before they are consumer friendly or consumer proof. The window of time from introduction to ease of use out of the box is shrinking thus minimizing the need for a “Techpert” at decision to purchase point. Consumers are using the internet and all its resources to figure things out before they bu. Often the retailers website is providing the expertise that informs the consumer enabling them to move to the cheapest price reseller with as few as 2-3 clicks.
Service likely will matter only in a break fix situation. That being the case, the products become secondary and the business model for those anking on service must be flipped. A retaler such as Best Buy becomes Best Reapir and Wal-Mart stays the market leader in sales toilet paper, dog food and TV’s leading manufacturers to become skinny and hungry vs. fat and happy.
CE Executive commented:
As Steve points out, both sides are to blame. The race to market share is short-sighted at best, creating a downward spiral that ultimately ends in failure for the manufacturer, the reseller and the consumer.
Is it too difficult to break from these self-destructive ways and innovate a new market strategy? Where has all of the talent gone? Anyone can sell by dropping price. In fact, some would not even call that sales. Can you build a lasting BRAND… That is how we’ll measure success.
buster commented:
Maybe you’ll think I’m crazy, but I could do with a little less innovation. This industry has a long history of rushing things to market, wasting money developing unasked for technologies (DVD-A, D-Theater, tablet PC, Web TV, Voom, SED, laser TV and now 3D TV–not to mention all the format wars), throwing them at the wall to see what sticks then complaining about consumers’ lack of adoption and understanding while consumers complain about buggy products and poor service/support.
John Ireland commented:
Surely if manufacturers had thier own Direct2Consumer (D2C) model and selling at thier recommended price, then price erosion would lessened and the potential for price wars negated. The retailer has too much power but unless the manufacturer thinks outside the box that will continue
In a D2C model. The consumer sees what the recommended maufacturer price is, the retailer and etailer will always sell below that, the manufacturer sells at the recommened price but includes accessories - differentiating the offer to the consumer … and avoiding channel conflict
The manufacturer has a multi channel model, selling to the consumer at a better gross margin, owns the customer, has the opportunity to inlcude all their ranging, as the retailer wont allow full sku count
The retailer adds nothing in added value to the manufacturer anymore, it has reduced the ranging of the manufacturer products allowing them little oppportunity to increase sku count, the retailer demands greater discounts, uses the manufacturer branding and mdf to build the no name brands and the retailers own brands ….
The manufacturer must use ist own online opportunity to sell directly, look what Philips, Canon, Kodak, are doing with thier online shops - future proofing the model of customer acquisition
regards
John
