Dave Workman, PRO Group: To some extent there’s a retail Darwinism going on, and there’s probably going to be some supply-demand correction in this market over the next couple of years.

Nasty and negative as that is, what you typically find on the other side are more profitable retailers that are better positioned, because they’ve stepped back, rethought their businesses and asked why somebody would shop them. You have to have a clear, marked, differentiated position in the marketplace. You can’t do copycat formats. You can’t be something that looks like somebody else and survive.

This period reminds me a little bit, without the superimposed economics, of the end of the VCR boom. We had retailers that were opening stores as fast as they could because you couldn’t sell VCRs quickly enough. Then when the boom stopped and the product cycle matured, you found a lot of retailers competing against each other with questionable differentiation in the marketplace.

We’re probably in the early stages of that now. The key is getting through the current situation and knowing that if history repeats itself, as it tends to do in this industry, there’ll be another technology boom and a brighter future in about two years.

TWICE: The cycles are hastened by the race to the bottom.

Workman: Blu-ray is the latest example. Here’s a product that is in a very early stage of penetration and could do $2.5 to $3 million this year, $5 million next year, and $10 million the year after. But the manufacturers figure we’ve got to move flat-panels, so let’s give it away free. It’s not just the fact that you created the free product to move the panel; what it also does, pretty much, is make "free" your new starting point.

Blu-ray may be the world record holder for screwing up a category the quickest. I know a lot of that gets funded by the software manufacturers, so maybe you give people some titles instead of bringing the product down to free.

It’s frustrating because where there are growth opportunities it’s almost like we’re falling on ourselves to make it that much tougher.

Everybody was saying, "Transactions were up, transactions were up, transactions were up." But there’s a point of diminishing returns. How long can you continue to put up 30 percent and 40 percent positive transactions just to get 5 percent to 6 percent comp dollar increases? Last I checked, everybody pays their bills in dollars, not transactions.

Our industry is tougher than most in that we have almost a natural deflationary aspect. We have to continually keep more people coming through the door, and that’s unlike most other industries out there.

Tom Galanis, Sixth Avenue Electronics: Technology has to be paid for. Factories have to recoup their investment in R&D. Maybe the cycles will get shorter, but I don’t think they could function if it comes out at entry level, because how would they pay for the technology?

Ross Rubin, industry analysis director, The NPD Group: They have to continue to differentiate, vs. commodity products.

Rick Souder, merchandising executive VP, Crutchfield: Is there some point, whether it’s short-term currency pressure or whatever, at which the price compression stops? Historically it has just gone on; there’s nothing to stop it. And now with Blu-ray, free is the norm.

That’s why the labor question is so difficult to address. When we were building a custom-installation department we spoke to dozens of retailers and got everything from "We lose money on labor" to "We make all our profit on labor," and everything in between. We’d ask basic accounting

questions and get deer-in-the-headlights looks. What part of your overhead do you assign to your custom department? How do you account for all those trucks and people that are on the payroll that aren’t working 24 hours a day, seven days a week?

The issue comes back to how you differentiate. We can put shopping carts and checkout counters in our stores and try to be Wal-Mart, but we probably wouldn’t be good at that. Wal-Mart said they want 40 percent market share in flat-panel in ’09. That’s their stated goal. Next year it’ll just be Amazon and Wal-Mart sitting at this table because we’ll all be gone.

TWICE: How severe will the retail consolidation be? We heard one estimate of a 10 percent to 15 percent attrition rate in 2009. Is that overly pessimistic or overly optimistic?

Jeannette Howe, Nationwide Marketing Group: I think it could be on track. This country has been over-stored for a decade. We’ve been riding a gravy train.

I think the DTV deadline actually helped us tremendously. If we hadn’t had that, we would not have sold anywhere near as many flat panels over the past year.

There will be a correction. You can’t have an over-stored economy — whether it be the Ann Taylor stores or the Tweeter and Circuit City stores — and not have it correct itself.

Galanis: One other problem we’ve had in the industry is that people that used to work for you have the ability of to go out and buy product from a distributor or other sources and then compete against you. And you have overhead and they don’t. That’s cutting costs also.

Richard Glikes, HTSA: As people are withering and dying.

Steve Caldero, Ken Crane’s: They’re withering and dying, but that’s going to help us in the long run.

Then you have the smaller mom-and-pop shops. It’s an owner and two or three installers, and they have a very efficient model too because they don’t have a distribution warehouse or all the expenses associated with a larger operation. I don’t know if it’s good or bad, but some of these guys are going to get squeezed out too, the little guys, because the business is going to get more complicated.

Workman: This gets back to the attrition of the industry. I think it’s already started. We as an industry forget people very quickly. We always look ahead to the one we think is going out of business next, but we forget about CompUSA and their $4 billion, and Tweeter, and Good Guys, and the downsizing of Ultimate Electronics.

It goes on all the time, but it doesn’t necessarily mean that we sell less product. When CompUSA went away the industry didn’t sell fewer computers. The consumer has plenty of choices. Even a Circuit City failure still won’t likely get us close to that market correction point.

Galanis: As Dave said, it’s a form of Darwinism. The herd has to get weeded out. The weak and the sick have to go away, leaving just the strong. That’s the way it is.

Souder: I guarantee this would also come up if you had a manufacturer roundtable. We’ve put much of the burden on the supplier side, asking them to differentiate product and be more intelligent in their distribution strategies, which is important. But I’m sure they would bring up the same responsibility or obligation for the retailer side. Retailers have played a big part over the years in the quick commoditization or reduction of profit levels, the race to low prices.

One thing that leaves me hopeful after we go through this upcoming attrition, shakeout, whatever, is that by definition, the people left will be more focused on profit, which may give us some breathing room to become more profitable as the consumer engages again. I hope I’m not being too Pollyanna there, but something has to give.

Release Date: 
2009-02-20 18:20:00
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Dave Workman, PRO Group: To some extent there’s a retail Darwinism going on, and there’s probably going to be some supply-demand correction in this market over the next couple of years.
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