By Lisa Johnston
New products on display at the American International Toy Fair, held in N
The loss of the nation's second-largest consumer electronics specialty chain will likely have a profound effect on the way the industry does business, retailers and analysts told TWICE.
For dealers, the estimated $7 billion in sales that Circuit City relinquished represents a once-in-a-lifetime opportunity to gain market share and become more important to vendors, they said.
Manufacturers, meanwhile, will have to re-jigger their channel strategies to offset the increased leverage of Best Buy and Wal-Mart and might look to independents, e-tailers and even their own vendor-branded retail stores to help fill the void.
Regardless of how it plays out, all agreed the demise of Circuit City is a defining moment for the consumer electronics business.
“It's a major, major event,” said Bob Lawrence, CEO of the $11 billion Brand Source buying organization. “Never in the history of our industry has such a dominant player gone down. There will be some very big ramifications all around.”
Dave Workman, executive director of the Progressive Retailers Organization (PRO Group), agreed. “We've never seen a larger entity fail,” he said, unlike the retail consolidation of past decades when, ironically, the national expansion of Circuit City and Best Buy helped force scores of regional players like Silo, Fretter, Highland and Lechmere into insolvency.
“It's a very unsettling moment when a major retailer goes away,” he said. “It really is sad.”
Nevertheless, the loss of Circuit City may mean a new lease on life for other struggling retailers. “Redistributing their business could give the rest of the industry the best chance of weathering the economic storm,” Workman noted. “There was no question that the industry would contract. The market had to reach equilibrium. If a big entity didn't fail, a hundred or a thousand smaller businesses could.”
Another irony according to Stephen Baker, industry analysis VP for The NPD Group, is that bad timing, rather than the struggles of the past two years, is what ultimately killed Circuit City. “If they had reorganized last year” — before the global financial market meltdown — “they would have come out fine,” he said. “Today there's no support for any retailer to emerge from Chapter 11,” as evidenced by the recent liquidations of Bombay, KB Toys, Linens 'n Things, Mervyn's, Steve & Barry's and other large retail chains.
Indeed, Circuit City said it was close to closing a deal with Mexican tycoon Ricardo Salinas Pliego or Golden Gate Capital, a private equity firm, which would have allowed it to continue operating on a smaller scale. But potential lenders demanded that manufacturers extend the company credit, an unlikely concession from vendors still awaiting payment for past orders.
“The vendor community has zero appetite for taking another haircut,” Workman said.
But turning off the Circuit City pipeline creates new headaches for manufacturers, who must find homes for their displaced production while balancing the increased clout of Best Buy and Wal-Mart. Enter the independent.
“We have a national brand and can fill that void,” said Brand Source's Lawrence. “We've been handed an opportunity like never before and I don't intend to pass it up.” To that end, the buying group's A/V specialty division, Home Entertainment Source (HES), will hold a joint vendor summit next month in New Jersey with Workman's PRO Group.
“The timing is not a coincidence,” Workman noted. “Vendors are faced with the unenviable task of re-vamping their business plans. They can't just replace that volume with Wal-Mart and Costco,” which carry a different mix of goods. Rather, the business will likely be parceled out to Best Buy, the e-commerce channel, and other brick and mortar chains, he said.
Tom Campbell, a director of the 10-store Linder's Furniture chain, said manufacturers also regard home furnishings as another “very viable channel.” Represented by such regional players as Bernie's in the Northeast, Conn's in the South, Nebraska Furniture Mart in the Midwest, and R.C. Willey in the West, the hybrid furniture/electronics format could once again play a central role in CE, as it did during the 1970s and 1980s, he suggested.
“The category is coming alive again,” Campbell said, citing Linder's 63 percent spike in dollar volume over the past seven weeks.
“No one entity will get it all,” Workman agreed. “But vendors have to determine who they can partner with more deeply to push the business forward. They're looking for direction. And we have to work more closely with key vendor partners to figure out how to work through this and make it okay.”
Still, Best Buy stands to be the biggest beneficiary of Circuit City's demise. Credit Suisse retail analyst Gary Balter believes it can capture as much as 40 percent of Circuit's volume, “given the combination of high store overlap and a strong Circuit City customer bias toward the specialty channel.” Analyst Michael Lasser of Barclays Capital puts that number at 33 percent, or more than $2 billion in sales, and calculates that hhgregg, another big-box CE specialist, could pick up 2 percent of Circuit City's business.
For its part, Best Buy remained mum on its prospects. “We won't project how any store closings might affect our business,” spokeswoman Sue Busch-Nehring told TWICE. “Right now we are focused on executing our strategy and finalizing our fiscal year 2010 plans.”
On a personal note, she added, “We're sorry to see the stores close and employees move on. The consumer electronics world is small and a number of people who worked there are folks we call friends.”
Besides the loss of 34,000 jobs, another drawback to Circuit City's departure may be the absence of its marketing and advertising, which helped spark some incremental demand for consumer electronics “by raising awareness and increasing consumer propensity to spend on these products,” suggested Barclays Capital's Lasser. “This could temper industry demand by a small degree over the long term,” he observed in a research note, although he expects other retailers will compensate for the drop-off in ad spending.
A spokesperson for Sony, which had been a core Circuit City supplier, noted, “As one of the nation's top retailers, their exit is certainly not good for our industry. However, we will continue to focus on driving a balanced portfolio of compelling products that starts with the consumer. Circuit City's revenue last year indicates that there are millions of consumers who choose that value equation, and we'll continue to make sure those consumers find our products wherever they choose to shop.”
This TWICE webinar, hosted by senior editor Alan Wolf, will take a look at what may be the hottest CE products at retail that will be sold during the all-important fourth quarter. Top technologies, market strategies and industry trends will be discussed with industry analysts and executives.