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Top CE Retailers See Challenging Times Ahead

LAS VEGAS -How can CE retailers survive the economic downturn? Will tough times claim more chains? And how will dealers meet the needs of a savvier consumer while remaining true to their brand franchise? Those were some of the hot potatoes tossed at this year’s TWICE Retail Roundtable, held last month during CES. To see how this Who’s Who of CE merchants made out…

TWICE:Are the recent bankruptcies of Wards, Bradlees and Roberds indicative of some greater retail malaise?

SHELLEY MILLER: No, not at all. It’s natural selection. Its stores that have no reason for being, they have outlived their usefulness. Prospects out there shop with their feet, and those stores had no compelling reason for people to shop there.

DAVE WORKMAN: Every year this industry sheds some of its own. Just think of the Silos and the Fretters and all the names that are missing in this business. I guess we’ve become somewhat desensitized to the business failures. At this point we mourn them for about five seconds, maybe not even that, and kick a thin shovel full of dirt over ’em and move on.

It’s a cold reality about this business because we’ve become so accustomed to people going out of business. But what Shelley said is absolutely true in that there is absolutely no place for ambiguity in terms of what you stand for with the consumer.

You have to be clear of message because there are the alternatives of the Amazons and the 800.coms and the different channels, and the blitz of media that people are exposed to. If you aren’t absolutely crystal clear with your message, you will get lost in the pack. And if you’re lost in the pack, you’re probably not long for this business.

MIKE LINTON: I’ve only been in the retail business for two years, but to me it’s no different than most other industries. Brands come and go based on the benefits they provide to the consumer and how well those benefits stack up versus others in the marketplace. Regardless of the industry, if you can’t make the cut, the consumer goes elsewhere.

TWICE:Economic Darwinism.

LINTON: This is just the natural evolution of all businesses, and it applies to retail just like everywhere else.

KEN WELLER: But Mike, don’t you think that’s caused by the fact that consumers today are a lot more savvy than they were three or four or five years ago?

LINTON: Yeah, I think the pressure on retailers all the time is to continue to evolve in order to deliver to consumers what consumers want as the marketplace changes.

WELLER: Consumers clearly got a view now of where retailers are in the ladder of life. This sort of segmentation has not only gone on in our industry but in retail in general, and it’s going to play itself out more strongly. More surprising than Wards was the announcement that Sears is going to close 89 stores. I mean, if any announcement were to make retailers concerned, I think that would be the one.

I’m not quite as optimistic as maybe a couple of you here. I think the next couple of years are really going to shake out retailing. Not just our industry, retailing in general. I don’t think I was naive, but it sort of surprised me that Wards closed down so quickly. I think there’s going to be more [consolidation] in the next two years, not less.

FRANK SADOWSKI: Ken makes a really good point about the consumer. A fundamental shift that happened over the last five or six years is that the consumer has decided that he or she wants to set their own agenda. They’re no longer accepting an agenda that’s presented to them by the retailer. I think our colleagues at Best Buy probably started that a lot of years ago by going to a business model that was based on convenience and not pressuring the consumer.

There was a lot of criticism about that model when it first came out, but the consumer has chosen to embrace it, and that company has been extremely successful. What Shelley and Dave have in their business models also shows maybe a different side of the exact same thing-consumers deciding “You know what? A $99 DVD player is maybe not what I want. I want to learn about DVD players and find someplace where people will figure out what I need.”

There’s something very unique about consumer electronics that’s different even from other complex products like automobiles, for instance. Most people have some idea of what their needs are and then they shop to meet them.

Our industry is fairly unique in that a fairly significant portion of the consumers don’t really know what their needs are. In the past they’ve been willing to accept the agenda of the retailer to go in and tell them what they’re supposed to buy. The fundamental shift is that they’re no longer doing that. They’re saying “I want the agenda to be mine.”

The only thing I would disagree with Shelley about is that not all consumers shop with their feet. Some of them shop with their index finger.

WORKMAN: One of the fun things about this business is that it’s not one size fits all. There are clearer delineations among the consumer groups. There are some who want to do everything with the index finger. There are some who want to be educated and surrounded with a service that perhaps only physical presence can provide. And there’s the Best Buy model, which educated us all about providing choice to the consumer.

Fortunately, TWICE isn’t only talking to one person at this table because one person got it all figured out and has the entire consumer base satisfied. There are definite lines of demarcation and different consumers that each of us, hopefully, can appeal to. And if you carve that position out and execute it as well as you know how, you will be successful.

Obviously, consumer patterns are changing. I think the one thing that the Internet has brought us is a more educated consumer. In contrast to the malaise of previous retail experience, there is absolutely no room for the slick salesperson telling consumers whatever he thinks they want to hear. That consumer coming in clearly is researching a single product, and one of the challenges at retail is you have to have a floor salesperson knowledgeable about many products.

And, in the service end of the business where we are, you don’t want to be in a position where that consumer theoretically knows more about the products than your staff. So it is a huge challenge

TV to buy. Reason is, you can buy a Wega for 400 bucks, or you can buy a 20-inch LCD panel for $4,000. Is that viewing experience 10 times better, and why would that be? Or you can go to Kromer’s and buy a Haier 20-inch for $99, and is that worth saving the money?

Pretty much you have to work that out as a consumer, and I’m not sure that’s easily worked out on your own. So where there is a selling force, somebody who can counsel and give advice like Dave’s operation and where Good Guys operates, all this confusion and complexity sort of works toward their advantage.

Even though people worry that they’re going to get beat up and sold something by some slick salesperson, the idea of doing lots and lots of research.there just isn’t time. It’s not like you’re back in college and you can take all Thursday afternoon to research which cassette deck you want to buy and read five publications. There just isn’t time.

At the end of the day, I think you want to go to a trusted retailer and get some good advice.

DAVE EDMONDSON: Kind of the first rule of marketing is that everybody’s not going to do any one thing. Some people are going to do one thing, and some people are going to do another. A major trend is that the number of groups of people who are doing different things and behaving in different ways is expanding, not contracting. Every consumer is different.

The consumer gets up every day and says, “Every day is a new day.” Have you ever seen the movie Groundhog’s Day ?I think sometimes retailers get up and say every day is the same day. If you approach your business like Groundhog’s Day instead of every day being a new day, you’re going to have problems.

To reinvent yourself while still being true to what it is you are and what you stand for to the people that you’re focused on serving, to constantly question whether or not what you’re doing is, in fact, focused on serving a group of people that you care about-that is the difference between success and failure at the end of the day.

CHRIS PAYNE: This concept of tailoring the experience and giving the customer the right information, you’ve taken it to the right level, Dave. It’s almost like you need a store for each individual consumer. That may be the ultimate nirvana. That’s one of the things at Amazon that we’re trying to focus on because we have that capability in the online channel.

A good example of this is digital cameras, which was probably our strongest category this past holiday season. We wanted to, I’ll use the term “reconfigure” our store, so that we could do a better job of servicing the digital photography market. Well, instead of having to roll it out to 500 stores, we could do it in a matter of a month and roll out a new store and then target that consumer. We also did it with MP3, and we’ll also do it with other categories as we go forward.

Additionally, we use technologies to help completely customize the site to the individual. If you go to our Electronics home page and you start navigating around, you’ll actually notice that the home page reconfigures itself

TWICE:How did you guys fare during fourth-quarter 2000? What were your hot categories?

LINTON: It was a slightly heavier promotional environment in December, but overall, we feel real good about how the holiday season turned out for Best Buy. We comped near 4 percent, and we had a very strong finish on a number of fronts.

What we saw were consumers coming into our stores chasing digital products-DVD in particular, both hardware and software-and a lot of digital cameras and TVs. On the computer side, notebooks were hot, as well as PDAs and some wireless stuff. Also, our ISP sign-ups went on sale-we signed up over 200,000 MSN folks.

So in general, we felt very good about the holiday season and had a particularly strong finish in some of our bigger digital categories. We appeared to get stronger as we closed out the year.

EDMONDSON: RadioShack had a good year in general. November 1999 was a very big month, with 22 percent growth all-store, so that was probably the month we had the most challenges as we began to plan out the year. But the team came together and really planned out very well, and we ended up November 2000 with 14 percent all-store, 11 percent comp-store gains, on top of 22 and 17.

That was a pleasant upside surprise. We actually over-planned for November, driven a lot by what happened after Thanksgiving. The day after Thanksgiving was the largest day in the history of our company. So that was a very pleasant surprise against some pretty big gains from the year before.

We were also able to re-margin that business. We were pretty promotional the day after Thanksgiving 1999 in terms of some key traffic-building items, which was the first time we had really gone after that as an opportunity. We traditionally didn’t believe we could get people to line up at the door on Friday morning. So November obviously was a very good month for us and above plan.

But then we moved into December. The most disheartening part was early on when the desktop computer business really just kind of hit the skids within a couple of days after the Thanksgiving weekend. It probably took two points off what we really wanted to do in our plan for December. But the environment was pretty tight.

The issues of the election and the lack of resolution were a distraction for a lot of people at the beginning of the month. But by the time we got to the end of December we were pretty pleased. And then of course after Christmas-we call that our 13th month-we really focused on all the things that Santa Claus forgot.

With the convenience of 7,100 stores, we’ve become a very important part of completing the sale after Christmas is over. So we ended the month and the year very strong, with 12 months of solid double-digit growth.

In terms of product, the wireless phone business for us was very robust throughout the fourth quarter and throughout the year. We certainly will end up well over 4 million wireless phones activated during the year 2000. So wireless was very, very strong for us across both carriers, Verizon and Sprint PCS.

Toys were a little bit disappointing, probably due to PS2. Even though there weren’t as many as were expected to be out there, we don’t participate in that category and it probably took a little bit away from some of the radio-control business that we would normally do.

DirecTV continues to be a very, very big item for us, and our foray into the installation business has been very beneficial. Traditionally we would have a do-it-yourself customer, and we are beginning to see very nice signs of being able to establish ourselves in the do-it-for-me part of the business, which is a major focus for us.

TWICE:How are you getting consumers to think of RadioShack as a home-installation resource?

EDMONDSON: A lot of communications. You probably have seen, or at least I hope you’ve seen-we’ve certainly spent enough money on it- Howie [Long] and Teri [Hatcher] doing their deal for the last year and a half or so. In 1999, we went through a whole optimization or our media mix and really brought to bear some statistical tools to determine what the real return was incrementally on advertising dollars spent.

This allowed us to really remix the whole business in terms of what we were doing from a media standpoint. We built a system that is very fact-based and that has been very good at being able to be predictive in terms of where we spend media dollars or what kind of return we get. So that’s had a big impact on helping us do that.

TWICE:Will we be seeing more of Howie?

EDMONDSON: Oh yeah. He’s a great guy. She’s a lot of fun too.

TWICE:I’ll bet.

MILLER: Our plan at Tweeter wasn’t to chase share. Our margins were actually up. We were up against very strong double-digit comps the year before, and our margins ended up a little bit ahead of plan, actually. We sold what we pretty much decided that we could sell effectively during the season. Digital is approaching 50 percent of our total business now. It is just an astounding number to us, and to have reached it so quickly.

We saw a lot of the same things everyone else at the table saw. We saw very unpredictable traffic patterns. November was a terrific month, then early December slowed down dramatically, and then the week before Christmas and the week after Christmas we saw very, very strong traffic. And the week after Christmas is definitely a 13th month now.

TWICE:How’s your inventory position?

MILLER: Inventories are good. We’re a little heavy in a few areas, nothing that won’t be perfectly adjusted by the end of January. But we’re quite a bit different, really, than everyone else at this table because we aren’t promotional at all.

We’re an everyday low price, and we’re out there trying to differentiate by selling the benefits of expertise and personal service-not that everyone else here isn’t trying to do the same thing. But we’re not out there with price-point product attempting to drive traffic into the stores. So we really have to do it based on the power of the need for expertise.

WORKMAN: The position of Ultimate is that in the marketplace, we cater to the consumer who can spend more. Our largely held belief is that the average consumer does under-buy consumer electronics somewhat, and if exposed to better electronics, they will purchase better electronics.

We finished the two-month holiday season with 12 percent comps, which came on top of 15 percent from last year. So we were extremely pleased with the results in a promotional environment that was out there.

Obviously, a lot of that was the floor pricing and regional players and all the rest of it. But I always find it interesting because if we had sat here last year, everyone would have been cracking open the champagne, thinking that we had just found the Holy Grail of retail. But we’ve improved the results of 1999, then kind of sweep the records under the table and say, “Geez, where’s that same level of optimism?” Well, you do a dollar more than the record of last year, obviously, it’s a new record.

So we’re very pleased with the results. Consumers still have a tremendous appetite for the new digital toys. There’s obviously a place in the market for channels where consumers can get an education. As an industry we’re bringing a whole influx of new technologies, and there’s a tremendous amount of questions on the part of the consumer, and they need to be educated first.

Our industry benefited from the fact that we did have the hot products. So maybe the shopping list that in 1999 might have included the sweater and the new coat and the consumer electronics purchase, maybe in 2000 the sweater got crossed off and just the DVD player got purchased. So I think our results in general are some of the best in the overall retail sector.

TWICE:Did the degree of promotional activity concern you?WORKMAN: At least the tone of the market was “now that we’ve all finished, we can all breathe the big sigh of relief and wipe the forehead and say wow, we made it through another one.” Everyone gets real anxious at Thanksgiving because as retailers, obviously so much rides upon those two months. But there was a sense out there that it wasn’t a natural win, all of us retailers basically felt more confident in the results before they occurred.

This year there was probably more disposition toward having to engineer those results, as opposed to 1999 when it was a more natural hit. So I think we all worked harder in the markets to create the wins that you hear at this table.

TWICE:Will this environment continue into the first quarter?WORKMAN: We found that the holiday sales season generally is a great predictor of the first six months of the following year. Obviously, retail trends don’t stop and start on the first and 31st of each month-as we often do with our books, thinking that if you had a bad month, it’s going to immediately turn around the next month. But we’ve typically found that if you have a good holiday season, the first six months are generally going to follow the same trend line.

WELLER: Good Guys did really well in high-end television. You have to sort of see historically that the company has not done particularly well in the last three or four years. So we’ve had now three quarters of back-to-back, really good, solid comps. Our margins were right on plan too, as we were less promotional around Thanksgiving. In fact-we record our sales by quarter-our December month was actually stronger than October and November. So we really had a nice finish.

And our inventory was right on plan. We were pretty good, we were pretty good. It was really heartening for me to see the high-end Mitsubishi and high-end Sony TVs [move]. We delivered literally thousands of them in the last two weeks of December.

TWICE:What went right?

stores. And boy, we’re getting really good receptivity from our customers on that. We’re trying to make a statement when you walk into our store that you can see products that you can’t see in other places.

MANN: MARTA sells more appliances than electronics, 60/40, maybe more. Electronics for years has been beaten up on, but the second half of this year it looked good compared to some of the strange things happening with the appliance business.

We had good reports around Thanksgiving, but then things went to sleep for awhile. Some of our people believe that customers have been trained to wait until the price gets really good. And it seems to be that way because right after Christmas it picked back up again. So we had kind of a U-shaped period.

But when you have a group, it’s not so uniform, so for every one guy who had the best December they ever had, I probably have two or three guys that were not happy with the results.

An overall assessment depends on the measurement. We sold bunches of units. So if we could ever get our vendors to accept units instead of money, it’s the best year by far that we’ve had. In terms of dollars, however, it was not the best year probably, and in terms of profitability, it certainly wasn’t. We can sell more and more stuff, but we just can’t seem to collect more and more money.

PAYNE: The holiday season went very well for Amazon Electronics. Sales in my business were up 200 percent year-over-year, so three times what they were in 1999.

In the past, customers had thought of us as a books, music and video business. But we really feel this year we became a destination for electronics buying. We announced that electronics is now our second largest business behind our book business, and certainly that trend continued going into the fourth quarter.

Seven of the top 10 products and 20 of the top 25 products that we sold on a revenue basis were electronic products this holiday season, with the Palm 3XE being the No. 1 product for us.

Certainly they’re vantaged on an average selling price basis. But boy, we sold a lot of copies of Harry Potter, and we’re very pleased with how well we did in electronics.

SADOWSKI: For this was our third Christmas season selling electronics on the Internet, and we just fell short of doubling sales. So we were very happy with that, and actually, our average unit price in electronics was up slightly to 1999, which we were very pleased about considering the devaluation of average retail in DVD.

Big categories for us? Obviously DVD, branded players at $199. We did not do a lot of revenue in product under $199, which made us very happy even though we had some of that product on the site. We were pleased with the step-up nature of the business.

TiVo and Replay were remarkably strong for us, we were very surprised with that. Not surprised at all by the DVD explosion with brands at $199. Digital cameras were also very strong.

The other two surprises were telecommunications, which was extraordinarily strong, particularly in upper-end telephones, upper-end cordless ITADs. And the last category that surprised me was portable audio. Personal audio, personal CD had been kind of flat the last couple of years, and it was explosive for us this year. I don’t have an explanation for it, but we were over double what our revenue plan was in the portable audio category.

TWICE:We talked about the best-selling products. Which were the losers?

HIRSCHBERG: Clearly anything cassette-based tanked. Cassette had a fantastic run, but it’s just about over. And that leads back to what Frank mentioned in portable CD being so incredibly hot.

Likewise, VCRs are giving way to DVD players. Even with the promotional activity on DVD-$99 widely used as a promotional price point dropped the average price to $199-dollar sales still doubled in that holiday season, and that drove everything home-theater-related as well.

Another category that’s down considerably is the CD player, which might seem counterintuitive with all the growth in digital. But with the installed base and DVD being backward compatible, CD players were one of the losers. Flip side though, CD-recorder was the fastest growing home audio product category. So it’s kind of trading off old technologies for new.