Virtual Retailers Spinning Ever-Growing CE Web

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Don't get Leon Temiz started.

The mere mention of the Internet gets the 6th Avenue Electronics CEO railing against the recent spate of virtual retailers, whom he regards as online insurgents.

"The Internet is the kiss of death for our industry," he said. "It's dangerous, it's only price-driven, and vendors need to dry up availability. I'm doing my part by not being on it."

To be sure, the advent of electronic commerce within the consumer electronics business has ignited a firestorm of conflict, questions and concerns among traditional storefront retailers, distributors and manufacturers. Who's selling what to whom? How thin can they shave their margins? Will brick-and-mortar stores become obsolete?

Granted, this high-tech distribution channel, with its soaring stock offerings and virtually unlimited venture capital, has clearly caught the public's eye. According to The Boston Consulting Group, a Toronto-based management consulting firm, a watershed moment in e-commerce occurred last Christmas when total online sales of all consumer products spiked 230% over the prior year period.

Observed senior VP David Pecaut, "The holiday season marked the year that online retailing moved from an interesting consumer experiment to an accepted retail alternative."

But what does this portend for the consumer electronics sector? Certainly not the end of CE commerce as we knew it, say analysts, buying groups, and the virtual stores themselves, who see their ilk as simply another channel of distribution, akin to the catalog business. Despite the competitive pricing afforded by their low overhead – a benefit of virtual storefronts and sales staffs – online sales remain a small, if growing, part of the total electronics market.

In Consumer Electronics Changes Channels, a recent report by Cambridge, Mass.-based market research firm Forrester Research, analyst Eric Brown pegged virtual sales of all electronics products at $1.2 billion last year, or 1% of total retail volume (estimated at $135 billion by Forrester).

An online shakeout notwithstanding, Internet sales could conceivably grow to $21 billion, or 12% of total volume by 2003, Brown added, assuming that manufacturers support the medium and that customers and merchants continue to flock to the web.

At the same time, e-tailers face considerable start-up costs as they develop their sites, market their brand names and corral sufficient critical customer mass, making the short-term profit picture bleak.

"I'd be surprised if anyone were profitable at this point," said Ken Cassar, an analyst with Jupiter Communications, a New York-based Internet research firm. "It's very expensive to establish brand identity online, particularly in consumer electronics where purchases tend to be infrequent."

Cassar is also convinced, contrary to the fears of traditional retailers, that many shoppers will only visit virtual stores to "capture information online, and they will consummate the sale offline, where they can see and hear the actual product."

Moreover, given the fact that no one retailer dominates the CE scene or wields the geographic ubiquity of a Wal-Mart, he argues that the virtual playing field remains wide open for on- and offline stores alike.

Bob Lawrence, executive director of the Associated Volume Buyers group in Long Beach, Calif., agrees that "people will still want to see and feel and touch the products," limiting online market share to 8% to 10% for the foreseeable future. But precisely because the Internet "evens the playing field," AVB plans to make its eight-month-old site,, sales-worthy in May.

"We see it as an enhancement rather than a replacement," Lawrence said. "Obviously, we're all brick-and-mortar retailers, but the Internet gives us a whole new channel to get customers in front of our members."

Virtual merchants also regard the Internet as an adjunct, rather than a successor, to physical stores.

"It's just another channel, and it's not going to rise to the point where it causes brick-and-mortar retailers to wither away," said Greg Drew, founder and CEO of, the self-described Ultimate Electronics Zone. "There's room enough for everyone in this industry."

Even the much-vaunted price advantage of virtual shops has been somewhat overstated. Just like their real-world counterparts, some e-tailers tout rock-bottom price points, while others profess a value-added approach. For every, which sells computers at distributor invoice prices and makes its money on transaction and shipping fees, there's a that has signed its MAP agreements and creates a "solution-oriented sell," said president Anthony Link, who insists that "we do not compete on price."

If virtual retailers do possess a secret weapon, however, it's service. "One reason people move away from brick-and-mortar is the bad experience they have in stores," said Paul Lipton, operations director of, the Internet arm of Huppins Hi-Fi, Photos & Video in Spokane, Wash. "They either get bad advice or no advice. We think the Internet is the best way to disseminate a great deal of information at the least expense."

"We've found that the Internet is a great medium to market products that need a lot of information and service," agreed Keith Clougherty, founder and chairman of "You'd think customers would get better service at brick-and-mortar stores, but that's not so. We can provide information online" – including setup tutorials, multimedia discussions and a personalized, automatic suggested sell process – "that's much more in-depth."

The ultimate test, said's Drew, is "who satisfies the customer's needs." And who can access the vendors' products. As Vann's president George Manlove observed, "Manufacturers are concerned about people without a profit-based model. They want to make sure their products are represented within a value-added infrastructure."

Jean Pierre Le Dour, general manager of, a joint venture between Tops Appliance City and online shopping mall Cybershop, recalled the lengthy process of securing e-commerce commitments from suppliers.

"It took a long time because some manufacturers had no policies in place and some only had some," Le Dour said, citing Japan's Internet lag time. "They're two years behind us on e-commerce, and management didn't think it would get here this quickly. It forced them to evaluate what they want to do."

According to Forrester's Brown, vendors will begin to open their supply lines when heavy storefront hitters such as Sears, Best Buy and Circuit City open their sites to selling. The result, however, could be bloody for the Internet's virtual pioneers.

"There will certainly be a shakeout," predicted Jupiter's Cassar. "Although the first ones in have the greatest opportunity, they also have the greatest risk. It may work for them, or it can all go up in smoke."

A report on plans by consumer electronics manufacturers to enter and deal with the e-commerce phenomenon will appear in the April 26 issue.


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