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A Y2K Tale Of Two Retailers

Twelve months ago everyone was talking about the computer disease that would probably result in disasters in many places around the globe: Y2K. Who would have thought that the only real Y2K disaster could come from faulty voting machines and butterfly ballots during the presidential election in Florida?

It only goes to show that the prognostication business is riddled with potholes. It is usually easier to reflect upon events and analyze their effects, and that usually makes for good storytelling and good reading. Typically, for our final issue of the year, we schedule two such stories: “The Year In Retailing” and “The Year in Major Appliances.” It is ordinarily safe to assume that by the beginning of December, when these stories are written, all of the major events except for the final holiday sales figures will have taken place.

Well, you can’t assume anything in the news business, and this issue is a classic case in point. It’s really a tale of two retailers. Who would have predicted 12 months ago that Best Buy would buy high-end CE chain Magnolia Hi-Fi and the Musicland Group and announce its move into Canada in 2002, all in the same day? Who would have thought a year ago that on the very next day Best Buy’s main rival, Circuit City, would announce lower sales for the third quarter, a probable earnings shortfall for the period, and the defense of its decision earlier in the year to drop out of the major appliance business?

As some wise person once said, “Who’d a thunk it?”

Who indeed. The moves on the part of Best Buy take it to three separate places at the same time. First, with Musicland it enters malls all over the country and will begin to stock some consumer electronics in more than 1,300 Musicland, Sam Goody and On Cue stores. With those mall stores, the chain could possibly challenge RadioShack. Second, with the purchase of Magnolia Hi-Fi, it enters the high-end audio/video business, which is the category this chain started with in the mid-1960s. And finally, with Best Buy in just about every major market in the United States, it turns its sights to Canada for expansion.

Best Buy’s moves could be considered risky, especially as the economy is seen cooling off during the new year, if not entering some type of a recession. But the chain’s acquisitions are investments in what everyone would consider to be its core categories: digital audio/video and home entertainment software.

As for Circuit City, its investment in what it considers to be core categories-consumer electronics, PCs and software of all stripes-in favor of major appliances did not turn the corner in the third quarter. Sales were down during the period, and the chain predicts an earnings shortfall. The reasons? Greater than normal price-cutting and store remodeling due to its exit from the appliance business. (President/CEO Alan McCollough said that sales during the quarter would have been worse if it had stayed with major appliances.)

And what about the major appliance business? Take a look at the story on p. 112. The always staid, more profitable, steady majap business has undergone a midlife crisis. The Circuit City move was only the tip of the iceberg. Home Depot and Lowe’s have become players, major brands have decided to change distribution strategies, prices have been cut more drastically than normal, and those manufacturers have named new executives.

The verdicts on the changes at Best Buy, Circuit City and in the major appliance business will not be decided upon during this holiday season. But by next year’s holiday season we will have a much clearer picture of how all these changes turned out.

One thing you can rely on. As always, TWICE will be around to cover the comings and goings of one of the most exciting industries in the world. Have a great holiday season and a prosperous New Year. See you in Vegas for the 2001 International CES.