Autumn's Aftermath: How CE Dealers Rescued Christmas - Twice

Autumn's Aftermath: How CE Dealers Rescued Christmas

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TWICE:What's your post-mortem on the holiday season?

MIKE LINTON (Best Buy): We saw a slip off starting in September, right after the event. But then it started picking up and continued to roar into November. We felt really good about DVDs, games, a number of products, and we had our share in those categories. But we were also real happy about the tie-ins we had with N'Sync and U2, as part of our whole December effort.

TWICE:Would you describe the season as promotional?

LINTON: We felt that the marketplace was a little more rational this year.

TWICE:Circuit City CEO Alan McCollugh described the season as 'appropriately promotional.'

RICK SOUDER (Circuit City): Promotions are a way of life. We all have to guess what they will be and make our business plans accordingly. Fortunately, it turned out much the way we expected. So, I would agree with what Mike said about the intensity of the promotions really not being that surprising or out of the ordinary.

The good news is that while promotions are an element of the business, most of our sales still come from added-value products, new technology products, which helps on the profit side of the equation.

TWICE:You guys had a strong December, with comps up 10 percent.

SOUDER: Yes, we are very pleased. It was our first full holiday season without appliances, so we were pleased that the businesses we filled the space with showed growth, whether it was digital cameras or DVD software or games. We represent all the platforms, which was not something we had done in the past. And the hardware, the software and the accessories are all doing well.

But some of our traditional businesses like projection televisions and digital imaging, whether it is cameras or camcorders, showed good growth, too. We got the growth we were hoping for out of that.

TWICE:So are the appliance replacement products meeting expectations?

SOUDER: It is right on expectation. Those businesses have more than made up for the appliance volume, particularly in the peak seasonal times.

DAVE EDMONSON (RadioShack): We had a very, very bad season as it related to computers. But that's not a business you make any money at. So, it's not the worst thing that could happen to you. So we were down, which was a little disappointing, but from a margin standpoint we saw significant margin expansion, which is really what we have been focusing on.

TWICE:How important to the fourth quarter are the radio control toys?

EDMONDSON: Actually, it did very, very well for the holidays, even with the gaming being as significant as it was. It was a complete sellout. It's a fairly significant part of the business at Christmas, and obviously drags along a lot of batteries and chargers and those types of things, so that's a business we really like.

RAY BROWN (Sears): We ended up exceeding our expectations for the fall season, although we had some very, very low expectations for computers. They continued their lemmings-off-th-cliff performance, as our model, to a certain degree, isn't too different than that of RadioShack's, with a single PC vendor. We don't have a core competency in that business, and the customer tells us that every day. So we continue to de-emphasize that while emphasizing home theater type products and such, which offset computers to a certain degree.

I think people were trying to get what business was out there and trying to actually not give the farm away and make a nickel doing it. We weren't anymore promotional than we were a year ago and we kind of saw the same thing in the marketplace.

At the end of the season, I really bought into that cocooning theory that everything for the home was hot, as long as they didn't have to leave the home. People were willing to invest in their homes, is what the customer was telling us.

The one big surprise was that camcorders, which just had a really tough year because of the travel issue, bounced back for us. And so we ended up with a fine fall season. All in all it kind of shook out the way we had expected it to.

TWICE:There seemed to be a lot of activity at the high-end and opening price points, but not much action in the middle. Was that your experience?

BROWN: Yes. From the vendor perspective, there are some folks that are clearly getting squeezed in the middle. At one end of the spectrum the Apex's of the world are doing extremely well in terms of moving hardware. And the upper end of the spectrum is doing extremely well.

But there are some folks that kind of play in that middle ground, what used to be peak-of-the-bell curve tonnage area, that are clearly finding themselves under pressure. Those are the folks that had the toughest time this fall. They didn't know where to go, and the customer didn't know what to expect from them.

FRANK SADOWSKI (Amazon.com): We are focusing on better brands and higher technologies as part of a drive toward higher margins, like pretty much everyone at the table. And we found as expected that digital products were extremely strong, digital cameras were very strong.

Late last summer we opened a computer store, which was our first foray into the world of PCs. And we are very happy with the preliminary results of the opening of that store, and we know it is a very down market. We are not comping any numbers because it is brand new. But, overall, we are fairly happy with the performance there.

Areas that surprised us: We were extraordinarily strong in digital camcorders and even the lower priced analog product, which, as everyone knows, has gone away. We have done very, very well there.

So overall, there were not a lot of surprises in the product mix this season, which enabled us to focus on inventory control and inventory and supply chain efficiency.

TWICE:Why open a PC store at this time?

SADOWSKI: We feel that the CE business resolves around four central pillars. That is home entertainment, based around the television; communications, namely telephone and wireless; imaging, based around cameras and camcorders; and computing, where the PC is the center.

We also have a very strong business in monitors and printers. It was just a natural for us to get into — very carefully I may add — the PC hardware business.

I also think our demographic just screams for it. I mean, our customer is the Road Warrior buying the PDA, buying the high-end laptop. And our goal in that business is to introduce new technologies and stay with the better product. And hopefully at the end of the day we can make a nickel in that business.

SHELLEY MILLER (Tweeter): Our business was definitely led by HD wide screen projection sets. In fact, they are now responsible for about 92 percent of our big screen business. HD glass was about 55 percent of our total direct-view business, which was really pretty amazing.

Probably the most exciting thing we saw was extraordinary strength in plasma, LCD, DVD-recordable, and other new technologies like that. They were virtually just houses on fire.

And we came up way short in terms of supply, even though we were very bullish in planning six months ago.

TWICE:That would be pre-Sept. 11?

MILLER: Yes.

TWICE:Did that force you to readjust your planning?

MILLER: It did a little bit. We certainly became more conservative as everybody did, but we saw business transitioning up almost every week, certainly every month over the course of the three-and-a-half months roughly, since the event.

Business was exactly where we guided Wall Street, but was below what we really expected or hoped for. And a lot of that has to do with the amazing compression in terms of price points. For example, our DVD business was up well in excess of 60 percent in units, but only 5 percent in dollars. It's a tough way to earn a living.

DAVE WORKMAN (Ultimate Electronics): We posted 5 percent comp store sales for December and last year we actually had been able to produce a 12 percent comp for the November-December period. So even though the year as a whole was challenging for us, it was nice to see a rebound in the holiday, and we were particularly pleased with the performance on the heels of last year's number.

TWICE:You guys seemed to play both sides of the pricing coin.

WORKMAN: Well, if anybody had seen our ads, the one question that always gets asked of Ultimate Electronics is, 'You always seem to be playing both ends.' On one end we have the Martin Logan-type product and Krell, and at the other end we're down there rolling in the mud with everyone else. Which is a somewhat unique position. We walk a very narrow tight rope relative to the message that we put forth for the consumer.

But our fundamental business strategy is that we believe that the consumer under-buys consumer electronics. Not because they can't afford something better, but simply that they are not exposed to something better. If you think about that and look at our advertising, you will see that that is very much a theme in how we go to market.

KEN WELLER (Good Guys): On the plus side, we had terrific success with the 40-inch Sony TVs and plasma TVs, although we didn't do quite as well on the audio side. I would typify December for us as very good on the video side and poorer on the audio side. If we had had anything like a reasonable audio season, I think we would have had good improvement.

GREG DREW (800.com): We just finished our fourth year, and no part of the ride was more interesting than 2001.

Considering that is our fourth year, and that we're a couple of quarters away from crossing over to profitability, we made a couple of decisions.

One is we were dramatically maturing our product mix. No. 2 is we decided we were not going to chase the business at any cost. There was still some irrational promotional behavior going on online, and we fight with those folks all the time. But we decided that we were not going to go there.

So along comes Sept. 11, after we had all of our plans very nicely framed out, and business came to a screeching halt for us. It was immediate and it was dramatic. We saw a 60- to 70-percent drop in sales for the 10 days after. Not to mention the fact that all of the product that was on the road on its way to consumers was stuck in airplanes somewhere, and deliveries stopped for 10 days. So, it created quite a chaotic environment for us.

Then you sprinkle a little Anthrax in there and it's just not a good formula for folks who are in a direct-to-consumer business, where fulfillment via these carriers is critical to success.

Then we get into October, and October was incredibly bad for us and we became very concerned. So we shifted gears. Our inventory controls were very tight to begin with and we made them even tighter.

So what you will see when we do release numbers is that our top-line revenue will be down slightly. But our gross margin dollars on an absolute basis are up 22 percent. It really speaks to the change in our product mix. And we got that performance on 84-percent less marketing dollars for the same period as compared with last year.

Because we've got 3 million names in our database, we are doing a lot of direct marketing, we are not relying any longer exclusively on all of those portal relationships or straight-up advertising. We've got enough critical mass now that we can adjust our scale and really have a sustainable model.

The good news and the bad news of this whole period was that December was incredibly strong for us, and we were all very surprised at how strong it was. So the result was that our inventory turns are well above our projections and we exited the end of the year with very modest inventory levels.

All in all, it could have been worse, given how dramatic the events were.

ED KELLY (Nationwide): We experienced a very good year, particularly in electronics. As you know, the independent retailer really had been abandoning that category to the large category dealers. But we have seen a tremendous upturn.

It started about a year a half ago. We've been really trying to direct the dealers to, pardon my French, get their butts back into this business and get into this high-end technology.

Home theater in a box is critical to that. We also started development about eighteen months ago of a store-within-a-store concept. We are going to roll it out at our convention in February, where they can see it. It's designed, laid out and merchandised, and provides a simple yellow brick road for them to get their rear ends back in the television business and into the packaged goods.

I think there is confusion with the consumer, and that's also the opportunity. It is our challenge to educate the consumer as to what all these new technologies are in the television business.

Electronics is just a tremendous opportunity for growth. And that's where we think our percentage of growth is going to really move up. I don't think it's a major threat to any of the major powers. But we've gone from over 50,000 independent dealers since 1983, and I think we are now less than 10,000, so there is certainly a lot of opportunity there for those who remain.

Those who are left are better businessmen. We're after profit and we are really thinking about, God knows, make some profit, sell extended warranties and higher-ended goods.

As a result, we saw what we consider some really strong increases for the year, in excess of 10 percent.

The surprising thing was that we were running about a 6 percent increase in white goods, which is our strongest suit. Our mix was like 75 white and 25 electronics. And now electronics moved to 28 percent.

We also saw the largest increase in November in the history of our company: a 12-and-a-half-percent increase.

We don't know why, we don't know if somebody let the floodgate out. They just went off the roof. And predominantly it was higher ended goods: the big screens, the flat screens, the glass screens, and the Wolf and Gaggenau-type products in appliances.

A couple of years ago it was kind of doom and gloom, but now there's a different attitude among the dealers, exclusive of September 11. I mean, we are hearing that the increases for our larger independents, those doing $25 million to $30 million, were as high as 30 percent for the fourth quarter. They had very good seasons.

So, we just thank the Lord for the business.

TWICE:But how do you account for that spike in white goods?

KELLY: I just don't know. They stopped traveling, they had their money, and momma said, 'I need a new washing machine or a new refrigerator' or whatever it was, and it just caught us totally by surprise.

WORKMAN: So instead of a gift from De Beers, it was like, 'No, honey, that's from Sears.'

BROWN: Nothing says love like a side-by-side.

KELLY: It's also easier to jump from smaller numbers compared with the real big numbers.

You know, independent retailers are very hard to organize, particularly when we have 1,800 corporations and 5,000-some stores. But it seems like they are coming closer, they are getting more targeted, more directed and I think that's through communications and what we have been doing particularly in the last five years.

We also are rolling out a b-to-c site that will be out by the first quarter. That will be all appliances to start with, and we are real pleased because we have 5,020 stores to back that up and support it. So, that's going to be a major initiative by us. And then we will move into the electronics side of the business.

We are also going to get more promotional in extended terms, which we're going to increase. It's the cocaine of the marketing side, and I think we will see an increase in that area.

So I think this year is going to be a good year.

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