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Discounters Still A Major Concern In Digital Era

Tom Edwards (NPD Group): Another issue is the number of stores out there where people can buy CE. This year, we saw product not only in the traditional retailers, but also in the supermarkets and drug stores, big places such as Walgreens and Longs Drugs on the West Coast. Albertsons and Acme had a wide variety for sale and people bought them. They recognized the value of the consumer electronics product.

Jeff Stone (Tweeter): It’s great for a Walgreens because $59 is a huge ticket compared to their average ticket of about $4.50.

Bob Lawrence (AVB/Brandsource): We’re headquartered in Anaheim, Calif. and right across the street from our office is a grocery store. I walked in there and there were $35 DVD players stacked in front of all the cash registers.

If somebody is going to walk in and buy groceries, and the store can make their margin there, then why not create those traffic busters? That is why we are losing our single unit sales. Customers are buying that single unit almost as an impulse item. It used to be gum was an impulse item. Now it’s a DVD player.

Jerry Throgmartin (H.H. Gregg): Walgreens, Wal-Mart and Target have become far bigger factors than they were before. So not only are you seeing price compression in some products, but consumers are also buying them in more and different places. We see that as a challenge.

I think everybody recognizes that Wal-Mart in particular is important and that they are very much a competitor. In a commodity environment, they win. As our products [become commodities] more rapidly, [mass merchants] becomes stronger.

The challenge here is not just for retail, but also for the manufacturers. We’ve talked about off brands becoming prevalent and very well accepted [see p. 22], so all of a sudden the manufacturer that was in that sweet middle has a challenge. If the consumer is willing to buy a DVD off the pegboard or at the end of the counter at the grocery store, then [price-driven chains] become a bigger factor in those areas.

Dave Workman (Ultimate Electronics): It will be weird to look back and say we long for the days of orderly price declines, which never seemed like it was the case. The industry then was ruled by a handful of large Japanese manufacturers, and those six guys sat in a hot tub and ruled the world. Now you have some guy from China doing cannonballs in the same hot tub and the rules are all different.

Somebody said once that these new digital products are a place for new brands to come into the marketplace. That goes hand-in-hand with the fact that Apex or anyone else can grab as much share as they have, and price points decline accordingly.

The way we look at it is that you have to be meaningful in some space in this business. [Mass merchants] are going to take some segment of it, and I don’t think that being a little of everything to everybody will work anymore. It will force some contraction within the industry among some retailers as a result. Some piece of what used to belong to us will belong to them and we cannot deny or ignore that. It will become a question of how well each of us can capitalize on the viable businesses that surround it.

Lawrence: What concerns us the most about that is that everybody in here thinks of themselves as having selling floors. What does it mean to selling floors that Wal-Mart has made the quantum leap to LCD as a cash-and-carry item? Who is now the expert in terms of the CE product?

Frank Sadowski ( We do not have selling floors but we take Wal-Mart’s entry into real electronics as a very serious move and I think they are a very serious competitor. Wal-Mart offers two of the very few things that customers manifestly want: great prices and convenience. Wal-Mart is very good at both, and the acceptance of some of the secondary and tertiary brands plays right into that.

The defensive strategy for a company like ours that does not have a consultative sales force to fall back on is to look at the community of people that do not look to [discount chains] for that kind of product. Fortunately, the early adopter community is also the Internet community. Rather than look for the next big product, we look to leverage the power of the early adopter who wants new technologies, which are typically not introduced by those secondary and tertiary brands and typically not introduced through commodity channels.

Look at how customers expand their applications. People are using their computers more than ever before. The computer industry is down but the networking business is on fire. That is what computer people are spending their money on. What more do you need once you have a 2GHz processor and an 80-meg hard drive? You do not need to go out and buy a new computer every 10 months like you did a few years ago. What are people spending that money on? Wireless networking and applications.

Across our business the same thing is true. The people jumping on that are the early adopter community. We think that is where we see a marketing answer.

Mike Linton (Best Buy): There is no doubt that Wal-Mart is a serious competitor that is changing the rules of the game in some ways. But you also have to be true to yourself and grow your brand as your consumers grow or you get thrown off your game while the game is changing, and that is a bad place to be.

We also think we are still at the front end of a long digital cycle. I personally think it is hell to be a consumer today in the technology market. It is hard, with lots of new technologies still coming to market.

We have not seen broadband come in a big way yet. Our goal is to evolve in this space as fast or faster than our consumers, who are a pretty loyal group. As the marketplace changes, we intend to change with them in terms of services, the clicks and mortar model, how we market to them, how we talk to them and how they connect with our brand.

Understand this is a huge issue in the market. The goal is to change your brand faster than your consumer group.

Dave Edmondson (Radio Shack): One [retailer] that has done very well and is as closely aligned to their space as anybody is Target. The Target people will tell you that they are trying to be different.

Wal-Mart’s strategy is to lower the total cost of living for everyone, everywhere. The discipline inside their organization on the cost side of their business is second to none and they have unbelievable scale. Sam Walton said in the early ’80s that he was going to start with the other half of America and by the time he finished, he would march into the rest of the world unopposed.

It’s a great idea that they have executed very well. If you try to chase what they do, you are going to get killed. They are going to take a big piece of the market in many categories. You need to develop your strategy around how you are going to live with them and compete in a space that does something different or you will get your head handed to you.

Ray Brown (Sears): Retail is about differentiation. It is about getting the consumer to drive past one store to another. There is going to be a segment of this business where the customer is not going to be willing to pay for differentiation. They win that space over the long-term so it is incumbent upon all of us not to be defensive, but to be offensive here and go look for those spaces of differentiation.

We do that every day amongst ourselves, especially now with Wal-Mart making a stand in this business. [We provide] different products and services and a different experience for the customer. That is what all of us are going to be doing in terms of going to market against [discount chains]. It will be about carving out that area of differentiation that the customer is willing to pay for.

Workman: Isn’t the reality that a whole chunk of the industry has moved very quickly to Wal-Mart, Target, Costco and a few others? Ten to 15 years ago it was the national retailers that forced some changes. As a result, there are many people that are not in this industry anymore, and five years from now there will probably once again be people who are no longer in this industry.

Yet out of every cycle, the remaining players are healthier, better, stronger and more focused around their business model. It is probably just another of those changes that evolves from the market.