The PRO Group marked its 20th anniversary by celebrating its strong retail presence and exchanging ideas with vendors on how to deal with a changing marketplace at its annual meeting here.
A popular topic of discussion was the acquisition in bankruptcy court of 32 Ultimate Electronics stores by once- and future-owner Mark Wattles which coincided with the annual gathering. (See story on p. 4.)
And there are were other concerns addressed, in no particular order: the sliding prices in flat-panel TVs, the continued rollout of Best Buy's Magnolia Audio Video departments, and Sony's decision to end buying group funding and compete at retail with many of its customers.
The bankruptcy and departure of founding member Ultimate Electronics reduced the size of PRO from a record 18-member organization, with sales of $2.4 billion and more than 310 stores, to a 17-member group with “about $1.8 billion to $1.9 billion in sales and between 250 and 260 locations,” said president/CEO Roger Heuberger during the meeting at the Hyatt Regency at Gainey Ranch, here.
Concerning Ultimate, Heuberger said, the newly configured chain could rejoin the group. He said that PRO has been in touch with the chain, and “if they develop a final plan and the size, shape and character of their business makes it beneficial for them to join PRO, the door is open.”
In commenting on the reasons for Ultimate's demise, Heuberger cited aggressive expansion as one of the causes. “I think the capital they raised in 2002 undid them,” he said, “Instead of paying down debt and other things, in retrospect they embarked on a very ill-advised expansion.” He also cited the decision of former COO Ed McIntire to “spend a fortune” on a major MIS system that “barely ever went live.”
George Manlove, president/CEO of Montana-based Vann's and PRO's chairman, noted, “An expansion plan like Ultimate's would have been a challenge for anyone, but doing it so rapidly and going into competitive markets like Dallas undid them.”
Heuberger does not see Ultimate's demise as an indication that regional CE chains are in danger. “Several of our members have six to 10 stores and are well-run businesses. Tweeter has over 170 stores and Ultimate was different, but chains that do $50 million to $100 million is still a good business for a lot of people.” For example, a recent NPD report on PRO's members showed strong market share in key categories for the group's members. (See table on p. 102.)
A big subject of concern for PRO members, and the industry in general, continues to be the pricing of flat-panel TVs, which has been sliding all year and will continue to do so during the second half. “It is going to be a significant challenge for the industry,” Manlove said. “Such a radical change in [pricing] so quickly means we have to be on our game. Supply-chain management is critical. We have to have the right product at the right time, especially during the fourth quarter when projected price moves are going to be aggressive.”
But Manlove put the current situation in perspective. “This is not the first case of price compression in consumer electronics. We're used to it. Knowing this far in advance allows us to prepare for it. Still, in flat panel we enjoyed large average ticket prices with sufficient margins. To keep that going will be a significant challenge.”
The expansion of Magnolia Audio Video departments by Best Buy is also a concern. Heuberger hopes “some of their decision making is hasty [and] that maybe it doesn't work as well as they claim it does.”
Wishful thinking aside, Heuberger noted that the first Magnolia departments PRO Group members saw “were beautifully done. We said, 'This reeks of Jim Tweeten [Magnolia's founder] and his guys.'”
But he added, “Now they seem to have cost-reduced [Magnolia] to the point where it is a decent sound room off of a linoleum tile floor. Of course we are a third party looking in, but when they began to clone them, [the departments] seem economized because the math didn't work for the [expansion].”
Manlove noted, “Not only has Wall Street given [Best Buy] a free pass, but so have the manufacturers. They have been able to carry [product] authorizations in a mass-market format. They were forced to segment [higher end products]. The jury is out — we don't know how all this will work. But we believe that out of all of this some type of hybrid [store] model will develop that will lean more to commodity [products]. They have realigned their floors for this business model, but if it doesn't work, what do they have to lose?”
Walt Stinson, co-founder of ListenUp in Denver and VP/secretary of PRO, emphasized that Best Buy “doesn't have a lot to lose” with its Magnolia rollout, “but the industry loses due to a lowering of standards. The worst case scenario is that [the departments] evolve into a 'Trojan horse' to acquire brands. Best Buy is getting a pass from [Wall Street] analysts because they are adding to their portfolios.”
Selling to both Magnolia and PRO members has put a strain on vendor/retailer relationships. “I can assure you that when [Magnolia] promotes these brands it has an impact on [ListenUp's] and [D.C.-based] MyerEmco's enthusiasm. But those suppliers have taken on that risk,” Heuberger said.
Sony's decision to end group funding and work directly with selected retailers as well the manufacturers' expanded company-owned store and Web presence has the potential to strain relationships.
Heuberger was philosophical, saying, “The way the world is, [Sony is] both a supplier and a competitor. It happens on the manufacturers' side with key components, for instance.”
While funding of individual retailer programs has stopped through PRO Group and other buying group offices, PRO still has a relationship with Sony. “The style of the relationship has changed because it is not about certain aspects of the finances,” Heuberger said. “Some of the money that was set up for collective goals is now being set up on an individual retail basis. In most cases it would be a break-even.”
But the relationship individual retailers have with Sony and with their buying group, like PRO, has forced retailers like Stinson's ListenUp chain to set priorities.
“Sony is our No. 1 vendor, very important to us. Our relationship with PRO is a very important one to maintain that channel of communication to make [Sony] aware what our concerns are. Any time they make a move to weaken the relationship with PRO, we feel it is a significant negative for us. We are willing to give it time to see how it sorts out.”
Stinson added, “But just as important as the money is having the right channels of communication. [ListenUp] would be very upset and concerned if Sony's communication with PRO deteriorated. Hopefully that won't occur.”
PRO Group's Industry Brand Shares
In dollars for December 2004, January and February 2005
(includes Ultimate Electronics' sales)
Front Projection TVs
Micro Display TVs
Home Theater In A Box