Best Buy chairman/CEO Richard Schulze said the consumer electronics industry has turned the corner in its devaluation of products, and he has re-engineered his company to take full advantage of the coming margin-rich digital revolution.
"We’re pretty much through the commoditization cycle," he said at a gathering of the Photoimaging Manufacturers & Distribution Association in New York last month, where the Best Buy founder received a Leadership Award. "And we’re excited about the opportunity to bring consumers exciting new products."
Schulze said the "dramatic commoditization" of consumer electronics in the early 1990s – which saw selling prices drop 14%-17% a year on CE products – profoundly impacted gross margins, which dipped into the 14% range. The result was a "survival of the fittest" mentality across the retailscape in which the "coefficient to survive was built on volume."
He noted that the retail highway is now littered with "casualties that didn’t make the cut" due to their inability to manage costs or present a differentiated business strategy. Some 300 storefronts were shut in the past year-and-a-half alone, Schulze said, and 380 closed in the year-and-a-half before that.
However, the loss of nearly 700 doors within the past three years has created "tremendous opportunities for us," he conceded, and Best Buy plans to fill the vacuum by opening upward of 240 more stores by 2003. The majority of those units will be the so-called Concept IV stores, which place high-margin digital products front-and-center on the selling floor and are producing 50% more revenue than preceding prototypes.
"Best Buy has re-engineered our company to appeal so much more to the consumer who is anxious to see, experience and learn about new technology," Schulze said. And along with emphasizing more profitable products, the plan furthers the superstore’s strategy of "chasing the consumer wherever he is and wherever we anticipate he’s going."
Schulze added that Best Buy has also begun targeting 9- to 12-year-olds in order to make Best Buy "their store of choice," beginning with Nintendo and boomboxes and later graduating to PC products. "Eventually," he said, "they’ll get keys to a car someday."
Turning to digital imaging, Schulze described the category as a "hotbed of success for our company," and one that the store is "moving toward with great relish." In December alone, he said, sales of digital cameras exceeded those of $299 point-and-shoot models, "which tells you a little something about how this product has taken off."
Attributing digital imaging’s success to techno-savvy PC users who are "climbing all over this technology," he projected industrywide sales of digital cameras and camcorders to grow from 1.4 million units in 1998 to 2 million in 1999 and 4.6 million in 2000.
Schulze said pricing on digital cameras would diminish at a slower rate than that of DVD players and will eventually fall within a range of $299 to $599. Currently, his best-selling cameras carry a $499 price point, although $399 would represent a "blockbuster" retail that would drive the category over the 1% mark as a percentage of total Best Buy sales.
He added that scanners, in support of digital imaging, "cannot be kept in stock" and are "exploding at a rate that’s even faster than DVD."
In an aside to the days before Best Buy, when Schulze sold audio equipment through his Sound of Music chain, he recalled that cameras were considered a low-margin, traffic-building business. "We were getting 30 points-plus on audio and only half as much on photographic gear," he said. "Now, I would be happy with gross margins as good as the photographic business."