Is this a David vs. Goliath battle, or should it be more of a truce in an industry where, rather than one foe slaying the other, there is space for both adversaries to co-exist?
With the demise of electronics retailer Circuit City, Best Buy and Wal-Mart Stores are ramping up their struggle to capture added share of the consumer electronics market. Best Buy, the nation’s largest specialty electronics retailer, is positioning itself as the provider of quality service and sales help to consumers who are often baffled by high-tech merchandise. The company is focusing on more high-end products and new interactive features to differentiate itself from the big box atmosphere at Wal-Mart.
Wal-Mart, the world’s largest retailer, is using its dominance in the global marketplace across all retail categories to position itself as the low-price option in consumer electronics. The chain also has massive reach with consumers. More than 800 million people a year visit a Wal-Mart store to buy everything from groceries to sweatpants to gasoline. In what’s seen as an attempt to compete with Best Buy, the chain is adding a new emphasis on electronics, including big-screen televisions and Apple iPods.
Wharton faculty and industry analysts say instead of fighting to the death, both stores can coexist if they follow clearly defined strategies focusing on service and price. “The good thing, the consumer electronics market is big enough that one doesn’t have to grow at the expense of the other. They can find their own space in the marketplace and prosper together,” says Wharton marketing professor John Zhang.
He and other Wharton faculty predict that Best Buy is likely to gain the biggest share of sales left behind following Circuit City’s liquidation in March. After 60 years in business, the Richmond, Va.-based retailer, which peaked with 700 stores and sales of roughly $10 billion, became a casualty of the current recession and competition from Best Buy, Wal-Mart and others.
Best Buy, which announced surprisingly strong full-year sales of $45 billion in March, has 900 U.S. stores and is the nation’s largest electronics seller, according to market research firm NPD. Wal-Mart, with total sales of more than $400 billion, does not release figures for individual categories, but NPD estimates that last year it was second to Best Buy in consumer electronics sales, followed by Dell, Circuit City and Apple.
Wharton marketing professor David Reibstein suggests that the key to Best Buy’s strategy is offering customers knowledgeable service from a youthful, somewhat geeky sales force identified by their bright blue shirts. He imagines how a consumer confused about whether to buy an LCD or plasma screen television would approach the purchase: “Would I go to Wal-Mart or Best Buy? The answer — no doubt about it — is Best Buy. Best Buy has the personnel who [can] help advise me.”
Some customers, he says, may have the product knowledge to feel confident about buying electronics off the shelf at Wal-Mart. But for those who do not buy new electronics frequently, the purchase is viewed as expensive and risky. “It’s critical to get the right item; for [those people], it turns out that Best Buy is the only real option,” says Reibstein. Another key element of Best Buy’s strategy is that it will install some of today’s more complex electronics systems. “For the person who is risk adverse, the depth of knowledge and the Geek Squad format at Best Buy is a really important component.”
Jagmohan S. Raju, another Wharton marketing professor, points out that Best Buy warranties are another way to comfort nervous buyers, although he says consumers generally pay more for that protection than the risk of a product failure justifies. Consumers, he says, tend to buy electronics warranties because they remember vividly when a product breaks, but don’t recall the many more times the product performs as expected. Because electronics retailers typically earn strong profit margins from warranty sales, just about every cashier is pushed to try and sell a warranty, Raju adds.
Best Buy might even be considered a “lifestyle” retailer that is able to build a level of intimacy with customers by matching them with gadgets that suit their particular psychic needs, says Wharton marketing professor Peter Fader. “At Best Buy, they really care about what the customer is doing and thinking. [They] want to make their stores into an experience so that customers might say on a Saturday night, ‘Let’s go see what’s going on at the Best Buy.’ You don’t go to Wal-Mart for fun.”
In an interview with the Wall Street Journal on March 16, Best Buy’s incoming chief executive officer, Brian Dunn, who started there as a salesman, said the key to his company’s success will be engaging the customer. “We want our stores to morph into a series of experiences. To do that, you have to go where the rubber meets the road, the sales floor.”
Wal-Mart’s strong suit is its highly efficient operations and supply chain systems, along with an extraordinary customer reach that allows the mass merchandiser to compete effectively in nearly every retail category.
Zhang notes that an emphasis on service over price led to the demise of Tweeter, the high-end electronics retailer whose 94 stores closed in December. Tweeter lost ground to Best Buy because, Zhang says, electronics technology tends to become commoditized over time, and consumers were unwilling to pay a premium for Tweeter. The same dynamic could work against Best Buy in its bid to compete with Wal-Mart.
For a consumer buying a new television set, the big issue is simply size, not the differences in technology that are hard to detect to the untrained eye, Zhang adds. “Given that most of the technology is more or less standardized, people will look for price.” In that case, Wal-Mart’s scale and its ability to negotiate sharp prices from its vendors will allow it to pass along substantial savings to shoppers. “If I were Best Buy, I would be a little bit scared, given that Wal-Mart is moving in a big way into consumer electronics. Wal-Mart has the scale and a huge customer base.”
The consumer electronics market is fluid, with consumers typically visiting two or three stores before making a purchase, according to Zhang. As a result, price becomes a key consideration. Even though Wal-Mart’s price is not always lowest, Zhang notes, most consumers perceive that to be the case, thereby making Wal-Mart the choice for price-conscious consumers, particularly during the current economic downturn.
To compete against Wal-Mart, Zhang advises Best Buy to provide a different product mix than its discount competitor. For example, Best Buy could develop multiple versions of products with manufacturers that are just slightly different; in that way, their model numbers could not be directly compared to those at Wal-Mart by shoppers online.
Meanwhile, he notes, Wal-Mart carries considerable sway with manufacturers because it can offer floor space for myriad products. For example, Wal-Mart can offer space to LG for consumer electronics, but also many models of LG’s home appliances and computers. “As leverage, Wal-Mart can say, ‘I will let you sell other products if you give me a better deal on the electronics.'”
Best Buy should try to avoid the common retailing mistake of making its stores totally uniform, says Zhang. Best Buy could use micromarketing techniques to compete against Wal-Mart on a store-by-store basis depending on the distance of its stores to the nearest Wal-Mart. Under this strategy, Best Buy stores closer to Wal-Mart locations should pay closer attention to price than others with the luxury of more distance.
In addition, he suggests, Best Buy should make the most of its low-price guarantee, which provides peace of mind to consumers most concerned with price. At the same time, the guarantee would not have a major impact on margins because, in practice, only about 15% of shoppers actually make an effort to find a lower price elsewhere.
Wal-Mart, for its part, could become even stronger if it began to develop better relationships with customers, says Zhang. The company falls short in developing these connections because it does not emphasize loyalty programs. For example, Wal-Mart could offer points for purchases of groceries and other necessities that could then be put toward big-ticket consumer electronics. “Wal-Mart has a lot of touch points with the consumer and could leverage the other products in the store,” says Zhang.
Buying from the Blue Shirts
While it is possible that customers will soak Best Buy salespeople for their knowledge and advice, and then drive across town to actually purchase items at Wal-Mart, Fader says most consumers are not likely to do that. “If you really develop a relationship with a good salesperson in the blue shirt, there’s going to be a strong inclination to buy from that person. Often, people think it’s awkward to say, ‘I’ll come back next week’ or ‘I’ll think about it some more.'”
Raju points out that the fate of all electronics retailers is often tied to the product development cycle in the industry. Best Buy, he says, rose to its current position largely on sales of the DVD player which, in its early days, was a breakthrough product that initially cost up to $800. “Now they are banking on wide screen televisions. They rely on innovation from the industry, [which brings] people into their stores. That’s what makes their business thrive.”
According to faculty, GPS systems are a current business driver, while low-priced, lightweight netbooks and reading devices, similar to the Kindle, are potential big sellers in the future.
David Schick, a managing director at Stifel Nicolaus Equity Research, who follows Best Buy, says the last major product — flat panel televisions — will continue to become commoditized through 2010. He predicts the next revolutionary technology will be 3DTV, which is still about five years away.
Schick points out that while Best Buy and Wal-Mart are the leaders in consumer electronics retailing, Target, Costco, BJ’s Wholesale and online retailer Amazon are also competitors in the consumer electronics market. “The truth is the bulk of retail is outside the channel.” He says that technology enthusiasts are willing to buy at a specialty retailer and pay top prices early in the product cycle. As time goes on and many consumers become familiar with a new gadget, they are willing to buy them at mass merchandisers or online. The retail distribution channel may also change as manufacturers become a more important part of the landscape — following the same path as Apple, which has opened its own chain of popular retail outlets.
As a general rule, all retailers in the consumer electronics space must concentrate on their strengths and ignore the noise from competitors, says Fader. “That’s what happened at Circuit City. It was neither fish nor fowl. They couldn’t match the efficiency of Wal-Mart, but they couldn’t match the relationship aspects of Best Buy.”
He points to Fry’s Home Electronics, the West Coast retailer with a strong reputation for service, as another potential factor. “This overall market has room for multiple players at the table, especially if they find ways to draw lines among each other. The danger is if one company attempts to beat the other at its own game.” Best Buy, he says, should avoid the temptation to cut prices at the expense of quality sales and service, and Wal-Mart should be wary of adding salespeople who are not fully able to compete with Best Buy.
“That would be mutually assured destruction,” Fader states. “If they each stick to their piece and grow that piece, they can expand the total pie rather than carve it up. The world is big enough for both of them. They would do well to ignore each other.”