Friday, August 10, 2012

2 Big-Box Electronic Stores, 2 Different Strategies

Electronics retailers are at a crossroads. The flagship products they made so much money on in the last decade, namely flat-screen tvs, are no longer as lucrative as they once were. Consider how differently these companies are choosing to react to the new environments they are facing.

In business, change is constant. Customer requirements change over time, as do supplier capabilities. Competition attacks from different angles, and regulations alter the environment. In electronics retail, consider how the merchandise of RadioShack has evolved over time in response to varying degrees of the above factors.

The company's storied history (allowing for mergers that have taken place over the years) first involved selling leather shoe parts and CB radios through mail-order catalogues. If it were in any of these businesses today, it would be cooked. So every now and then, the company has had to evolve to continue to provide customers with what they want. Consumer items such as radios, tvs, PCs and others have all gone through different phases of popularity, leaving question marks in their wake as to where future profitability may lie. Is today any different?

There are many reasons why flat-screen TVs are not as lucrative as they once were. For one thing, almost everybody has one now, so demand is fairly mature. For another, the housing market is weak, and the number of sales of new units is likely linked to housing sales. Also, consumers just haven't fallen in love with 3D capabilities or smart TVs as much as they did with flatscreens.

This brings us to the supply side, where manufacturers built overcapacity as they mis-read demand. This has caused pricing pressure on the entire supply chain, reducing the profitability of the units the stores do sell.

So where do the retailers go from here?

There is one area of consumer electronics that has shown remarkable strength: smartphones and tablets. To be sure, each of these retailers has jumped on this bandwagon, but the economics of these products just aren't as favourable as they were for TVs. Gross margins are lower, likely on account of supplier power (namely, Apple), form factor (allowing for competition that doesn't need big-box space) and price.

In response, Best Buy has decided to go with a smaller footprint. It is reducing its square footage, and opening smaller stores that can still sell these smaller products, but at lower cost. In this way, the company is looking to take advantage of its distribution scale and brand name. (The company's founder who has expressed interest in buying the company, however, may have an entirely different strategy.)

hhgregg, on the other hand, is looking to add merchandise to fill up the space left vacant by its tv department. In the next month, the company will be testing out furniture and fitness equipment in select showrooms. In this way, the company is looking to take advantage of its large stores and its delivery scale.

Which strategy will prove more effective? It's not possible to determine. Both strategies can work, and both may. It's important to note, however, that there are barriers to entry in each of the regions in which these companies operate, thanks to the scale these companies have built over time. For this reason, don't be surprised if they manage to be profitable despite how the market is discounting their stock prices.

At some point down the line, consumers may be enamoured by a completely different product. A new TV (3D, perhaps), solar power panels, who knows! Until such time, we'll get a chance to see which of these companies fares better in the current challenging environment. It should be interesting!

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