Broad Big-Box Selection at Lowest Prices Is Now the Online Phenomenon

With that change emerged a new class of Internet retailers -- Amazon, TigerDirect, Newegg -- that not only delivered the lowest prices, but also blurred the lines between what was once limited distribution products and those more widely available, industry executives said. And while low-end products were once key ingredients in promotional fodder, higher-priced goods are no longer immune to the pricing fray, the executives said.

The turn in the market forced many retailers to adopt smaller, nimbler models for their brick-and-mortar stores. Retailers from Best Buy to Staples have unveiled plans for shrinking their store formats while emphasizing their online businesses as they battle Internet-only retailers. Retailers also have rolled out smaller outlets focused on select categories such Best Buy with Best Buy Mobile and Magnolia Design Centers, Staples with its printing stores and regional retailer Vann’s with On, a 3,000-square-foot location, where Apple accounts for 75 percent of the sales. Those retailers that didn’t make the changes fast enough to compete with Internet dealers were consumed by bankruptcies and liquidations, as witnessed by the departures of Bernie’s Audio Video, Circuit City, Tweeter Home Entertainment, Ultimate Electronics and a long list of others, industry executives said.

"The premise 10 years ago of what big box CE retailers were was to communicate a bigger selection than the other guy and lower price,” said PRO Group Executive Director David Workman, a former Ultimate Electronics CEO. “But the Internet now conveys the biggest selection and lowest price and so you have the big box format stuck trying to figure out how they develop the experience when they have had the two main platforms of their existence taken away."

Those retailers that fell by the wayside met their death not just because they failed to adapt to a changing market, but also for many other reasons, ranging from over-expansion to loss of focus on the business, industry officials said. For example, Tweeter labored to become a national chain, but never quite tied all the stores together, industry executives said. Ultimate appeared well funded when Mark Wattles purchased some of its stores out of bankruptcy in 2005, but the U.S. economic downturn squelched growth plans. And Circuit City, having taken its eye off the ball to cater to its Digital Video Express and CarMax ventures in the late 1990s, found itself saddled with an ailing retail business as it faced intensified competition from Internet retailers along with Best Buy. Costco, Target and Walmart also emerged strong purveyors of CE goods, using them to draw store traffic.

In many ways, the CE retail cycle repeated itself during the past 10 years, retail executives said. Fretter, Highland Superstores, Silo and others grew rapidly in the 1980s, but crashed in the 1990s amid over-expansion. Best Buy and Circuit City emerged to fill their void for national CE retail chains and then they faced competition from Internet retailers, industry executives said. And as Circuit liquidated in 2009, rival retailers circled as they scooped up the chain’s better locations at cut-rate prices amid the U.S. economic crisis.

"If you are in a great financial position, choosing to expand, it’s actually a good decision,” Abt Electronics General Manager Philip Hannon said. “If you are in a weak financial position you still may not do well because you have a problem with the business. These chains that sucked some the old Circuit locations, time will be tell because money and real estate is cheap and there is no better time to expand but you have to have a strong business model to it. To expand a weak business isn’t necessarily smart.”

Among the retailers that gobbled former Circuit City locations was P.C. Richard & Sons, which has extended its chain gradually over the years and expanded in Connecticut rapidly as a result of Circuit’s departure. Hhgregg, Electronics Express and ABC Warehouse also converted former Circuit sites to relocated or new stores. The strategies were designed to upgrade stores, but using a less expensive means to do so, a marked contrast with new locations that opened 10 years ago.

Moving into Connecticut “was too easy and we knew we had to do that,” P.C. Richard Senior Buyer John LaRegina said. “Whether it was strategic or defensive we had to do it and it was a good idea. We knew we always had to be in Connecticut, but we wanted to make sure New York and New Jersey infrastructure was right before we moved on. If we have a chance to open a location and it feels right, you have to do it, but you can’t open up 25 stores in a period of months. You can’t lose your culture and core competency and expect to have a long-running business."

Like Best Buy and Staples, regional retailers, their ranks thinned by bankruptcies and liquidations over the past decade, have also tested smaller formats. While Circuit and Tweeter also tested new formats -- a smaller The City store and Home Architects -- the new strategies weren’t enough to save the chains. With that in mind, regional dealers have been more conservative in their approach to new formats. For Vann’s, On was a chance to sharpen focus on wireless products that could get lost in the chain’s larger locations, CEO George Manlove said. And while Vann’s has plans for up to 10 On stores, it’s in no rush to expand, Manlove said. At BrandsMart, which has concentrated on 100,000-square-foot or more locations, the new 42,000-square-foot store it opened last year was a chance to try a new strategy as it weighed entering new markets, CEO Michael Pearlman said.

"We have different concepts we are playing with,” Pearlman said. “We're very happy with a new 42,000-square-foot store and we can use that to enter new markets. We're not a cookie cutter-type chain” and a smaller format that dispenses with a warehouse and loading dock gives the chain another means for securing a new location, he said.

In addition to new formats, retailers have moved to create an “experience” for consumers when they enter the stores that can’t be matched online, industry executives said. This includes selling “solutions” that tie a product with a warranty, accessories and installation, industry officials said. Installation services have emerged at almost every retailer from Walmart and Best Buy, the latter’s Geek Squad being among the most prominent. Retailers also have tried new categories that they might have avoided in the past. Abt, which has a single 350,000-square-foot store, has added jewelry and hot water heaters alongside CE and major appliances and store-within-store formats that include Apple, Bang & Olufsen and Sony.

"Expanding our business in new directions is probably the best thing we have done because that way we are ahead of the curve,” Abt Electronics Vice President Billy Abt said. “If business softens we can move into other areas. Home Services are becoming more relevant to consumers and giving us more areas to drive traffic."

Along with bringing new products into the bricks and mortar merchandise mix, the retailers that survived also have built formidable online businesses. Many retailers have added ship-to-store options to their Web sites enabling them to carry a larger selection of product than could otherwise fit on store shelves, industry executives said. And retailers have built up their warehouses to ship directly to consumers’ homes, industry executives said. Also, distributors, many of whom parted ways with CE companies years ago as manufacturers moved to direct sales to retail, have returned. As CE manufacturers cut back, distributors emerged as a means for continuing to reach smaller specialty chains. Sony earlier this year turned over part of CE retail distribution to Tech Data.

Yet as dealers have sought to distinguish themselves, they have also have suffered from a blurring of distribution channels with online, discount, CE and mass retailers all carrying virtually the same products, retail executives said. Manufacturers that once had select distribution of some brands now offer them to most distribution channels, driven largely by a need for sales volume to shore up sagging balance sheets, industry executives said.

"What has brought more pressure across all levels of retail during the past 10 years is the absolute lack of differentiation by channel,” Workman said. “That clearly is a problem in our business that is so different than before. One of the key points that Ultimate used to make to the investment community” in 2002 “was that over 50 percent of dollar sales occurred in products that weren’t carried by national retailers. I don’t know that a dealer could find 10 percent today. What is being provided as differentiation today is blurry at best and that has brought pressure because you don’t have the safe harbor of ‘you can’t find this anywhere else.'"

While the pace of CE retail store closings has eased, there may be additional shutdowns going forward if the U.S. economy doesn’t improve soon, retail executives said. Sixth Avenue Electronics appears on the verge of closing, having shut 16 of its 19 stores since the start of the year. And others could follow “depending on where the economy goes,” said Jay Buchanan, CE division director at Nebraska Furniture Mart.

"If the economy recovers and customers open their wallets, stability will occur at the manufacturer and retailer level,” Buchanan said. “If it does not, there will be continued casualties at the retailer level. It is inevitable and a matter of time.”