The recent addition of hhgregg to the list of failed U.S. consumer electronics retailers makes now as good a time as any to discuss the biggest mistakes that CE dealers have made and continue to make. And wow, that list sure is long. Perhaps the first name that comes to mind for most people is Circuit City, which was the nation's number two CE dealer (behind Best Buy) when it went bankrupt in 2008 and closed its doors for good in early 2009. Just to name a few others, there was Crazy Eddie (which proved that crazy might be entertaining for a while but is rarely a good business strategy), The Good Guys, Incredible Universe (not so incredible, it turns out), Newmark & Lewis, Nobody Beats the Wiz (actually, just about everybody beat it), Sixth Avenue Electronics, Tops Appliance City, Tweeter Home Entertainment, Ultimate Electronics, and Lafayette. These dealers were doomed by a combination of factors, including too much competition, bad management decisions, and (in more recent years) a bad overall economy.
Since the demise of Circuit City, things haven't gotten any easier for CE dealers. It has become much harder to make a profit off of the vast majority of core CE products--especially TVs, due to commodity pricing and shrinking margins. The new reality has led to many CE dealers becoming more reliant on appliances, furniture, mattresses, and new CE categories like smart home devices. Finding the right mix of such products is a challenge.
Failing to Create an Effective Online Strategy
"Consumer tech is a dynamic marketplace where the suite of products and services is changing rapidly," explained Jeff Joseph, senior vice president of communications and strategic relationships at the Consumer Technology Association (CTA). "Retailers that are successful in this space have been able to do a few key things really well."
One major issue that hurt both Circuit City and hhgregg was their inability to come up with effective "bricks and clicks" strategies in the face of the growing popularity of e-commerce, led by Amazon. "It is vital in today's environment that retailers have an in-store and e-commerce experience that complement each other," Joseph said. "This includes clear and upfront pricing that is consistent across both channels-promoting transparency and trust between retailers and the consumer. Retailers that have thrived offer services that complement consumers' desire for flexibility, such as in-store pickup, in-store returns, [and] extended return policies during peak shopping times."
Another clear example is RadioShack, which went bankrupt in 2015 and still has some remaining stores operated by franchises or General Wireless, which itself recently filed for bankruptcy and plans to close most of its remaining stores to focus on e-commerce. Then there's Sears, which keeps shrinking its electronics presence at U.S. retail stores.
One of the advantages that bricks-and-clicks retailers have over pure-play online dealers is that, in theory, it should be even easier and faster to return an item bought online because one can just bring it to a local store. Ah, but that is just in theory. Good luck, for example, returning a product sold by a third-party seller at Sears.com to a local Sears store. And don't be surprised if the pricing and other promotional offers for a product at Sears.com are different than what is found for the same product at one of its stores.
All CE retailers must develop an effective online strategy, said Dave Workman, president and CEO of the ProSource Buying Group. Also, "brick and mortar has to evolve to make sure" there is some sort of unique "experience associated with shopping--because if it's simply an item-price experience, there are more efficient ways to gain a customer than there is for somebody traveling into a store."
According to NPD analyst Stephen Baker, "probably the key mistake" for retailers selling home theater and smart home products is being content to sell a 65-inch TV to a consumer without explaining to them the benefits of additional products, such as stands and soundbars. "So much of e-commerce feels transactional, and a lot of what happens in a retail store-especially around a home theater purchase-is more solutions-based," he said, adding: "There are a lot of retailers who aren't examining how they can be more solutions-oriented online or how they can merge those two pieces" of the bricks-and-clicks strategy together.
Retailers must have an online site to communicate with consumers now, even if (especially for smaller dealers) it's not a transactional site where they're actually selling products, according to both Baker and Workman.
RadioShack, for one, "never came up with a viable Internet strategy," Workman said. That was an especially big missed opportunity because the store "probably, more than any other retail operation out there, had a unique advantage because of [its] proximity" to consumers throughout the U.S., and its ability to significantly expand the product selection beyond what its small store format could accommodate. The retailer instead "doubled down their bet" on cellphones, which worked for a while-until the carriers started expanding their own retail store strategies.
Double Whammy: Not Understanding One's Market and Growing Too Fast
According to Workman, two other all-too-common mistakes are for CE dealers to not understand the market in which they "can operate and defend" and for them to "grow beyond their abilities to execute to whatever market they think they serve." "The two kind of go hand in hand," he explained, adding that a third mistake is "not adapting to the change in the marketplace quickly enough."
Ultimate Electronics, of which Workman was CEO and president, is a good example here. "Ultimate made some of the same mistakes in that we grew too fast--although not to the extent others have," acknowledged Workman. "Our downfall was mostly due to a failed [point-of-sale] implementation, which buried the company both in the expense of the system and its failure to actually run correctly."
Although the same mistakes have been made by retailers outside the CE sector, the third mistake--not adapting to change--can be especially damaging for electronics retailers. Workman pointed out that the CE market has "constantly been in flux and change, and you have to be mindful of that and constantly adapt." He believes that "the biggest change, which is occurring in every sector of retail, is the migration or the comfort level of consumers to e-commerce." But he went on to say, "There are still specific products, I think, that the consumer wants to see, feel, and touch before making a purchase decision," especially in the CE sector. For starters, many consumers would prefer to see what a TV's picture looks like or hear what a speaker or set of headphones sounds like before buying them. That's especially the case with many of the higher-end products that the members of the ProSource Buying Group sell.
Workman also believes that all the talk about a physical retail store only serving as a "showroom" for consumers who will eventually just buy an item online is "somewhat overrated." But he was quick to add, "Once you get a customer in the store, you have to make sure that there is a commensurate experience so that it doesn't leave them with that touch and feel, and then [they] go back home and buy."
E-commerce has "carved the middle out" of the CE retail sector, Workman said, adding that it "does a very, very good job of serving the customer-and more efficiently than a brick-and-mortar operation"--when it comes to lower-cost products. There are exceptions, though. TVs are "uneconomical to ship because the shipping costs are greater than the margin dollars," he explained. That's one reason why Amazon doesn't have as significant of a market share on TVs as it has on other CE product categories.
However, the middle of the CE market--where retailers like hhgregg and Sears "used to live"--has been the hardest hit by the changes we've seen in recent years. Workman said, "You can make a business, hypothetically, on being the cheapest guy on the block. You can make a business on being a luxury purveyor and a solution-oriented dealer. But it's very difficult to maintain a business being stuck in the middle."
Hhgregg is clearly an example of a dealer that grew much too quickly. "They fell for the bait," Workman explained. "The manufacturers wanted a brick-and-mortar replacement to Circuit City, and it's not a secret that they supplied a certain amount of funding to hhgregg's ambitions that helped them along the way, and their whole focus was grow, grow, grow, grow." In the process, "more became the prime objective, not better," and "their capabilities suffered and they found themselves basically being very mediocre, I think, in their execution." He added, "The growth eventually killed them ... They probably could have retooled the business on a smaller base and reinvented themselves. But with 200[-plus] stores, changing the toilet paper rolls costs you a million dollars."
Getting the Basics Wrong
It should go without saying that, amid the upheaval that's been seen in the retail sector, it has become more important than ever for dealers to get all the small things right. Yet some CE retailers have messed up at least some of the basics by, among other things, not properly demonstrating their TVs and other devices and not paying salespeople enough to get experienced staff to sell those products.
Take Sears, for instance. "The list of mistakes that Sears has made is probably longer than your article," Workman told me with a laugh. Among other issues, he called the company's decision to introduce Kenmore-branded TVs last year "a yawner." That puzzling move only underscored "how weak they are" in CE after having a decent market share in the category a few years back, he said.
Once retailers start getting "squeezed on profitability," they will often look to the few places they have available to adjust costs--and it's typically marketing and sales commissions that end up on the chopping block, Workman pointed out. The latter was one of the mistakes that Circuit City made, which had a horrible impact on the morale of its sales staff. Of the Sears CE department, he said: "They were paying people just about minimum wage. Their biggest challenge was keeping and retaining employees because they could go to McDonald's and make more money."
Unless a retail store is run on a pretty much self-serve basis, like Walmart, where the staffing is not a critical issue having an impact on a consumer buying a product, it's hard for a CE retailer to get by without salespeople who "add value to your operation," he said.
Retailers that don't effectively keep up with the industry's rapid changes are likely doomed and may very well be among the next additions to the long list of failed CE dealers.
After all, on top of the continued rise of e-commerce, we're heading into a period of rapid technological change that includes a growing shift from HDTV to Ultra HD TV, as well as the rise of smart home and voice assistant devices that are bringing a huge number of new products and suppliers--as well as rivals--into the market, said NPD's Stephen Baker. He added, "Expecting that the same old business model is going to continue to apply over the next couple of years is probably a mistake."
• Inventory Matters in Specialty AV at HomeTheaterReview.com.
• Selling Audio/Video to Gen Xers Versus Baby Boomers at HomeTheaterReview.com.
• Why the "Store Within a Store" Approach Makes Sense for CE Manufacturers at HomeTheaterReview.com.