By slashing prices on flat-panel TVs, the retail giant has clobbered another sector — this time, consumer-electronics stores.
Last “Black Friday,” for its annual post-Thanksgiving sales blitz,decided to slash the price of one of the hottest electronics items for the holidays, the 42-inch flat-panel TV, to $988. The world’s largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing’s “low-price leader.”
In turn, Wal-Mart’s move caused a free fall in prices of flat-panel televisions at hundreds of retailers — to the glee of many people who were able to afford their first big-screen plasma or liquid-crystal-display (LCD) model.
Now, it is becoming apparent that Wal-Mart’s calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.
he fallout is evident: After closing 70 stores in February,on March 28 laid off 3,400 employees and put its 800 Canadian stores on the block. , a high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. CompUSA is closing 126 of its 229 stores, and regional retailer is boarding up dozens of outlets, as well as selling 94 of its 211 stores.
“The tube business and big-screen business just dropped off a cliff,” says Stuart Rose, chief executive officer of Rex Stores. “We expected a drop-off, but nowhere near the decline that we had.”
Clearly, these retailers are taking such drastic measures because they don’t see any respite in sight.
Since early February, when the companies first started closing stores and announcing layoffs, most of their stock prices also have been battered. Circuit City shares have fallen 24%, to $18.76, since the end of November, when the price war started. In the same period, Tweeter’s shares declined 32%, to $1.72, near a 52-week low, andstock is down 9%, to $48.73. Shares of Rex Stores have been flat, down 0.7%, to $16.98.
The carnage has one phrase written all over it: the “Wal-Mart effect.” For many electronics competitors, the experience with flat panels has been a replay of what happened in other sectors over the past two decades as Wal-Mart’s business stature grew dramatically.
Competitors caught off guard
And Wal-Mart’s discounting of popular toys sent FAO Schwartz and KB Toys into bankruptcy.
Now, Wal-Mart has clearly turned its attention to electronics. “We recommitted to our customers that we would be their low-price leader, especially on those products that were rising in popularity, such as flat-screen and high-definition TVs,” says Kevin O’Connor, Wal-Mart vice president and general merchandise manager.
None in the industry doubted that flat-panel television prices would fall or that Wal-Mart would offer heavy promotions. But most expected the promotions to be limited to lesser-known brands like the Viore TV that Wal-Mart was selling at $988.
What caught competitors off guard was that Wal-Mart also cut the price of a top brand name — the 42-inch Panasonic high-definition TV — by $500, to $1,294. That sent dozens of retailers across the country scrambling, and many rushed to match prices: Circuit City offered the same Panasonic TV at $1,299, while Best Buy sold a Westinghouse 42-inch LCD for $999. Others tried to lure customers to larger TVs — CompUSA gave a $500 rebate on its 50-inch Panasonic plasma for $2,499.
Panasonic executives are still smarting from Wal-Mart’s decision to drop the price on its 42-inch model, although company officials won’t discuss the issue. “I’m not going to comment on what Wal-Mart did,” says Andrew Nelkin, president of Panasonic Professional Display in Secaucus, N.J.
‘It’s Econ 101’
For one, many more retailers such asand CompUSA were starting to stock a wider selection of flat-panel TVs after seeing demand soar over the previous two years.
Also, manufacturers like Samsung,, Panasonic and Westinghouse had ramped up production last year with new factories in Asia and the United States. They began flooding the market with new TVs in the latter half of 2006.
All these forces combined to make a commodity of what just six months earlier had been a solidly high-end, high-margin entertainment product.
“It’s Econ 101: Best Buy and Circuit City had seen fat margins from flat-panel TVs for a while, and as it happens with any product, eventually the margins come down and the music stops,” says David Abella, a portfolio manager at Rochdale Investment Management, which has assets of $2 billion.
Wal-Mart is the second-largest electronics retailer today, behind Best Buy, which has fared relatively well compared to many of its rivals. But, as CEO Brad Anderson admits, Best Buy has done so by imitating some of Wal-Mart’s best practices, most notably an efficient supply chain. It also has more diversified merchandise than other specialty-electronics retailers.
Despite its bold move last year, Wal-Mart currently is not the largest seller of flat-panel TVs. In fact, even though Wal-Mart set in motion the price drops, it has actually been a bit player in the high-definition TV segment. By most accounts, Wal-Mart had little to lose by dropping the price on the Panasonic TVs because it sold out its inventory nearly instantly.
Couldn’t be more uncertain
“We desperately hope that sanity reigns and that the lessons of the past holiday season are not lost on anybody in the industry,” says Tweeter CEO Joe McGuire.
Despite shoppers paying lower prices, Circuit City CEO Phil Schoonover is hoping customers will continue to want their TVs installed and therefore will use the company’s Firedog service, a competitor to Best Buy’s Geek Squad. Sales at Firedog grew 80% to $200 million last year, and Schoonover says he expects them to double this year. He admits, however, that the environment couldn’t be more uncertain.
“I’m not here to say that we’re sure what the second half looks like because we have 96 suppliers of flat-panel TVs who market their products in the U.S.,” he says. “With production facilities all over the world and brands from China, we don’t know what their real marketing strategies are. We think it’s going to be a competitive marketplace for the flat-panel TV business.”
As new technology emerges and as LCD TVs with crisper images hit the market this May, some retailers are hoping to lure the technophiles. However, if consumer-electronics purveyors are hoping to maintain sky-high prices on new products, they’d better not count on it. After all, they have no idea what Wal-Mart has in mind.
This article was reported and written by Pallavi Gogoi for BusinessWeek.