Vertical Integration

Best Buy Store 291: Houston, Texas

The retail channel is usually considered to be the dominant route to market for the consumer electronics manufacturers. It's understood that they may add other products and services at the point of sale - cross-selling accessories, adding delivery and installation options, vying for post-sales warranty and service revenues. Building out the basket. Increasing their 'average transaction value'. But backward integration - competing with their suppliers - that's not generally the role of a 'channel partner'.

Best Buy is the giant of US electronics retailing. With the death of Circuit City earlier in the year, Best Buy is now far and away the largest specialist retailer in the US, with annual revenues expected to be not far short of some $50bn in its current fiscal year. But a story in the latest edition of [Bloomberg] Business Week says that:

Rather than waiting for electronics makers to ship Best Buy the same products its rivals get, [Best Buy's staff] are walking factory floors with executives from companies such as Hewlett Packard and Toshiba, influencing product development and design. [For example], the retailer is pushing suppliers to use standardised software and digital services so consumers can listen to music or watch movies on any device. And Best Buy set up its own venture fund to pour millions of dollars into start-ups from Silicon Valley to Asia. The goal is to shape development of new technologies in promising fields such as green vehicles, digital health, and home monitoring.

Needless to say, while it remains largely unspoken, the threat of significant 'channel conflict' is a serious possibility if Best Buy goes beyond the acknowledged [and generally accepted] route of supplying private label equivalents. By trying to find products which no one else stocks - either by doing deals with a few 'A Brand' manufacturers, or building its own products in untapped niches, or demanding product homogeneity to suit its own ends - Best Buy could be on a collision course with many of its key suppliers. And while Best Buy dominates the specialist retail sector for electronics, it has to be looking over its shoulder at the advances made by Wal-Mart and Amazon, both of which are making great inroads in the US consumer electronics business.

Wal-Mart's Electronics

Specialists v Generalists #2

And now we learn that Apple's iPhone will be available in Wal-Mart stores before the end of the year...

Specialists v Generalists #1

A recent post from Pali Research gives a good example of what we've known for some time - the generalists will ultimately win over the specialists. Stacey Widlitz at Pali published a note [registration required] last Thursday saying that their No. 1 concern for Best Buy, beyond the macro environment, 'was the potential for share loss to the discounters'. 'Over Thanksgiving weekend', the note goes on to say, 'we noticed both stronger traffic and conversion in Wal-Mart electronics departments relative to the Best Buy stores we visited'.

Discounters Rule

ChangeWave tells us that consumer electronics is one of the weakest spending categories in the US in the run up to the Thanksgiving holiday period. This will be no surprise to most of us, but the dramatic change from previous years just might be.

One of the charts used by ChangeWave is based on answers to a simple question: 'Will you be spending more or less money on consumer electronics over the next 90 days?'.

- In November 2006, the answer was 52% said 'spending more', while 24% said 'spending less';

- In November 2007, the answer was 39% said 'spending more', while 23% said 'spending less';

- In November 2008, the answer was 19% said 'spending more', while 43% said 'spending less'.

And for those who are going to spend their hard earned cash, "people are favouring stores such as Wal-Mart and Costco for electronics ", says a Bloomerg article, and not the likes of Best Buy or Circuit City.

Solution Stations

Wal-Mart is testing a number of 'Solution Stations' in its stores in the Dallas area. These stations will be managed by Dell. And there are suggestions, elsewhere, that Dell might be resurrecting its own retail formats, using modified concepts from a Texas-based consultancy - Thinq Design & Interactive.

Wal-Mart Redesign

Earlier in the month, Wal-Mart announced that it had completed a redesign of its consumer electronics department. In the computer area, this includes a new display centre, showcasing the right equipment for the right application - in Wal-Mart's case, that means home, school or entertainment. Good to see a mass merchandiser acknowledge differences in consumers' needs beyond just the price point.