How Point-and-Click is Killing Certain Retailers
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Retailers like Best Buy (NYSE: BBY), GameStop (NYSE: GME) and RadioShack (NYSE: RSH) used to dominate the electronics field. They provided an alternative place for consumers to shop for televisions, VCRs/DVDs and gaming systems over department stores. Many people opted to use these resources rather than local department stores, such as Wal-Mart Stores (WMT) and Target (TGT), because the selection was often better and the prices, because of the sheer volume, were usually at least on par. Plus, there was a knowledgeable person there to answer any questions, offer advice and provide installation services.
But, modern shopping may be the end of the electronics retailer. Companies like Amazon.com (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) are changing that. On the one hand, consumers are more knowledgeable about technology now and online reviews help fill in most the gaps. The other companies like Amazon and Apple offer a wider range of products, often cheaper, with fast delivery on physical products and instant downloads for others.
The old electronics retail chains are having to up their games – and fast.
According to the Wall Street Journal, many are implementing “turnaround strategies that highlight their abilities to obtain hot new smartphones and tablets, and are trying to capture those purchases that consumers still prefer to make in person.”
"There is a future for consumer electronics in retail," insists GameStop's chief executive, Paul Raines. "But in order to survive, our internal rate of change has to be greater than the external rate of change." In Raines’ case, that strategy is to increase its offering of used iPhones and tablets while offering more digital downloads. According to the Wall Street Journal, “GameStop expects to garner $200 million in sales from its used mobile device business this year.”
RadioShack is also changing its focus. Rather than centering its efforts on cables and connectors, it is trying to refashion “itself as a convenience store for smartphone buyers” and move away from its image as an electronics parts warehouse. The company is certainly moving in that direction – mobile devices accounted for 51% of its sales last year, up from 44% the year before – but its gross profit margin on those products has shrunk, falling to 37.8% from 45.9% last quarter.
Best Buy is doing something similar, choosing to position itself as a tech support resource and closing some of its larger stores in favor of smaller locations focused on smartphones and tablets. "We're balancing secular decline in the industry with capturing growth in the areas that are exploding," said Best Buy's President of U.S. operations, Mike Vitelli.
The problem is that there is only so much of a need for smartphones and tablets. Plus, with every big box retailer adopting the same strategy, this method will not work for every company. A leader will have to emerge, either based on price, tech support or both – a very real possibility as these companies look for anyway to maintain and grow their footholds in the electronics market, even cutting prices.
Already profit margins on electronics are shrinking. “Today, retailers have to sell almost twice as many TVs as five years ago to achieve an equivalent amount of revenue—and even more than that to match past profit levels,” reports the Wall Street Journal. “The average price of a TV has fallen 40% since 2007 even as screen sizes have increased, while gross profit margins have tightened from about 30% on upper-end models to the low teens.”
It really is a fight for these companies to survive. Point in case from the Wall Street Journal: “The liquidation of Circuit City Stores Inc. in 2009 was expected to be a boon for surviving electronics retailers. Instead, Amazon's share of the market rose to 11% from 2% and Apple's jumped to 8% from 6%” – and no wonder.
Apple and Amazon both offer a wide range of items, downloads and peripherals, such as printers and keyboards. Further, they sell new products as well as many used or refurbished models. The combination creates an environment in which consumers just go there when they need something – they don’t necessarily shop around. For instance, Apple offers its OSX users a built-in App Store. When a Mac user needs a piece of software, the first place he or she will usually go to is the App Store because the programs have been vetted by Apple, they can read reviews and compare prices, and should they find something they want they can download it in minutes. Amazon offers a similar capability for both Mac and PC users, allowing them to download products from Rosetta Stone to Microsoft Office. This is a huge advantage in that it creates a sort of “ecosystem.”
As electronics retailers lose market share, locations will close, forcing many shoppers on-line. Couple this with the sheer availability of knowledge and tech support via the Internet and those market shares are bound to sink even further. Investors can leverage these facts by investing in companies like Apple and Amazon that offer consumers an entire ecosystem. In other words, they are true “one-stop” shops.
I recommend investors play this fact to their advantage by investing in companies that provide such an ecosystem because loyalty is generally very high thanks to the convenience such services provide. Further, in the case of both Apple and Amazon, their businesses are not dependent solely upon electronics or downloads. They are hedged with a range of other products. Amazon has its streaming video service and full retail catalog, while Apple has its iTunes store and a range of authorized retailers, making the risk of investing in either one minimal.
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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Best Buy, GameStop, and RadioShack. Motley Fool newsletter services recommend Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
