Rafi Mohammed

Best Buy, Circuit City…Wal-Mart is Moving Your Cheese

Posted on December 22nd, 2006 (0 Comments)

Gary McWilliams wrote an interesting article in Wednesday’s Wall Street Journal titled “Hefty Discounting of Flat Panel TVs Pinches Retailers.” In his article, Gary discusses how Wal-Mart’s aggressive push to sell flat panel televisions has put Best Buy and Circuit City on the defensive. After Wal-Mart launched the first missile strike by offering a 42 inch Panasonic flat screen for $1,249, Best Buy responded by dropping its price on the same model to $1,000. Circuit City upped the ante on its “best price” guarantee for television sets. Instead of its usual “match a competitor’s price and offer a 10% refund between Circuit City’s and the competitor’s price” guarantee, Circuit City is now matching price plus paying a 25% refund. Price has been the chief weapon of choice to respond to Wal-Mart’s new focus on high-end electronics. As a result, consumers are often purchasing flat panel televisions below the retailer’s cost. Volume isn’t going to cure this pricing chill!

A memo to Best Buy and Circuit City: remember the plight that small town retailers faced when Wal-Mart moved to town? You’re now officially the small town merchant. Wal-Mart is aiming to go upscale and the discount giant has its sights set on your bread and butter products, electronics (particularly high-end products like flat screen televisions). And while Wal-Mart has made a few recent strategic missteps, it’d be ludicrous to bet your companies on the hope that Wal-Mart will botch its efforts to become a dominant player in the higher-end electronics market.

Best Buy & Circuit City are taking the right strategic steps to combat Wal-Mart. Both companies are differentiating their offerings through sales force training (both to better serve customers and upgrade sales with items like extended warranties), low-cost financing, and delivery/installation. They are also introducing private label brands to better compete with low priced Wal-Mart electronics. And don’t forget, these retailers are often in more convenient locations.

But when it comes down to price, both companies need to develop a cohesive strategy. For example, Best Buy has successfully maintained margins by focusing on customers who aren’t solely price driven (e.g., gadget obsessed young men). But when Wal-Mart posed a threat, Brad Anderson (Best Buy’s CEO) discounted some flat panel televisions below cost (and well below Wal-Mart’s price) with the rationale of “if we’re the same price as Wal-Mart, we lose.” It’s going to be a challenge to reconcile these two divergent points of view.

Here are a few pricing issues Best Buy & Circuit City need to come to terms with:

  1. What customers does Wal-Mart really pose a competitive threat to? Your “starter high-end” (e.g., those buying the low-end flat panel televisions, “high-end high-end” (e.g., those purchasing more expensive flat panel televisions with all of the bells and whistles), or both customer types? At this point, the general consensus seems to be that Wal-Mart’s biggest threat is poaching “starter high-end” customers.
  1. What is it going to take to compete with Wal-Mart for “starter high-end” customers? Do you really have to beat Wal-Mart’s price by $250 or refund customers 25% of the differential between your and Wal-Mart’s prices? Is a match or even a slight premium good enough? Remember, you provide a differentiated offering…don’t commoditize yourself!
  1. Do rock bottom prices have to be offered in all of your stores? Sure…if Wal-Mart is located across the street, I can understand lowering prices. But if Wal-Mart is not a meaningful competitor (e.g., located far away), why unnecessarily give away margin?
  1. Are your “high-end high-end” customers really going to defect to Wal-Mart? If not, you don’t have to vigorously compete on price when Wal-Mart discounts “high-end high-end” electronics.

I imagine the terror associated with competing against Wal-Mart is akin to my fear of being attacked by a shark in murky water (the movie “Jaws” had a big impact on me). And it’s understandable to react with drastic price cuts. But now is the time to reevaluate these price cuts. With Circuit City operating at a loss (a 1% price increase would swing its net profits to positive) and Best Buy’s net income being 1.8% of revenues (a 1% price increase would lead to a 56% increase in profits), a little improved pricing precision can have blockbuster effects.

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