The hint of a problem started with the closure notice in a CompUSA store near the internetnews.com San Francisco offices. Very quickly, it turned into an avalanche. CompUSA, the last remaining pure play computer retail store in the country, is closing 126 of its 229 stores in the United States and Puerto Rico by the end of May.
It’s rough times for other retailers, too. Circuit City, the country’s number two electronics chain behind Best Buy, said last month that it would close 70 stores and cut 400 jobs, most of them in Canada.
OfficeMax closed 110 stores late last year, and even Best Buy, the overlord of consumer electronics retail at the moment, reported a profit that fell short of analysts predictions for its third quarter, which ended Oct. 25.
The excuses all around are the same: price competition.
“It’s indicative of how tough it is to generate decent margins in retail,” Chris Swenson, director of software industry analysis for NPD Group, told internetnews.com
Swenson thinks CompUSA’s decision to close under performing stores is a good one, especially in stores with saturated markets. “There’s definitely room for a retailer on a smaller scale with all the stuff they sell. There’s a whole spectrum of retail demand,” he said.
But Brian Sozzi, research analyst for Wall Street Strategies, thinks the clock is ticking on CompUSA.
“They just haven’t found that niche they can carve into. Why go to CompUSA when you can buy a computer and a TV at Best Buy?” he said. “I think it’s just about the end for them. There’s only so many stores you can cut for profits.”
CompUSA, based in Dallas, did not return inquiries from internetnews.com.
Acquisition Strategy Pays off for Best Buy
CompUSA’s acquisition of The Good Guys, a west coast retailer, was seen as an attempt to counter Best Buy’s momentum. It was also seen as a failure. CompUSA closed The Good Guys in 2005, only retaining the stores that were co-located within CompUSA stores.
“They went from being in one business they knew reasonably well, and added another piece to their business which is equally as competitive. I don’t think they were able to manage that transition very well,” said Van Baker, a research director for Gartner.
Best Buy, on the other hand, has been very smart with its acquisition strategy. It bought Geek Squad in 2002, giving it a tech service arm that has enhanced the chain’s reputation and provided a high margin business. CompUSA’s technical support reputation, on the other hand, is about as bad as Dell’s among the online community.
The second smart move was acquiring Magnolia, an in-store consumer electronics business catering to the high-end customers, offering technical support and installation assistance. Baker said Magnolia is slowly strangling Tweeter, a long-running high-end consumer electronics chain that specializes in in-home installations.
Baker calls Magnolia and Geek Squad service-oriented, “margin enhancers” for Best Buy. “They can do battle in a bloody mainstream market and enhance their margin with Magnolia and Geek Squad,” he said.
Holding Off Online Retailers
The retail market remains strong even with online breathing down its neck. Patti Freeman Evans, a senior analyst for JupiterKagan, said there are plenty of alternatives even if your local CompUSA closes.
“There are huge amounts of competition across the spectrum, whether it’s Staples, Wal-Mart, Circuit City, the Internet,” she said. Evans thinks CompUSA might simply have had too many stores. “In the offline world, that’s something most retailers of large chains are looking at. Even Wal-Mart is reviewing their store expansion program,” she said.
Online is far more competitive and cutthroat, said Evans.
“Switching costs are basically zero for consumers and so easy to compare prices and get a deal. It’s really hard to keep clients you might have kept offline,” she said. Evans has found customers have about a 40 percent retention rate with online merchants, meaning 60 percent will switch.
Online certainly has its success stories. Amazon moves a fair amount of product, and Newegg.com has come roaring out of nowhere to a huge position of dominance. Founded in 2001 (and not from the ashes of retailer Egghead Software, contrary to popular myth), the company is now already a billion dollar player.
Evans said CompUSA’s online efforts were quite good, but NewEgg does an outstanding job with customer service and retention rates. “They have very high customer return rate and very high referral rates. Half of their new customers that come in are referrals, which is incredible. So they are doing a really good job in a competitive market space,” she said.
The Dell Factor
There has been speculation that Dell Computer would finally enter the retail channel as a way to turn around its flagging fortunes. Its most recent quarter was an even bigger letdown than previously expected.
“It’s a logical evolution of Dell’s business and they are going to have to get into retail if they want to survive,” said Sozzi. How it will do this is the question mark. Dell has small kiosks in malls across America, where a handful of employees in Dell polo shorts show off around six to eight Dell machines, but that’s not a retail presence.
Dell could go for the branded store approach, which failed dismally for Gateway but is working for Apple. Sozzi doesn’t think Dell can do it.
“Being they don’t have the knowledge of retail, I think they will have to start off selling through Best Buy and Circuit City. Apple’s had great success [with its own stores] but that doesn’t mean Dell’s going to,” he said.
So what’s the fate for other retailers? NPD’s Swenson predicts the emphasis will become on service, which is why Circuit City and Staples have both established their own support programs comparable to Geek Squad.
He also predicts more emphasis on e-commerce for software sales, such as IGN Entertainment’s Direct2Drive and Microsoft’s Windows Marketplace. But it will also involve brick and mortar, too. “What goes unlooked is retailers are doing significant e-commerce. Circuit City lets you buy software through its Web site, but then go pick it up at a local store,” he said.
Sozzi predicts Wal-Mart and Target will make bigger pushes into consumer electronics, offering more and more floor space to sell iPods, televisions, laptops and other digital equipment. “I think they will make a big push into ’07 and ’08 to kind of be a mini Best Buy,” he said.
