The future of big box electrical brands

The downturn is the catalyst for a number of different trends in electrical goods retailing; Richard Jenkings summarises the key challenges for the leading electrical goods brands. The internet increases its appeal as a place not only to check prices but also to shop, with competition from Amazon turning the screw. On the high street, supermarkets increasingly stock electrical goods at keen prices, new outlets such as HMV are emerging and Carphone Warehouse’s link with US retailer Best Buy will bring a greater professionalism and customer service to the marketplace. These activities together with pressures on manufacturer brands, constant price pressure, green issues and convergence of technology promise much change in electrical retailing.

With the credit crunch entering the Oxford Dictionary for the first time we are all aware of the way that consumers’ spending power is being squeezed between rises in fuel, food and housing costs. What then does this mean for the companies that sell electrical goods?

The past world of electrical retailers in the UK is littered with companies that are gone, although in some cases still remembered. Powerhouse and Miller Brothers went into administration in 2006 and before them Tempo, Radio Rentals, Rumbelows and others passed into history.

At the moment the industry is dominated by a small number of major multiples, most notably Comet and the Dixons group with a wide range of specialists from John Lewis to Richer Sounds. The supermarkets have also seen a significant rise, with Tesco having a larger market share than John Lewis after 2006 and Asda adding electrical space. (Verdict). Meanwhile online sales from Amazon and others have grown to be a significant part of the market.

Verdict considered that the Comet and Dixons group had nearly reached full market saturation by late 2006 and were in-filling the remaining gaps. Since then Dixons has had a programme of 75 closures (for mainly Currys Digital in-town stores) to concentrate on out of town in larger stores and online. Most recently Carphone Warehouse and US retailer Best Buy have announced a tie-up, potentially bringing the Best Buy reputation for scale, low costs and staff knowledge to the UK. For the electrical retailer, 2008 is becoming an interesting year.

All the current electrical retailers now face a wide range of challenges that are likely to shake up the present market structure. Let’s now look at each of these and what they may mean for the current players.

1. The wider economy weakening – credit crunch starts to bite

Large electrical goods and big TVs in particular are purchases often triggered by house moves. So fewer people moving, and wider economic uncertainty and loss of confidence makes it harder to sell big-ticket electrical items, although these goods are often going down in price. Most economists seem to think that we are looking at a year or more of depressed demand.

Historically it has often been the super-luxury brands and the discounters that have fared best in hard times. So Bang & Olufsen should be safe if perceived as being upmarket enough and, at the other end, we can expect better sales of discounted televisions from supermarkets. Perhaps the biggest threat is that consumers may decide not to update their equipment and wait until the economic uncertainty is resolved.

2. Internet – clicks and bricks

Increasingly, people are using the internet not only to compare the price and features of electrical goods, but also to buy. Most of the bricks-and-mortar electrical retailers sell on the net and the move of Amazon into this area has certainly hotted up the competition. Figures show the growing volume of people using the sites to browse and buy electrical goods. With an increasingly value-conscious consumer the second-hand market can also be expected to grow with eBay and others adding to the pressure.

3. Supermarkets – buy a TV while you’re here

It seems that most big supermarkets are trying to sell you TVs, DVD players and all manner of electrical goods. Indeed a recent survey stated that these items are necessities in a household’s budget and not luxuries. Certainly many of the largest Asda Wal- Mart and Tesco Extra stores begin to look like department stores with their own electrical departments. Their strengths are keen pricing, space and the captive audience that is already there to buy food. The drawback is that it is rare to find staff that really know about the goods they are selling.

4. Best Buy/Carphone Warehouse link-up

The recently announced joint venture between Carphone Warehouse and the US giant retailer Best Buy has been much trumpeted in the UK press. The ability for Carphone Warehouse to sell a wide range of smaller electronic goods will add to the competition already hotting up, with moves by HMV, M&S and all other major supermarkets increasingly moving into this area. The reputation of Carphone Warehouse for customer care, coupled with existing relationship with Apple as suppliers of the iPhone will make it a formidable competitor.

Best Buy will bring its US model of large out-of-town electrical sheds, majoring on both keen prices and staff knowledge about its technical products. Starting in 2009 it plans 200 big blue boxes (big out-of-town stores) in the UK. The Best Buy technical support, the ‘Geek squad’, has already been imitated by the ‘Comet on Call’ service.

5. Other retailers entering the market (e.g. HMV, M&S and others)

The already crowded marketplace has got even busier as retailers on the margins of the market start to enter it. HMV, finding music sales pressured by downloaded music, is selling more electrical equipment to watch and play on. As time goes by iPods, DVD players and much more will be available in outlets that never used to sell them. It is hard to believe that everybody can sell electrical goods and I am forced to think that we may be seeing a rerun of the earlier days of pay- as-you go mobile phones when you could buy them from everywhere including my barbers. There will not be room for everyone and, in time, those offering the best combination of range, price-service and knowledge will survive.

HMV is selling more electrical equipment to watch and play on.

6. Price pressure – ever cheaper deals

In an era when inflation is starting to raise its ugly head once more, many electrical goods have been falling in price, in both relative and real terms. I now have a DVD player that cost me less than some of the discs I am playing on it. The consumer may be seeing serious inflation in many items of expenditure but electrical goods have certainly got cheaper. The major existing retailers have until recent times concentrated their advertising on price, and many small electrical items such as digital cameras have become commoditised. In this market margins can be small and only large volume can make the process stack up.

7. Events

In the early days of television the first TV sales coincided with the coronation. Ever since, major events have had an effect on sales. Sadly the failure of England to qualify for Euro 2008 will have held back sales in this sector, as well as being bad news for pizza delivery and supermarket multi-pack beer. Recent events such as the Olympics in China will have helped spur demand although even the recent price cutting on large TVs has still been held back by a lack of confidence in the wider economy.

8. Technological change and innovation

Over the years, technological innovation has driven electrical markets. Many white goods sales are replacements but many sales of entertainment products are based on newness, innovation and fashion. Records followed by eight track, followed by cassette players have given way to CDs and then hard disk MP3 players and iPods. VHSVideo has given way to DVDs and then down loaded films. The big trends are iPods, SatNavs and the combination of HD TVs linked to HD service boxes and Blue Ray players. Being up to date in timing the phasing in of new technologies and phasing out of old technologies is crucial to success.

9. Behaviour changes

A pub and restaurant operator has described how the recent Saturday night when the finals of Britain’s Got Talent and the choice of a ‘Nancy’ for Oliver resulted in a quiet night for restaurants. This can be seen as part of a wider trend, with more people staying at home. The combination of ‘better’ Saturday- night variety TV and ready meals offers such as those from M&S suggesting a chilled meal and wine for a fixed price of £10, may help electrical retailers sales.

10. Rising costs of energy, and green issues

We can already see that the energy efficiency of electrical goods is a factor in people’s choice of products. This is strong in white goods, with the energy rating of ABC being tagged to washing machines, fridges and dish washers. With rising costs of energy and growing environmental concern, this trend can be expected to spread to most electrical goods. However, people still think more about the cost of purchase rather than the costs of running an item over time. Printers are cheap but toner is expensive. The price of a washing machine matters more to people than how much power and water it uses to run it. It is likely, however, that the large amounts of advertising and press inches dedicated to the size of carbon footprints will influence people’s choice of products, and that the lifespan, running costs and carbon rating of goods will become more important. Those retailers with a green image will benefit.

11. Manufacturers’ brands

The strength of the retailer over the manufacturer still dominates, but there are a few notable exceptions, such as Apple and to a lesser extent Sony with their own stores as well as sales through other people’s shops. Such stores as Nike and Apple act as brand show-cases, places of retail theatre, and help advertise the products. Historically many mobile phone shops have been strongly tied to their supplier – O2, Vodafone and Orange.

But leaving issues of fashion and brand loyalty aside, customers often like to see a range of offers such as those from Phones4U and Carphone Warehouse.

12. Convergence of technology

We are moving towards a world where all you need is a single device that does everything: mobile phone, email, satnav, computer, a portable TV all in one.

For electrical retailers that are strong in one area, such as Halfords for SatNav or Jessops for cameras it can be a threat as technologies converge. When you can buy a digital camera very cheaply online or get a satnav fitted as standard in your car or on your mobile phone then this changes the market. In both these cases Halfords and Jessops have pushed the importance of service and the knowledge of their staff. It is clear that the public want to be helped and those companies offering product knowledge will do best, providing they can still offer a good deal.

Some conclusions:

Unless you are a specialist, you will need to combine the vast scale that gives you the ability to offer the best value with staff that know about your products. You need to follow fashions and key demand-triggering events.

Despite the increasing costs of fuel we expect the trend towards fewer, bigger electrical shops to continue and, with the exception of a few specialists, to be at the edge or out of town.

What then can we conclude about the future of big box electrical retailing in the UK? For many electrical goods, there is an element of play, the fascination of a new gadget is irresistible. The Future Foundation’s Nvision survey shows that people still want to touch and play with their toys before they buy them. I see no reason why this should not continue.

This piece is based on Jenkings’ exclusive article, first published on www.warc.com, June 2008.

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Increasingly people are using the internet not only to compare the price and features of electrical goods, but also to buy. Most of the bricks-and-mortar electrical retailers sell on the net, and the move of Amazon into this area has certainly hotted up the competition.

People still think more about the cost of purchase rather than the cost of running an item over time. The price of a washing machine matters more to people than how much power and water it uses to run it