Best Buy Throwing in the Towel?

The evidence now is clear that the consumer electronics manufacturing and retailing industries are both at a profound strategic crossroads, and weak-kneed responses from top retailers and product brands alike are dramatically reshaping the competitive landscape in potentially destructive ways for tomorrow’s consumers.

In the early-2000s we saw CompUSA and Circuit City go bankrupt and ultimately defunct on the back of tragic customer experience decisions to buckle under rampant flat screen price commoditization pressures. Passivity by lead product vendors was a missed opportunity then and a bigger one now. Thankfully we still had Steve Jobs around to offer an exciting new Apple Store shopping experience that consumers lined up for, even while the same Apple products were available in old school retail locations down the street (sometimes even at a lower price).

So it is disheartening to learn that Best Buy is throwing in the towel and all but abandoning any hope of reinvigorating its core customer experience (see this article in the WSJ on 12 October 2012). Does anyone really believe that Best Buy can out-online Amazon and other stripped-down, low-cost, no-frills, “services are free” and "taxes aren’t paid" online discounters?

The future is cloudier than ever for top branded product manufacturers as well, especially those investing heavily in innovation. When all the so-called “retail showrooms” are closed down or turned into local online shipping warehouses a la Wal-Mart’s lead, where is it that consumers will touch, experience, learn and get excited about new product innovations? Will vendor paid online recommendations and testimonials really do the trick for tomorrow’s shoppers?

Look around investors, where are the new strategic visions worth betting on? And consumers beware, it’s still true that’s there’s no free lunch.

Why Verizon is Down 30%

Verizon’s FiOS strategy of taking super-fast fiber optic internet access to consumers' homes held great promise when it was unveiled. Internally at the company it was held up as the path to renewed marketplace dominance. It was going to be the platform Verizon would use to fight back AT&T and T-Mobile (remember them?) on the old carrier war front, and Apple, Nokia, Samsung, Dell, HP, Microsoft, and others on the new mobility solutions front. The company’s top-most executives, including its CEO, unabashedly trumpeted the super-fast, broadband service as savior of the old guard's future.

Things don’t seem to be playing out, and the question on the minds of next-gen Leaders at Verizon, as well as interested on-lookers, is why and what can be done about it. They might want to start by digging in with a more critical eye to that distant image, their end consumers.

Only a few short years ago I sat amazed as the head of corporate strategy at a top wireless player wagged a finger and exclaimed: “I sense you have a handset bias, but our data shows conclusively that consumers care first and foremost about their choice of telecommunications service provider, and only then about different hardware options”. As quaint and nostalgic as that view may sound, It illustrates well a pandemic problem in many of today’s long-established businesses.

It is extremely hard for died-in-the-wool veterans in any industry to give up out-dated notions of how their customers think and how well-suited their companies’ old business models are to today’s world. Certainly AT&T’s near total dependence on Apple’s innovative products must rub salt on the wound, even as it generates the core fear that drives such resistance to hearing important new truth.

In a world where customers are influenced most by exciting, innovative, often expensive, downstream hardware, applications, and retail channels, won’t the telecommunications carriers become more and more commoditized back-end providers? For Verizon, can they really build a sustainable, margin-rich growth platform by simply wiring consumers' homes with faster and faster broadband? What really sits behind Apple's, and AT&T's through coat tails, success? [Hint: think about how the iphone creates - relative to other companies' offerings in the field - actual, tangible, demonstrable shifts in end consumers' lives and mobility experiences. What used to be called "value" added before value became equated with lowest price].

At the end of the day, lost legacy players will always encounter forks on the road to reinvention, growth, differentiation, and profitability. But unless they have the luxury of monopoly, taking the path that refuses to acknowledge the voice of the customer is never the best decision.

Microsoft Escalates Vertical Integration Wars

The WSJ reported today that Microsoft has decided to enter the rapidly escalating battle over how the consumer electronics market space is being fundamentally restructured (Microsoft Seeks to Take a Bite Out of Apple With New Stores).

Unlike Gateway's anemic efforts at forward integration into retail (1997-2004), I anticipate Microsoft's moves, along with those of other leading players, will dramatically reshape the landscape. Those moves include Best Buy's backward integration in private label (see: In Hard Times, Is Best Buy’s Best Good Enough? ), Wal-Mart's and wireless service reseller Tracfone's entry into mass market electronics (see: Wal-Mart Wireless Expands), Samsung's designs on the content and apps end of digital retail (see: Samsung Seeks Some iPhone Magic ) and Amazon's rabid appetite to dominate the conventional 'click and buy' internet merchant space (see: Can Amazon Be the Wal-Mart of the Web?).

But back to Microsoft's forward integration into consumer electronics retailing: here's the bottom line perspective from the company:

"Our customers have told us they want more choice, more value and better service, and that's what we'll deliver through our Microsoft Stores" David Porter, corporate vice president . Microsoft retail stores, WSJ, 10/15/09

This is only the latest entry of another major player in what is shaping up to be a battle of the titans. Noisy dithering by wall street analysts, journalists, and other pundits over who's making the most aggressive price reductions, who's sourcing smartest, who's ramping up their M&A engines for greater scale and efficiency, and who's "getting the value message from consumer" is simply obscuring a more fundamental and ultimately dramatic business model restructuting hidden in plain sight.

So, buckle up - it's going to become a (much) bumpier ride competing in the consumer electronics space! (due credit to Bette)

iPhone a Home Run for AT&T

AT&T gave up a lot to get its exclusive deal on Apple's iPhone. Increased data load on its network, higher phone subsidies, changes to it's customer support and retail practices. Not the kind of power that wireless carriers like to cede to a handset maker. Some pundits have decided that at the end of the day AT&T's exclusive deal with Apple was great for Apple, but just not worth the "gives" for AT&T (see the WSJ's Martin Peer's latest story here).

While I can understand how easy it is to draw this conclusion, upon deeper analysis I think this view is flawed.

Sure, on its surface, AT&T's "new" iPhone customers represent a small share of its almost 80 million subscribers, and a dramatic increase in costly service and support supply activity. But peel the onion on this exclusive arrangement and it becomes clear why the iPhone is so valuable:

• New iPhone customers might have accounted for 25% of AT&T's "Gross" new subscribers in the first quarter of 2009. Success at gaining new subscribers is an important metric that gets lost in the fuzzy math of looking at iPhone's share of "total subscribers" who tend to stay with their carriers.
  
  
• New iPhone customers bolster the significantly more lucrative business of "contracted" customers versus ones that buy minutes at a retail store on a month to month basis.
  
  
• AT&T's overall "subscriber churn" (subscribers leaving AT&T) seems to be dropping over the iPhone's life at the carrier. While wireless carriers tend to have low churn anway (usually around 1.5% of subscribers), they do try to lower it. The iPhone helps.
  
  
• While AT&T's network is experiencing a dramatic increase in performance problems and overall usage load, that trend is happening at all carriers. The iPhone may be spurring AT&T to act faster than its rivals on this future strategic crisis - a not insignificant benefit for slow-moving lumbering carriers that come out of a culture that is still clinging to their landline businesses!

So when you dig a little deeper, it's safe to say that an exclusive deal on the iPhone has Branded Manufacturersbeen a Home Run for AT&T.

Poloroid Redux - Gaming Industry Lock-In?

For some time, Polaroid's tragic response to arguably its most important growth and sustainability challenges has endured as a popular and fascinating case study of how a company and its leaders can let outdated beliefs ambush their future.

Polaroid was founded in 1937 by Edwin Land who went on to introduce the first instant camera in 1948. From that point forward the company's dominance of instant photography technology remained unsurpassed, and it was not surprising that the company moved aggressively into digital imaging long before its competitors. In 1991 its prototype of a high-resolution megapixel camera had a performance/price ratio far superior to most other products on the market. Yet in one of the most stunning illustrations of framing lock-in, Polaroid’s digital market entry was an utter failure, and the company exited the business within five years.

Four critical management beliefs created the framing lock-in that drove the company’s demise in digital imaging. First, Polaroid’s culture did not value market research as an input to product development; instead, it was believed with a passion that Polaroid’s technology and products would create markets. Second, there was a firmly held belief that customers valued physical instant prints. As a result, products such as video camcorders were not seen as competition. Third, there was an obsession with matching the quality of traditional 35 mm prints, driven by a belief that customers required ‘photographic’ quality.

Finally, and most importantly, there was a strong belief in the razor/blade business model pursued to-date. While Polaroid had initially made money on both camera hardware and film, a decision was eventually made to adopt a razor/blade pricing strategy. The firm dropped prices on cameras to stimulate adoption and demand for film. Film prices and margins were increased, and the strategy was extremely successful. Over time a fundamental belief developed: Polaroid could not make money on hardware, only software (i.e., film).

These deeply held management biases also meant that important areas were not invested in. To compete successfully in hardware using a business model different from the traditional razor/blade approach, Polaroid would have to have developed low-cost electronics manufacturing capability and rapid product development capability—two areas that remained weak. And the firm never invested in developing any sales or marketing capability specific to digital imaging or new distribution channels.

Polaroid’s fatal management decision-making limitations can be felt acutely when a then new Polaroid Digital Imaging hire from outside the company described top management’s struggles:

“The catch [to our product concept] was that you had to be in the hardware business to make money. ‘How could you say that? Where’s the film? There’s no film?’ So what we had was a constant fight with the senior executive management in Polaroid for five years … We constantly challenged the notion of the current business model, the core business, as being old, antiquated and unable to go forward … What was fascinating to me was that these guys used to turn their noses up at 38 percent margins … But that was their big argument, ‘Why 38 percent? I can get 70 percent on film. Why do I want to do this?’...”

Fast forward to mid-2009, and we're seeing signs of a potential shift in the gaming market as the products evolve from mostly "serious gamers" with sophisticated and expensive gaming hardware and software (and lots of time to play!), to a more mass-market opportunity with "casual gamers" who pursue spurts of gaming for 5-10 minutes on the iPhones, and to a lesser extent other smartphone devices.

So how are the leading game device and software players responding? Here are how executives at Nintendo and Sony indicate they are viewing the situation:

"At the end of the day you buy an iPhone to make calls, and the (Sony) PSP to play games" (June 29, 2009)

"No one can match (Nintendo's) years of experience in the hand held (gaming) market" (June 29, 2009)

How might the ghosts of the old management team at Polaroid counsel these firms?

Case Study: Retail "Free Riding" Hurts Technology Adoption

Back to the Future:
Color Television Retailing Slows Adoption

In January, 1954 RCA introduced the first color television set with a striking color telecast of the Tournament of Roses parade. In today’s dollars, the revolutionary new technology represented a $7,000 upgrade over a consumer’s black & white set. Even so, initial demand surged, and within ten years was approaching one and a half million units per year. By 1962, hundreds of color television manufacturers were emerging, with Sylvania achieving a 1-2% share of the national market through a vast and loosely managed network of independent local television retailers.

Yet by 1966, color technology had still only penetrated 17% of all TV households, and evidence was mounting that the traditional black & white television retailing system was hindering adoption of color. With over 350 models on the market, upgrading to color televisions was seen as an increasingly confusing process and consumer word-of-mouth was becoming a problem. Indeed, families were finding that a color television repair would be 50% more expensive than with black & white, a new set might not get quality reception in their particular home, and the products were extremely fickle and sensitive to careful placement and tuning when delivered. There were also signs that while traditional black and white TV dealers would sell color, most could not repair the new products, and were unwilling to provide no-obligation in-home trials.

After careful review, Sylvania determined that accelerated growth would require a dramatic change to it retail distribution system, if it hoped to get beyond a national market share hovering at 1-2%. As a result, the company moved away from loosely managed, saturation retailing to a more selective franchising approach involving only approved retailers willing to rigidly adhere to performance specifications for every element of an exceptional new consumer buying experience.

Territory protection was an essential element of the franchise strategy. Without it, a Sylvania retailer in one geographic area might free ride on a franchised retailer in an adjacent geographic area, by using lower prices to steal consumer sales away from the local franchised retailer (who would presumably have higher costs from investing in the new consumer experience in areas such as product education, in-home trial, repair service, etc.). Within three years, Sylvanias’ national share had doubled, with share in high priority geographic areas reaching as high as 15%.

But in 1977, a renegade Sylvania retailer entered an adjacent territory in which it was not authorized to conduct business, advertising significantly lower prices to those offered by the local Sylvania retailer. Sylvania promptly terminated its entire business relationship with the offending retailer, who sued on antitrust grounds.

In one of the most discussed and debated antitrust cases in history, the U.S. Supreme Court upheld Sylvania’s right to protect its products against intra-brand price competition. The court found that competition between brands – its primary concern – could actually be lessened when consumers lacked the retail experience required to discriminate between manufacturers. Put positively, the court determined that by offering a differentiated retail experience, consumers would be in a stronger position to make informed choices, and inter-brand competition would increase.

Looming Distribution War Faces Gaming Industry

At this year's big Gaming industry event (E3 Media & Business Summit), much attention was lavished on the question of evolving hardware and software strategies for success. There is growing recognition that mass market growth ambitions must be matched with offerings that appeal to market segments other than rabid teen gamers.

Alex Pham of the Los Angeles Times quotes a senior executive from Disney's Game Group on the company's growth strategy in the Gaming market: "as the game industry grows, it needs to reach out to a broader audience...the industry has built its $40 billion empire on customers who camp out overnight to buy a next-generation console or the latest installment of Halo. But that audience is getting tapped out".

But what's noticeably missing in all the Gaming industry buzz is any fresh thinking on go-to-market retail distribution strategy for reaching this broader market.

Disney and other game product and service companies would be well-advised to take a page from Steve Job's play book:

1. Match product innovation with go-to-market distribution innovation


2. Simplify the customer's total experience - not just the
   product


3. Forward integrate selectively if external go-to-market options are
   inadequate

Whether it's Disney, Ubisoft, Microsoft or one of the rest of the Gaming market gang, advantage will accrue to whoever widens their strategy lens to understand and improve the mass market consumer's overall experience. Get ready gamers: the next battlefield is go-to-market (retailing) strategy.

Branded Product Wars - Best Buy Fires Warning Shot

While branded product marketers are focusing more and more on just how their retail partners are thinking, they better pick up speed.

Originally, their interest in these retail relationships was simply an after-effect of years of acrimony and antagonism, and vicious margin-sharing wars. They focused initially on ramping up their 'key account' activity; learning more about retailers' concerns, objectives, store equity and images and how these companies go about creating bonds with shoppers.

But times are changing fast, and the window for branded product action is closing fast. As Advertising Age ominously warned a few weeks ago:

"Today's retailers are evolving far beyond their historical role as simple points of distribution for selling national brands. They have changed their approach, marketing their stores as their own brands and systematically building better, stronger relationships with shoppers.

Believing that their long-term growth is tied to shopper loyalty, retailers increasingly want to develop their own shoppers. And because it is easier to get additional shopping trips, and increased purchases per trip, from shoppers who like your store, retailers are consistently using organized, data-driven, shopper-insight approaches. Retailers are creating better touch points and shopping experiences to build stronger, more-loyal shoppers. This is largely the result of the creation of their own voices-their retail brands".

And now comes Best Buy, the latest national retail player to announce what will ultimately herald another round of branded product market share loss. The company, long focused on the tough task of improving customers' experiences, has shifted more aggressively into traditional and comfortable retail strategy territory: private label or house brand products. Apparently the company's new Blue Label house brand is a result of collaboration between Best Buy and technology companies in which Best Buy gathered insights from customers and worked with contract manufacturers to design products.

We know these type of private label programs take a massive amount of management attention, logistics investment, and product development risk. It's too early to tell if Best Buy's new House Brand development program will distract the retailer from its core mission of creating a differentiated customer experience. We certainly hope it doesn't become the slippery slope it has for others.

But in the end, it's branded product players that should take note. And it's simply inadequate to say this is a weeding out of weak players; the branded player strategy problem is too systemic for that. As their available shelf space and retailer support continues to dwindle, their opportunities for growth and differentiation head in the same direction. It's time for these players to step up and recognize that old-school marketing and distribution models are broken and require new forms of strategy and leadership.

Winning Upstream - Online Distribution Battles Heat Up

The go-to-market battle for new consumer technology products is as heated as ever, and we're seeing signs that a major restructuring of the retail landscape may be in motion. After years (decades?) of lackluster retailing models, retail strategy buzz is more and more about improved customer experiences. We're finding that it's increasingly old-school thinking to assume that differentiation and market share growth will accrue from myopically focusing on global supply chain efficiency and lowest price.

But influencing the consumer's total experience in favor of your company's products and solutions does not require capital intensive forward integration into end retailing, especially of the brick-and-mortar variety.

Consumer products manufacturers are finding instead that social network-intensive online environment can be leveraged as a valuable go-to-market distribution lever. Jonathan Yarmis of AMR Research writes brilliantly in his AMR Research blog ("The iPhone and the Kindle: Backing Into the Retail Store") that 'it is imperative for organizations to think about how they exploit the usage-based systems to complement, and in some instances supplement, their selling-based systems.' I highly recommend reading his description of the accelerating encroachment of hardware manufacturers and Internet retailers into the retail space.

Successful 21st Century consumer product and service marketers are changing the playing field in three important ways:

1. Focusing go-to-market strategy on critical Service Output Demands - individual elements of end consumers' desired experiences.


2. Restructuring marketing channel flows by leveraging online communities and applications to link target consumers with winning solutions


3. Locking in marketplace advantage by pre-emptively building partnerships with new types of intermediaries and go-to-market partners

Winning Upstream - Online Distribution Battles Heat Up

The go-to-market battle for new consumer technology products is as heated as ever, and we're seeing signs that a major restructuring of the retail landscape may be in motion. After years (decades?) of lackluster retailing models, retail strategy buzz is more and more about improved customer experiences. We're finding that it's increasingly old-school thinking to assume that differentiation and market share growth will accrue from myopically focusing on global supply chain efficiency and lowest price.

But influencing the consumer's total experience in favor of your company's products and solutions does not require capital intensive forward integration into end retailing, especially of the brick-and-mortar variety.

Consumer products manufacturers are finding instead that social network-intensive online environment can be leveraged as a valuable go-to-market distribution lever. Jonathan Yarmis of AMR Research writes brilliantly in his AMR Research blog ("The iPhone and the Kindle: Backing Into the Retail Store") that 'it is imperative for organizations to think about how they exploit the usage-based systems to complement, and in some instances supplement, their selling-based systems.' I highly recommend reading his description of the accelerating encroachment of hardware manufacturers and Internet retailers into the retail space.

Successful 21st Century consumer product and service marketers are changing the playing field in three important ways:

1. Focusing go-to-market strategy on critical Service Output Demands - individual elements of end consumers' desired experiences.


2. Restructuring marketing channel flows by leveraging online communities and applications to link target consumers with winning solutions


3. Locking in marketplace advantage by pre-emptively building partnerships with new types of intermediaries and go-to-market partners

Retailers Morphing into CPG Players?

I've been describing for some time the danger to 'old school' CPG manufacturers of the ravenous retailer appetite for private label growth. In fact, for some grocery categories it's getting harder and harder for shoppers to find anything new and interesting - unless it's private label.

Ouch, that must hurt when the subject comes up in executive meetings at national brands and big name CPG companies.

And now we see retailers rubbing salt in the wounds, or maybe showing mercy by driving a stake through the CPG players' hearts. Strategy advisors to these retailers have encouraged them to take the last step and actually become "integrated CPG manufacturer-retailer" powerhouses.

Translation: forget independent manufacturers and brand developers - we can do it all ourselves!

That's certainly very big news, and only the tip of the iceberg froim what I'm hearing.

And check out this striking news from a recent New York Times article by Rob Walker:

..."Safeway has initiated the Better Living Brands Alliance, with the highly
unusual goal of selling these two store-brand lines in places other than the chain that created them — school cafeterias, foreign markets and, ultimately, other U.S. grocers. In the judgment of the trade publication Refrigerated and Frozen Foods Retailer, which recently named Safeway as its retailer of the year, the experiment is “breaking the mold on what we all thought we knew about private label.”

These strategic moves are bound to restructure consumer markets in ways we have not seen before. And it won't be confined to just the grocery sector. Keep your eyes out for similar developments in other markets- especially Home Centers and Consumer Electronics.

Contractor or Architect?

A recent Wall Street Journal article draws an intriguing contrast between Sharp Electronics, the Japanese maker of liquid crystal displays, and Apple, Inc. Sharp, the Journal author says, is becoming a vertically integrated manufacturer, whereas Apple is doing just the opposite, outsourcing all of its hardware fabrication. (See “Sharp Focuses on Manufacturing”).

So, is it smarter to be like Sharp, the 'integrator', or like Apple, the 'architect'? The Journal’s comparison, neat as it appears to be, is a red herring. It assumes that Sharp and Apple are both manufacturers in the same sense, when they aren’t really. By the nature of its product set, Sharp is betting on conventional 'old school' manufacturing. LCD’s are pure hardware, or 99% so. Apple, on the other hand, is more 'new school' solution developer. Granted it’s the programmer sitting right at the hardware interface. But at their business ends, the iMac, the iPod, and the iPhone are all about sexy, exciting new interfaces and software.

Stylish looks aside, what makes an Apple an Apple is innovative functionality, innovation. And what makes Apple a great company is something deeper – an almost uncanny focus on customers, knowing what they want better than they do. Aside from the success of Apple’s products, remember what it’s accomplished with its Apple Stores and its daring, if not entirely successful, gambit to get some of the recurring revenue stream on the iPhone.The real distinction between Sharp and Apple isn’t integrating versus outsourcing. It’s the direction they choose to look. Sharp’s head is turned upstream. Apple’s points downstream toward the end consumer.

Both companies root their strategies in technology bets, but Apple’s has a more solid grasp of the new playing field and where winners in the consumer electronics marketplace are staking out their territory.

Handset Market . . . Precariously on the Fence

No sooner do Motorola, Nokia, Samsung and other traditional cell phone product makers start to feel comfortable that the battle lines have been drawn for wireless handset share, then in marches HMS from Taiwan and Videocon from India.

Who?

It seems that the big consulting firms’ prevailing strategic recommendations to wireless handset makers is to give in to the growing demands of mega-carriers for exclusive, essentially private label handset products. Ugh!

If only these telecom pundits would look at how private label strategies have played out over the past decade in consumer packaged goods. In those markets, much touted short-term, early gross margin gains at retailers pursuing private label and overseas sourcing strategies have more often than not resulted in yawn-inspiring product selections, back-office retail cost nightmares, atrophied promotional expenditures, declining ‘net’ margins for everyone in the system, and commoditizing retail environments and customer experiences. It seems that there is a point in a ‘stripped bare supply chain’ environments when consumers balk, and make it clear they care about more than lowest price.

In the same vein, what would best serve the interests of wireless consumers and product makers is a robust, competitive handset selection and marketplace. New features. New capabilities. New styles. The stuff that Apple’s so good at. What RIM has been doing with the Blackberry. What’s not likely to win any excitement awards are constrained, sub-scale efforts by network and infrastructure bureaucrats to control consumer fashion decisions. Do we really think an AT&T network manager is going to design, let alone launch successfully, the iPhone?

In the spirit of full disclosure, you might find it relevant that I’ve been accused by a wireless network executive as having a “handset bias”. The accusation emerged during lively strategy debates about the best way to gain share in the heated marketplace battles for the heart, mind – and wallets – of end wireless consumers. Maybe I do, but ask anyone under 40 years old what drives their wireless decisions.

Nonetheless, new overseas entrants such as HMS (started as recently as 2002 as a contract manufacturer for Palm, Dell and HP) and Videocon are announcing plans to heat up the battle, with strategies aimed at out-commoditizing the commoditizers. By shifting handset competition to look more like any global private label business. What Nokia, Blackberry, and Motorola – if it remains an independent branded product maker – should do is resist this temptation with every fiber of their strategic being. It’s a sure path to ruinous commoditization for branded players.

Wireless carriers are handset channels – not handset customers. The end consumer should be the focus. Only be allowing new commodity supply chain players to redefine the playing field will branded product makers lose the battle. Will they methodically keep the marketplace focused on national, multi-channel brands and increasing consumer excitement? Will they rise to the branded player’s challenge?

Customer Experience Innovator Makes Unusual Category Move

Ask any leading retail grocer in the U.S. which competitor has them quaking in their shoes and you'll hear a resounding moan about Tesco, the UK retailing innovator that is opening new formats in California and other markets on the west coast. So it's with much interest that we monitor other strategic moves by Tesco in their home market. Is the US next?

Planet Retail reports that Tesco has acquired PC Guys, a computer support company, and is testing a home IT visit concept from one of their grocery stores prior to a possible national rollout. PC Guys will offer support in Tesco stores, over the phone and in customers' homes. The service will compete directly with Best Buy's Geek Squad (Carphone Warehouse).

Services will include installing TVs ($60) and setting up home cinema systems ($140). The retailer is recruiting IT experts and testing a new zone called Tesco Digital, offering a large computer, electrical and mobile phone sales area, with PC Guys on hand to help.

In Tesco's own words: "we want to help consumers keep up with the latest electronic trends and technologies, as well as provide support and maintenance to those who need a helping hand.''

[Note from last year: When you traverse the aisles of a Tesco store in search of baked beans, you can also grab yourself a copy of Tesco Office -- an alternative to Microsoft Office -- or Tesco Antivirus, which is designed to keep your PC free of viruses. Other programs are also available, including personal finance and photo-editing software.]

Top-to-Top Relationships Drive New Era of Distribution

The new era of channel stewardship that Harvard's distribution guru Kash Rangan predicts is gaining traction. And there's a reason that Apple CEO Steve Jobs and Deutsche Telekom's wireless CEO Hamid Akhavan jointly - and personally - announced their new relationship to the world.

Apple has been very very astute in making sure that its impressive product innovations are taken to market by retail partners invested in equally exciting and innovative experience environments. But it's been a long, slow search, with willing partners few. Most consumer electronics retailers are focused on price discounting, overseas sourcing, and private label offerings in stripped-down, low-cost store environments. See my earlier comments about the state of U.S. consumer electronics retail .

So Jobs reluctantly integrated forward and proved to his independent retail partners that lifestyle retailing and consumer excitement sell. But not wanting to limit the company's market share as it did with computers, Jobs knows he needs a robust network of like-minded retail partners. Best Buy in the U.S. O2 in the UK. Deutsche Telecom in Germany.

What's important to note is the top-to-top dimension. Structuring and 'stewarding' these relationships is CEO-level activity.





Steven P. Jobs, left, of Apple and
Hamid Akhavan of T-Mobile introduced
the iPhone in Germany to go on sale Nov. 9.
John MacDougall
Agence France-Presse — Getty Images
as published in the New York Times (9/19/07)

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

* * * * *
Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

* * * * * *
UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Lifestyle Retailing Moves European Retailers Out of Consumer Electronics Malaise

New-style retail leaders in key European markets are re-focusing their business models away from price discounting to consumer excitement and growth. They're returning to their competencies as merchants by driving new "lifestyle retailing" formats that can be married with equally exciting lifestyle product offerings from trusted branded product manufacturers.

We're seeing the fast decline of a long, painful period in which low price-obsessed category buyers at earnings-driven retailers drove the sector after sector into commoditized retailing. But consumers have balked at all the sameness and general lack of assistance and experience excitement that has followed the rush to low-cost private label blandness. Take a look at some new-style retail leaders in action:

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Boulanger, a major retailer of multimedia equipment and appliances in France and Spain is refocusing its growth strategy on making the company's stores a "window to innovative products and services". The stores now include a range of specialty "lifestyle retailing" sections:

• Photo developing services


• Cooking (which includes a selection of cooking utensils, recipe books and wines)


• A 'nomad' section (which includes products such as mobile phones, cameras, MP3 players)


• A cinema-style area (that demonstrates new personal entertainment products)


• A space with consoles for gamers (to try out new video games)


• A ‘Zen area’ for well being products.


• An environmentally friendly products area (with Ecolabel Européen certified goods)

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UK retailer HMV's stores are being reformatted to focus on "lifestyle retailing" with all sorts of new experiential elements for consumers. Says Simon Fox, chief executive: "if you have a store people want to visit you will sell more...this is not a refit, this is a fundamental rethink of how people should perceive us'

• Interactive 'hub' area to log on to social networking sites like Bebo or Facebook


• Minimalist and high-quality store personality (akin to Apple's stores)


• A large plasma screen in the window showing promos for the latest music, film and games


• Xbox machines in a dedicated gaming section for interactive play sessions


• Internet kiosks to scan a CD or DVD and listen to or watch a clip before buying


• Kiosks to order from HMV's website or download free songs to a memory card


• Interactive screens which promote and cross-sell to shoppers


• And there is a Lovejuice smoothie bar for the thirsty shoppers engaged in all this fun

While consumers are starting to reward innovative, helpful, enjoyable retailers with growth, the high road is not an easy one. Short-term financial market players will fail to see the magnitude of what's happening in market after market. Consider these comments from Nick Bubb, a retail analyst at Pali International, who had this to say about all the innovation at HMV (The Daily Telegraph, 9/13/07):

"how will it help restore HMV's profitability? It is not very
'commercial'.... there is no price promotional message and there is a lot of
space given to non-productive 'interactive' play areas...whether it [all] helps
sales at Christmas is another matter.'..

But longer-term, new-style retail leaders need only look across the Atlantic at Apple's stunning lifestyle retailing success in the U.S. After setting a U.S. record in 'speed to $1 billion", the retail chain has one of the most attractive financial performance records in any consumer market sector. They've achieved sales-per-square-foot and profit margins that make retailers (and analysts) giddy.

Next CEO at Circuit City to Refocus on Forgotten Consumer

Ask anyone in the business, and they'll be quick to point out that 'retail is a tough business'. Nobody feels that crushing reality more acutely these days than Phil Schoonover, Circuit City's President, CEO and Chairman.

Generals Are Always Prepared to Fight the Last War

Times are particularly brutal for electronics retailers, who created their own worst nightmare by addicting consumers to commoditized shopping experiences and a lust for price shopping bargains. In a recent conference call with investors, Schoonover acknowledged that Circuit City was focusing too much on selling higher-tech televisions when consumers cared more about price. And overseas contract manufacturers are always there to fuel the addiction, with factories adding low cost production lines at a dizzying pace, allowing retailers to keep up with the increased demand triggered by lower prices.

Retail experts convinced Circuit City's leaders that the industry was commoditized, and that the only growth strategy that would produce results was one focused on organizational changes, cost cutting, and store operations fixes. Schoonover announced to Wall Street that his decision to take that advice was flawed.

Kris Hudson reports in the WSJ that sales at stores open at least a year fell 7.9 percent in the last quarter registered and the company saw a decline of more than three percentage points in gross margin (to 21%). Schoonover blamed the wider-than-expected loss on disruptions he had implemented such as shuffling store managers, letting highly paid salespeople go, trimming its headquarters staff and recasting store procedures.

"When Somebody persuades me I am wrong, I change my mind. What do you do? - John Maynard Keynes

A new era of retail distribution is quietly emerging, and it's all about consumer experiences. In a 'back to the future' swing of the pendulum, merchants are back in vogue, with a twist. Merchants are today remembered as those old-school retailers, the ones who were run out of the executive suite for being too much about creative, and not hard-edged enough about the income statement. Buyers rose in power, and private label sourcing fed a preoccupation with scale. Lost in the shuffle was any sense of excitement for the consumer. In a world where all that's different is price, guess what smart consumers make their decisions on?

But consumers are voting with their wallets, and demanding that retailers deliver retail innovations and experiences and leave it to branded product makers to deliver on the promises of trust, quality and innovation in the actual product.

The new consumer era will require new-style leaders from both brand makers and retailers who are willing to work together to drive pro-consumer growth strategies. New leaders that are up to the task of marrying together the creative demands of consumer experience with investor demands for profitability.

In retail, sacrificing great consumer experiences to achieve short-term profit gains is quickly becoming the new “old school” thinking.

A New Era of Trusted Brands and Channel Stewardship

A long-overdue new era of partnership between trusted brand manufacturers and dominant retailers is taking hold in many consumer markets. Long-overdue because these relationships have been acrimonious and short-sighted; focusing on price negotiations, overseas sourcing, and stripping out any hope of consumer excitement and experience differentiation in market after market. Times are changing. And they're changing fast.

• While the financial re-engineering of faltering retailer JC Penny was initially built on the back of deep backward integration into every element of design, sourcing, logistics and merchandising for house private label products, the company is starting a big move back to more traditional vendor-based relationships with powerhouse brands. Today, roughly 40 per cent of JC Penney sales are private label (versus 20 per cent for Federated and Kohls), and these early house brand names (Nicole Miller; Chris Madden) helped the company attract lost customers back into its stores and also increased sales of more profitable private name labels. But in an important nod to the strategic role of strong branded apparel company relationships, JC Penney has recently reached a striking new deal with brand powerhouse Polo Ralph Lauren to launch a range of exclusive private label apparel and home goods in 2008 under the name American Living. And insiders indicate that RL will have significant control over fabric selection, design, merchandising, pricing and advertising, along with some involvement in key sourcing decisions.
  
  
• Best Buy announced plans to expand its Apple outlets to 270 by year end, from about 200 currently. Best Buy executives have been quoted saying Apple products, including the iMac and new music and video products, are boosting customer traffic in stores and adding to sales which has helped Best Buy gain market share, customer loyalty and improve its customer satisfaction scores.

We're seeing these moves now for several reasons.

First, the US Supreme Court themselves weighed in when they recently overturned an almost 100 year ruling and will now let branded manufacturers create minimum resale price agreements with channel partners. Why would the court conclude higher prices are good for consumers? Because higher prices provide the margins needed to get moribund retail systems energized to invest in the consumer experiences and services required to make competition more vital between brands.

Second, low-cost private label initiatives at major retailers are faltering. Sure, short-term profit gains have been impressive and branded products were replaced with obscenely low cost overseas alternatives. Large Asian contract supply wholesalers such as HTC in consumer electronics (see earlier post) and Li & Fung in apparel (see earlier post) have grown quickly by providing these retail private label initiatives with easy, turnkey sourcing machines. But there was one catch for income statement-oriented retail managers: consumers got bored and stopped shopping in the stores. And on top of that alarming trend, it turns out that manging the supply chain risks associated with recalls and safety scares is one big expense pit for aggressive supply-integrated retailers.

Bottom line: consumers seek out and spend money on product innovations and lifestyle shopping environments. Consumers ultimately want some level of excitement and experience. It's true that a few fully-integrated manufacturing/retailing players know how to make it work. Abercrombie and Fitch. Apple. Benetton. But for most players on both the retailing and manufacturing sides, narrow distribution and product offerings are simply inadequate and limit their market share and growth upside.

The new era of partnership and channel stewardship will see new-style branded product makers focusing on and investing more in strong, lifestyle brand platforms. And new-style retailing leaders focusing on and investing more in strong, lifestyle shopping platforms. Core competencies are back!

It's Come to Vending Machines for High End Consumer Electronics

In a sign of just how commoditized consumer electronics retailing has become, grocer Stop & Shop is implementing a new vending machine-based retail format for new high end consumer products.Vending machines?

.... According to Progressive Grocer, Ahold’s US chain Stop & Shop is testing five instore vending machines offering high-end portable electronics and accessories, or premium skin care products. The vending kiosks featuring robotic arms that carefully pluck and dispense the expensive iPods and face creams, are from San Francisco-based Zoom Systems. Each store in the test boasts a Proactiv Solution skin care kiosk, and a consumer electronics kiosk with iPods, headphones and other electronics items.

"We hope our shoppers will enjoy the ease of finding these items -- not usually available at a supermarket -- at a great value," noted Stop & Shop director of new ventures Scott Forbes in a statement. ..."

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An excellent read on the development of kiosk retail formats for new high-end consumer consumer products is expressed by David Polinchock at Brand Experience Lab:

"...the key to success in harnessing technology for marketing or sales is to realize that technology has to be focused on creating a better experience for the consumer, not for the retailer. Audiences have come to expect dynamic environments in everything that they do. They watch content when they want to. They receive information when they want it. The have bought into just-in-time marketing. When they are bored with our content, they make
their own. So as you look at the technologies on the retail horizon, think about how you could use them to create something more unique for the consumer.

Dan Pink, writing for Yahoo Finance, recently had this to say: "Today, utility is abundant. We have more products and services than we can handle, and most function just fine. To stand out in a crowded marketplace, sellers must make a dramatic leap in utility-or stand out in some other way. They can try to compete on price, but that usually ends in a downward death spiral. So the alternative is to compete not on left-brain attributes like price and functionality, but on right-brain qualities such as emotion, meaning, and look and feel...."

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The strategic analytical error will occur if the kiosk program selling consumer electronics at a grocer achieves revenue projections and pundits conclude that it demonstrates consumers care most about price and convenience. Not neccesarily the case. Sure, a segment of consumers will always buy on price, no matter what a retailer tries to do to innovate.

But the success of a "consumer electronics kiosk in grocery" format is more likely the result of the grand commoditization of retailing and the overall level of 'sameness' across consumers' options of where to shop and buy. In the abscence of any compelling higher-value experience environments, a smart consumer will always make their decision on price. In that world, a kiosk is a stunningly effective and efficient answer.