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.

Into the (Discount) Looking Glass

You have to admire Eileen Fisher, who designs luxury women’s apparel and sells it through department stores. She’s exasperated with her retailers (not uncommon among manufacturers).  They’re deep-discounting her entire line, along with others, almost as soon as her garments touch the racks. And she’s doing something about it (not common at all).

 The Wall Street Journal reports Ms. Fisher has suggested retailers use “scalpel markdowns” to prune only the weak SKUs while preserving margins on the vast majority of her items. She’s also preparing to rent space in host retailers herself. Store-in-store, as this technique is known, will allow her to control merchandising and impose needed discipline on pricing. 

She  might want to consider another alternative.

A couple years ago the Supreme Court showed new-found openness to certain types of price discipline.  In ruling on Leegin vs. PSKS, the Court basically reversed a sweeping precedent created almost a century ago, a time when manufacturers were the only ones that were big and strong,  and retailers were almost all small and relatively weaker in setting market policies. Today’s situation is nearly the reverse; it’s now the manufacturer who often stands in need of legal recourse.

If a producer can demonstrate, the Court has now decided, that it's distribution system is doing extra things to create more choice for consumers, then it should be permitted to require its retailers to uphold the price minimums needed to fund those extra costs. Not in all cases, and only under certain circumstances, but a watershed new channel strategy opportunity nonetheless.

I think Ms. Fisher should look into some new contracts. Establishing legally structured price management tools to ensure adequate activity in the retail system would likely be a lot easier than forward integrating into company-owned retail. If she approaches her partners adroitly, and it looks like she’s good at this, I predict the stronger influence she seeks over consumers' experiences will actually lead to stronger working relationships with retailers. 

Of course, she should work closely with her lawyers to do all this in a legally defensible way. They always want a piece of the action!

 

 

 

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.

Pressures Rise for Overseas Markets to Match New US Distribution Law

A recent US Supreme Court ruling has given manufacturers the right to set minimum prices at which their goods can be sold by retailers. The US decision allows courts to consider the effect of "retail price maintenance" before ruling on legality.The case will likely have major implications for Australian exporters and regulators, writes Marc Moncrief from Australia in The Age.

Meanwhile, in Australia, manufacturers are allowed to set a maximum price at which their goods can be sold but setting a minimum price is illegal, whether the arrangement has competitive benefits or not.

Yet there is evidence that Australian manufacturers will probably agitate for change and that the free trade agreement with the US would militate for the two countries to keep in step

Australian lawyer Bob Baxt goes on to say that: "Lots of agreements are international in scope and businesses operate internationally. Why should they have to have a different set of rules in one country to another.... there will be some interesting pressure from a lot of manufacturers and others who will say 'why shouldn't we be able to impose constraints on the way in which our products are sold?"

In any event, experts acknowledge that businesses exporting to the US will be able to use the decision in negotiations with retailers, and that its most immediate impact is not on the Australian regulatory framework. Its most immediate impact is on the Australian exporters into the US market.