Giant Electronics Chains Slug It Out
Los Angeles pharmacist Joe Mancuso is in the market for a car stereo to replace a unit stolen from his car. His problem isn’t what to buy, but where to buy it.
Since Richmond, Va.-based Circuit City Stores entered Southern California’s $2.1-billion consumer electronics market in November, 1985, Mancuso has found that area retailers are competing for business like never before. Everything from laser beams to baby sitters is being employed to get his patronage and that of other shoppers.
“I try to research everything down to the last detail but it’s harder now,” Mancuso noted. “There’s more competition. Everybody says they have the best price. I drive my wife crazy trying to get the best deal.”
Welcome to the front lines of the retail electronics battle. As the holiday season approaches, hard-bargaining consumers such as Mancuso are testing the financial resolve of the area’s electronics and appliance outlets--often to the detriment to those stores that don’t measure up to the price, selection and promotional standards set by the area’s biggest chains.
Until recently, Federated Group, based in Commerce, reigned virtually unchallenged in Southern California. Its dominance was so complete that it ran television commercials so self-indulgently eccentric that Adweek magazine in January called one spot “undeniably tasteless” in depicting a spokesman shouting out special sales while battling hordes of rubber frogs.
Then, too, there is Federated’s newest store, which sports a bright green laser shooting into a tower in the parking lot at Sunset Boulevard and La Brea Avenue. A Federated salesman said the laser symbolically “shows how we zap the competition.”
That brashness, however, has been shaken by the arrival of Circuit City.
Backed by a $10-million television advertising campaign, Circuit City has quickly drawn attention with supermarket-size stores displaying everything from washers to compact disc players. Many Circuit City stores even have child-care facilities for shoppers who want to browse without being distracted by their kids.
In its first six months of this year, Circuit City ranked No. 3 among shoppers who said they purchased a videocassette recorder and No. 9 for television buyers, according to a survey of Los Angeles County and Orange County shopper traffic conducted by the Times Consumer Marketing Research Department.
In the wake of the onslaught, Pacific Stereo Corp., a chain that critics say waited too long to offer hot-selling video items such as VCRs and TVs along with its broad selection of audio products, closed in October and began selling fixtures after filing from protection from its creditors under the U.S. Bankruptcy Code in May.
Then, early this month, First Family Group, a major specialty retailer of home appliance and consumer electronic products based in Akron, Ohio, closed its 13 Golden Bear Home & Sports Centers in Southern California.
“Price competition in California was intense,” Theodore R. Princehorn, president of First Family Group, has complained.
Analysts say both chains suffered from a limited product selection. The Golden Bear Home & Sports Centers, formerly known as ATA stores, were also hurt by bad mangement.
“The name of the game is selection,” said David V. Jackson, an analyst with Morgan Olmstead Kennedy & Gardner of Los Angeles. “And that requires a very large . . . store. Smaller chains will continue to be under pressure. I expect more (smaller stores) may go out of business, because you have to have all of the bells and whistles” to please consumers.
This is not the first time there has been a shakeout in the industry.
In the early 1980s, three chains--University Stereo, Cal Stereo and Custom Hi-Fi--folded and closed more than 35 stores, citing the effects of the poor economy and tight consumer credit.
Economy Stronger Now
However, the latest failures come at a time of a generally strong economy and widespread consumer interest in all sorts of electronic gadgets, ranging from portable personal stereos and compact disc players to digital television sets and stereo VCRs.
Indeed, the sheer variety of consumer interest is blurring traditional differences between the old audio business and the television trade that was largely handled by appliance stores. Today, audio stores are offering TVs and VCRs while TV shops are stocking stereos along with items such as refrigerators and washers.
That shift has benefited retailers such as Circuit City and Federated, which early on recognized the trend and rushed to build large stores of 25,000 to 40,000 square feet that stock up to 9,000 different products. The wide selection has produced hefty sales for both retailers.
Circuit City, which operates 78 stores in 12 states, including 20 stores in Southern California, had record sales and earnings for the second quarter ended Aug. 31. The company said the rosy results were largely due to its success in the Southern California market.
Second-quarter sales totaled $217 million, up 47% from $149.9 million the previous year. Net income rose to $7.1 million, up 80% from $4 million in the prior year.
For the six months ended Aug. 31, sales increased 40% to $386.7 million and net income rose 50% to $10.9 million.
Buoyed by its success in the Southland, Circuit City announced last week that it planned to open as many as 10 new stores in Northern California by the fall of 1987.
“Our results from the West Coast continue to be exceptional in both sales and margins,” said Richard L. Sharp, president of Circuit City. “From the results to date, it is clear that Circuit City has been well received in the Los Angeles market.”
Federated Group, which operates 60 stores in California, Arizona and Texas, up from only 20 stores in 1984, also reported a substantial sales increase in the quarter but had poor net income due to the expenses associated with the chain’s aggressive expansion efforts.
For the second quarter ended Aug. 31, Federated reported $97.3 million in sales, up 26% from $77.5 million the prior year. Net income declined to $721,000 from $2.7 million.
For the six months ended Aug. 31, sales increased 23% to $187 million from $151.9 million a year earlier. Net income declined to $1.4 million from $5.5 million.
Analyst Jackson says that while he likes the “longer-term prospects” for Federated, it is “unlikely that the company will be able to show any significant earnings until at least February, 1987, fourth quarter” due to the chain’s high operating expenses.
Said Federated President Keith Powell: “We knew before Circuit City came here they were going to be significant competition. But my feeling is competition is always good and that the consumer benefits.”
One clear benefit felt by consumers has been low prices.
Almost unheard of before Circuit City arrived in November, 1985, price guarantees have now been embraced by virtually every major discount consumer electronics retailer in Southern California.
“Circuit City is betting on the fact that consumers will not shop around,” said Kamyar Matinkhou, marketing manager for Adray’s, a privately held retailer that operates three stores in the Los Angeles area.
More Price Conscious
Yet Matinkhou, who says Adray’s stores had $98 million in revenue last year from the sale of electronic equipment and a variety of household products, says consumers are actually becoming more price conscious and are shopping around more. In response, he said, his store now offers to meet any competitor’s price and refund an additional 25% off the sales price for the customer’s trouble.
Federated also offers a 30-day price guarantee. The new Federated store drives the point home with an electronic billboard that urges consumers to “check our low prices.”
“The value that’s represented by consumer electronics is probably the greatest in the world,” said Federated’s Powell. “We sell video tape recorders for as low as $199. That’s cheaper than going to Las Vegas for the weekend.”
Such generous offers don’t necessarily build consumer allegiance, however.
Jeff Traintime, an MCA Records executive in Universal City, said he got a $30 refund from Circuit City when he sought to return a receiver after discovering he could buy it at Adray’s for less.
But although Traintime, who spent a recent evening browsing in Federated’s Hollywood store, said he was “pleasantly surprised” by the Circuit City refund, he said price guarantees “can lead to an endless game where you go out and collect price quotes.”
That game could soon end.
Japanese electronic manufacturers, whose products dominate the consumer electronics industry, have seen their profits take a beating as the value of the yen has skyrocketed against the dollar.
So far, the 47% increase in the yen’s value against the dollar since September, 1985, has not prompted the kind of price hikes for Japanese consumer electronics that it has for Japanese cars.
Decline Has Slowed
Yet the dramatic drop in equipment prices during the last decade, which saw VCR and CD prices fall to half their introductory levels several years ago, has clearly slowed. And experts say that retailers will have a tough time holding on to customers who have grown accustomed to bargains.
“The Japanese companies have cut costs like crazy but they don’t have a whole lot more options,” said Art Levis, editor of Consumer Electronics Monthly in New York. “The giant retailers are whittling their margins to the thinnest levels (so as to) not risk offending consumers. But the competition at the retail level is going to become more intense and suicidal.”
Pretty soon, Levis said, even big chains such as “Federated and Circuit City will be beating each other into the ground.”
Matinkhou thinks the solution may be to take the superstore concept a step further.
A shopper in the market for a new china set, Matinkhou theorizes, may buy a television from the same store if she thinks she can get it at a bargain.
“We offer everything for the house from infants’ clothing to jewelry,” Matinkhou said. “The price competition only makes a store like us look better.”