In Electronics, Store Wars : Retailing: With newcomers Silo and the Good Guys taking on Circuit City, consumers may enjoy lower prices. But mom-and-pop outlets may find their survival at stake.
How sweet it’s been. Since Circuit City Stores opened in the Los Angeles area five years ago, it has devoured the nation’s biggest and most lucrative consumer electronics market.
Circuit City has been selling an estimated five times as many TV sets and compact disc players as its closest rivals in Los Angeles and Orange counties, and the company has helped drive out merchants that once were prominent here: Federated Group, Pacific Stereo and Golden Bear.
But now Circuit City is getting a stiff jolt of competition. Enticed by the promise of the Los Angeles market, two smaller but sizable chains--Silo and, to a lesser extent, Good Guys--have opened a flock of consumer electronics “superstores” here in time for the Christmas shopping season.
The stepped-up competition is transforming a huge but comparatively sleepy market into a hotly contested one. Retail prices, some industry observers say, already have fallen.
Before long, though, the competition could mean disaster for many mom-and-pop TV and stereo shops and small chains. And while most experts figure that Richmond, Va.-based Circuit City will remain the king of consumer electronics retailing in the Southland, they say its profit will be squeezed.
In fact, retailing analyst Robert M. Raiff of the investment firm C. J. Lawrence predicted that Circuit City and its probable main rival, Silo, “will both lose money as a result, and they’ll both be sorry.”
The timing of the invasion by Silo and Good Guys couldn’t be worse for local retailers. The consumer electronics industry, a volatile business that operates on thin profit margins, has struggled for several years in the absence of a hot new product.
Moreover, the overall economy appears to be sinking into a recession that’s clobbering even the best retailers. Circuit City, for instance, surprised Wall Street last week by reporting that its sales fell 7% in October at stores open more than one year.
“This isn’t when you want to be opening a big chain,” said Paul Cohen, chairman and chief executive of Leo’s Industries, whose Leo’s Stereo chain is standing pat with 29 stores in the Los Angeles area.
Executives of Silo and Good Guys concede that they didn’t anticipate the economic slowdown when they signed leases last year and early this year for their new stores, but they say they have the financial strength and commitment to ride out the downturn.
Philadelphia-based Silo, which has had stores in San Diego since 1976, poses the greater challenge to Circuit City, largely because of its grand ambitions: Silo over the last two months has opened 13 stores, each with 17,000 square feet of selling space, in the Los Angeles area. Two more should be open by Thanksgiving, and the company expects to be operating 30 in the area within three years.
By comparison, Circuit City has 26 stores in the Los Angeles area and expects to add one or two next year.
Moreover, Silo’s merchandise resembles Circuit City’s. Both chains carry some appliances along with broad selections of consumer electronics gear--which tend to be in the low- to medium-price ranges.
San Francisco’s Good Guys, on the other hand, sells consumer electronics only and focuses on medium- to higher-priced goods. Good Guys is expected to siphon off some of Circuit City’s higher-end business, but it probably will compete more directly against such upscale chains as Canoga Park-based Rogersound Labs.
Good Guys has opened six stores in the Los Angeles area since July and plans to open another four to six in 1991.
Industry executives say there may be room for all three chains--but only if they divert enough sales from smaller local dealers, department stores and general merchandisers such as Sears, Roebuck & Co. Sears has been one of Circuit City’s biggest rivals here.
That prospect worries people such as Bernie Eckstein, part-owner and manager of Bar’s TV and Appliances in Canoga Park, which has done business in the area for 28 years.
“There will only be so many TVs sold in this area, and I know it,” said Eckstein, whose drab, aging store competes against nearby Circuit City and Silo outlets.
Eckstein said loyal, longtime customers sustain his store, but “five years down the line, I don’t know what will happen to us.”
In the growing battle among the consumer electronics retailers, much of the advertising emphasizes low prices. But price already is declining as a competitive factor. “I’d love to tell you that we’ll have the best prices, but that’s nonsense. Everyone will have the same prices,” said Barry H. Feinberg, president and chief executive of Silo.
Even when listed prices differ, consumers can take advantage of widespread “price guarantees” promising to match competitors’ advertised discounts. “The superstores have neutralized each other,” said Marvin M. Stern, vice president of Sears’ home appliances and entertainment.
As price differences fade, customer service should become even more important. On that score, smaller retailers could have an edge. For example, Eckstein of Bar’s TV says his store keeps customers happy by doing things such as setting up new stereos, VCRs and televisions for free.
“We don’t give you a bunch of packages and tell you to hook it up,” he said.
Executives of the big chains also tout the efforts they have made to improve customer service, largely through employee training programs. But many customers remain skeptical about customer service at the chains, including Forest Phillips, a 42-year-old insurance office worker from Moorpark.
Phillips visited the Canoga Park Silo store last week to buy loudspeakers. After leaving without finding what he wanted, Phillips lamented that the Silo salespeople, like those at many chains, seemed to know little about their products.
“You need to know what you want before you go in,” he said. “These guys are out to make their sales quotas and commissions, and that’s it.”
Phillips and other customers, however, said they liked the wide-open, uncluttered layout of the Silo store, which they regarded as one of the few features distinguishing it from Circuit City.
“When you come in, you can find things,” said Bill Williams, a retired apparel retailer from Van Nuys. “In some places, you have to go in and hunt.”
Circuit City executives don’t sound worried.
“When a new competitor comes into the market, everyone feels it a little bit, but we’ll feel it less than many,” said Richard L. Sharp, Circuit City’s president and chief executive. For example, Sharp said, when Silo followed Circuit City into Nashville, Tenn., Circuit City remained the dominant chain. It still sells two to three times more merchandise than Silo, he said.
Nationally, as well as in Southern California, Circuit City benefits greatly from economies of scale that hold down expenses. With annual revenue exceeding $2 billion, it remains the nation’s biggest and most successful retailer specializing in consumer electronics and appliances--despite its recent sales slowdown.
In Los Angeles and Orange counties, Circuit City became the No. 1 consumer electronics retailer within a year after arriving in late 1985, and it has developed a huge lead since then, according to surveys by the Los Angeles Times Marketing Research Department.
The Times’ most recent survey showed that 28.8% of households in the two counties that bought new TV sets in the first six months of 1990 got them at Circuit City. Sears--which last year expanded its consumer electronics and appliances departments in the Southland under the Brand Central format--was second, at 5.4%.
Silo, though less than half Circuit City’s size, still ranks as high as No. 3 among U.S. merchants specializing in consumer electronics and appliances. But lately the company, founded in Philadelphia 44 years ago but now owned by Britain’s Dixons Group, has reported weak earnings. In the fiscal year ended April 30, it posted pretax earnings of $16.8 million on sales of $892.7 million.
Feinberg attributed the results to the expense of installing new computer systems, the company’s $80-million investment in Southern California stores and the recent slowdown in consumer spending. Although he acknowledged that the company has suffered in some Midwestern markets, Feinberg said the Los Angeles stores are off to a strong start.
He said the Los Angeles market is buoyed by its relatively strong economy and local consumers’ hefty appetite for new electronics gadgets. Feinberg and other industry executives also say that the departure in recent years of chains such as Federated left a void.
“There was a lack of competition in the market that Circuit City was able to take advantage of over the last few years,” Feinberg said. But, he added with a laugh, “there’s more than enough now.”
CIRCUIT CITY’S CLOUT These figures reflect sales of new televisions and compact disc players in Los Angeles and Orange counties from July, 1989 through June, 1990. The percentages show what portion of all sales were garnered by each store. TV Set Sales Circuit City: 28.8% Sears: 5.4% Broadway: 4.5% Price Club: 3.6% Montgomery Ward: 3.5% Fedco: 3.3% Kmart: 2.6% Adray’s: 2.4% May Co.: 2.1% Target: 2.1% Store undetermined: 13.7% Smaller dealers: 28.0% Compact Disc Player Sales Circuit City: 30.9% Price Club: 6.1% Rogersound Labs: 6.1% Adray’s: 2.5% Fedco: 2.2% May Co.: 2.2% Store undetermined: 19.1% Smaller dealers: 30.9% Source: Los Angeles Times Marketing Research Dept.
