With the demise of electronics retailer Circuit City, Best Buy and Wal-Mart stores are ramping up their struggle to capture added share of the consumer electronics market according to a recent report from the Wharton School at the University of Pennsylvania. Best Buy, the nation's largest specialty electronics retailer, is positioning itself as the provider of quality service and sales help to consumers who are often baffled by high-tech merchandise. The company is focusing on more high-end products and new interactive features to differentiate itself from the big box atmosphere at Wal-Mart.
Wal-Mart, the world's largest retailer, is using its dominance in the global marketplace across all retail categories to position itself as the low-price option in consumer electronics. The chain also has massive reach with consumers. More than 800 million people a year visit a Wal-Mart store to buy everything from groceries to sweatpants to gasoline. In what's seen as an attempt to compete with Best Buy, the chain is adding a new emphasis on electronics, including big-screen televisions and Apple iPods.
Wharton faculty and industry analysts say instead of fighting to the death, both stores can coexist if they follow clearly defined strategies focusing on service and price. "The good thing, the consumer electronics market is big enough that one doesn't have to grow at the expense of the other. They can find their own space in the marketplace and prosper together," says Wharton marketing professor John Zhang.
He and other Wharton faculty predict that Best Buy is likely to gain the biggest share of sales left behind following Circuit City's liquidation in March. After 60 years in business, the Richmond, Virginia-based retailer, which peaked with 700 stores and sales of roughly $10 billion, became a casualty of the current recession and competition from Best Buy, Wal-Mart and others.
Best Buy, which announced surprisingly strong full-year sales of $45 billion in March, has 900 U.S. stores and is the nation's largest electronics seller, according to market research firm NPD. Wal-Mart, with total sales of more than $400 billion, does not release figures for individual categories, but NPD estimates that last year it was second to Best Buy in consumer electronics sales, followed by Dell, Circuit City and Apple.
Wal-Mart's strong suit is its highly efficient operations and supply chain systems, along with an extraordinary customer reach that allows the mass merchandiser to compete effectively in nearly every retail category.
The consumer electronics market is fluid, with consumers typically visiting two or three stores before making a purchase, according to Zhang. As a result, price becomes a key consideration. Even though Wal-Mart's price is not always lowest, Zhang notes, most consumers perceive that to be the case, thereby making Wal-Mart the choice for price-conscious consumers, particularly during the current economic downturn.
Meanwhile, he notes, Wal-Mart carries considerable sway with manufacturers because it can offer floor space for myriad products. For example, Wal-Mart can offer space to LG for consumer electronics, but also many models of LG's home appliances and computers. "As leverage, Wal-Mart can say, 'I will let you sell other products if you give me a better deal on the electronics.'"
Best Buy should try to avoid the common retailing mistake of making its stores totally uniform, says Zhang. Best Buy could use micromarketing techniques to compete against Wal-Mart on a store-by-store basis depending on the distance of its stores to the nearest Wal-Mart. Under this strategy, Best Buy stores closer to Wal-Mart locations should pay closer attention to price than others with the luxury of more distance.
In addition, he suggests, Best Buy should make the most of its low-price guarantee, which provides peace of mind to consumers most concerned with price. At the same time, the guarantee would not have a major impact on margins because, in practice, only about 15% of shoppers actually make an effort to find a lower price elsewhere.
Wal-Mart, for its part, could become even stronger if it began to develop better relationships with customers, says Zhang. The company falls short in developing these connections because it does not emphasize loyalty programs. For example, Wal-Mart could offer points for purchases of groceries and other necessities that could then be put toward big-ticket consumer electronics. "Wal-Mart has a lot of touch points with the consumer and could leverage the other products in the store," says Zhang.
For complete coverage, see: "Best Buy vs. Wal-Mart: Is There Room for Both, and Others?"