gl gi wade fenn seminar final
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GLGi: Consumer Electronics Industry Overview
Wade FennJanuary 30, 2008
New York
© 2007 Gerson Lehrman Group Inc., All Rights Reserved
► Council Member Biography
► Wade Fenn is the Managing Partner of Retail Masters, a consulting firm that specializes in the consumer electronics industry, where he has been since 2002. Prior to this, Mr. Fenn was with the President of Business Development and Entertainment for Best Buy where he worked from 1980 until 2002. Mr. Fenn began is career as a Store Manager working his way up to a variety of positions including, VP of Retail Stores, SVP of Retail Sales and Operation and EVP of Marketing. Mr. Fenn also founded Navvo, a consumer electronics company that specializes in voice applications for the consumer, in 2002.
© 2007 Gerson Lehrman Group Inc., All Rights Reserved
► Topics
► Evaluation of Best Buy’s current business and US vs. International retail strategy
► Assessment of Circuit City current business state and strategic options
► Analysis of the current TV cycle and the implications across retail channels
► Overview of the Consumer Electronic Show
© 2007 Gerson Lehrman Group Inc., All Rights Reserved
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► Gerson Lehrman Group Contacts
► Randi Reiner Culang► Vice President, Consumer Goods &
Services Global ► Research Head► Gerson Lehrman Group► 850 Third Avenue, 9th Floor► New York, NY 10022► 212-750-1229 ► [email protected]
► Aaron Liberman► Managing Director, Sales and Marketing► Gerson Lehrman Group► 850 Third Avenue, 9th Floor► New York, NY 10022► 212-984-3684 ► [email protected]
► Carly Pisarri► Process Manager► Gerson Lehrman Group► 850 Third Avenue, 9th Floor► New York, NY 10022► 212-750-1435► [email protected]
Wade Fenn
January 2008
Key Themes• TV Cycle past prime…5th inning and still not stable. Everyone feeling pain from Suppliers
to retailers. High teens margins
• Game Cycle at peak…biggest 12 months of hardware and software…
• CC struggling with management and strategy issues…Wattles takes a 6% position…attempts to shake up the board
• BBY China a wildcard…adding Mexico, Turkey, Puerto Rico…Weimin Lu resigns from China
• Wal-mart and Costco gain share… compression with Vizio to tier one brands brand loyalty
• Connected TV…the next big thing• Apple providing the best integrated solution…Apple Retail setting the bar
• Slowdown post Christmas…• Even though product cycle trumps economic cycle, CE stocks have underperformed the
market during downturns
The Digital TV Revolution
Flat Panel Competitive Situation
Source: Company Websites, Sunday Circulars
TV Type Lower Tier Tier 1 Differential Name Brand Premium
50" Plasma 720p/1080i 1,250$ 1,700$
450$ 36%42" Plasma 720p/1080i 900$
1,160$
260$ 29%
42" LCD 720p/1080i 1,000$ 1,310$
310$ 31%42" LCD 1080p 1,200$ 1,600$
400$ 33%37" LCD 720p/1080i 760$
1,080$
320$ 42%32" LCD 720p/1080i 600$
800 200$
33%
Average Premium 34%
Median Price by Manufacturer 2007
TV Type Lower Tier Tier 1 Differential Name Brand Premium
50" Plasma 720p 2,000$ 2,900$
900$ 45%42" Plasma 720p 1,400$ 2,100$
700$ 50%
42"/40" LCD 720p 1,400$ 2,100$
700$ 50%
37"/32" LCD 720p $ 900 1,475$
575$ 64%Average Premium 52%
Median Price by Manufacturer 2006
TV Type Lower Tier Tier 1 DifferentialName Brand
Premium
50" Plasma 720p/1080i 1199$ 1,499$ $ 300 25%42" Plasma 720p/1080i $ 799 999 $ $ 200 25%
42" LCD 720p/1080i 1099$
1,249$ $ 150 14%42" LCD 1080p 989$ $1099 $ 110 11%37" LCD 720p/1080i
$ 699 $ 899 $ 200 29%32" LCD 720p/1080i
$ 549 $ 699 $ 150 27%
Average Premium 21%
Median Price by Manufacturer
2008
$
1080p Premium
13821065BBY
16001000CC
1200900Tiger Direct
1080p720p
LCD
16001032BBY
1600900CC
1300850Tiger Direct
1080p720p
Plasma
Median Price for 42” Screen Size & Technology
Best Buy Inventory Yield
BBY Inventory Yield
1.65
1.70
1.75
1.80
1.85
1.90
1.95
2.00
2.05
2.10
6/1/2002
8/31/2002
11/30/2002
3/1/2003
5/31/2003
8/30/2003
11/29/2003
2/28/2004
5/29/2004
8/28/2004
12/2/2004
2/26/2005
5/28/2005
8/27/2005
11/26/2005
2/25/2006
5/27/2006
8/26/2006
11/25/2006
3/3/2007
6/2/2007
Inve
nto
ry Y
ield
$12.00
$17.00
$22.00
$27.00
$32.00
$37.00
$42.00
$47.00
$52.00
$57.00
Sto
ck P
rice
Yield Price
Source: Company Reports
Circuit City Inventory Yield
CC
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
1.50
1.55
5/31/2002
8/31/2002
11/30/2002
2/28/2003
5/31/2003
8/31/2003
11/30/2003
2/29/2004
5/31/2004
8/31/2004
11/30/2004
2/28/2005
5/31/2005
8/31/2005
11/30/2005
2/28/2006
5/31/2006
8/31/2006
11/30/2006
2/28/2007
5/31/2007
Inve
nto
ry Y
ield
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Sto
ck P
rice
Yield Price
Source: Company Reports
Margin Declines and GMROI
• Plasma TV…32-36 points… 2001• Average declines 200 basis points per year after
year 1• GmROI declining in boutiques 2004• GmROI declined in Mass Specialists beginning
fall of 2006• GmROI of Mass will increase once price points
hit 999 …spring of 2007
Product Lifecycle
Boutique
LargeSpecialty
MassMerchants
Convenience
Cedia/Pro Group
• Products typically migrate from high end to mass over time, compressing margins while dimensions of value change
Pri
ce
Time
Product Lifecycle…current examples
Boutique
LargeSpecialty
MassMerchants
Convenience
Cedia/Pro Group
Pri
ce
Time
Satellite RadioFlat Panel TV
DVD Hardware/software
Compact Disc
Home automation
Integrated remotes
Profit Curves by Segment
0
10
20
30
40
50
60
70
80
90
100
intro growth mature consolidation
WalMart
Best Buy
Tweeter
Walgreens
Dealing with ChangeBest Buy
• Attempting to maintain momentum by attracting new customers– Best Buy for Business – Bringing business
customers the benefit of the master brand– Magnolia Home Theater and Geek Squad– Geographic expansion to China, Mexico,
Turkey
Dealing with ChangeBest Buy
• Has killed many of its internal concepts which were not producing, rationalizing costs
• Is over-expanding US store base
• Has the digitization of content coming at key businesses, offset by the peak of the game cycle
• Continues to have the best overall depth of management talent
Dealing with ChangeCircuit City
• Adopted non-commission late• Attempting store remodels and relocation• Struggling to retail management… 3 of top 6 left…• Employees sense a need for change of strategy• Limited experimentation
– Firedog, The City
• Surprisingly conservative given past corporate strategy initiatives– CarMax– Divx
Dealing with ChangeCircuit City
• Management feels its problems are operational• Customer value proposition declining…no space
between Best Buy and Wal-mart• Anti-Apple or Mobile store possible solutions…
needs vision• Supplier credibility strained
Can Best Buy and CC co-exist?
• No, not as CC is positioned today.
• Yes if CC commits to creating a new position, that while being number two overall, is number one with a desirable set of customers
Can Best Buy and CC co-exist?
• CC vs. BBY today = Kmart vs. Wal-Mart– Insufficient differentiation– CC is playing catch up (too late) and trying to own the
same position– Unable to overcome inherent structural advantages
• Kmart kept fussing with store layout, pricing, color scheme, store signage, but never created a unique position that was number one with a desirable customer
Can Best Buy and CC co-exist?
• CC vs. BBY possibilities: = Target vs Wal-Mart
– Focused on a different customer target• Smaller, but more desirable
– Able to command a premium for goods through integration of content, hardware, interface
– Clearly number one with their customers
Surviving as #2
• The Home Depot• Lowe’s• Wal-mart• Target• Dick’s Sporting Goods• Sportmart• Sports Authority• GART Sports• Oshman’s
The Need For Positioning
The Need For Positioning
“The best way to predict the future is to create it.”
–Peter Drucker
The Need For Positioning
• Brands bypassing traditional retail channels to reach customers
Categories to Watch from CES
• Digital Television OLED• Digital media vs. Physical
media …NBC booth• Wireless network peripherals
and portable devices• In Home Services• Set top box Revolution• The Interface: Voice• The Gaming business
Appendix
CEDIA and Pro Group
• Typically high-end, custom installations
• 6.3 billion annual sales, 5.3 to consumers
• Most don’t have bricks and mortar
• Growth in integrating CE, IT, Networking, and Telephony
Boutiques
• Business models under substantial pressure
• Too inefficient for product centric model to survive
• Lost their ability to make markets
• Must become service or fashion stores
Mass Specialists
• Efficiency of the mass with better selection
• Attempting to move to services
• Under siege by Wal-Mart/Costco expanding into middle high-end
Convenience
• Products sold everywhere (Batteries and Coke)
• Categories don’t define the store any longer
• Categories become convenience after supplier consolidation
Mass Retail
• Pressuring Suppliers for mid/hi end products
• Dominate commodity categories…
• Female based shoppers
• Wal-Mart and Best Buy in heated competition for Chinese supply
Brand Name Opening Price Point decline from 2006/2008
42” TV
LCD Plasma DLP
Circuit City 1799/1169 2199/999 1799/999
Best Buy 1899/1099 1799/996 1799/1199
Costco 2299/999 2199/999 2199/2199
Wal-Mart 949 999 N/A
Source: Store visits and company websites
Private Label Opening Price Point decline from 2006/2008
42” TVLCD Plasma DLP
Circuit City 1799/899 1669/899 1498/999
Best Buy 1799/996 1698/899 1699/1199
Costco 2299/899 1699/1099 2199/2199
Wal-Mart 899 899 N/A
Source: Store visits and company websites
Average Price Point Decline from 2006/200840’-65’ TV
LCD Plasma DLP
Circuit City 3536/1891 3953/1710 2474/2070
Best Buy 3180/2132 4541/2844 2929/2011
Costco 2699/1715 2859/2032 2624/2924
Source: Store visits and company websites
Retail Mix by Technology40-49 TV
LCD
1080P
LCD
720p
Plasma
1080p
Plasma
720P
Circuit City 40 10 2 6
Best Buy 38 6 2 6
Costco 7 1 0 2
Wal-Mart 7 3 0 0
Source: Store visits and company websites
LCD
1080P
LCD
720p
Plasma
1080p
Plasma
720P
Circuit City 9 0 7 7
Best Buy 9 1 7 7
Costco 3 0 1 3
Wal-Mart 2 0 0 3
Retail Mix by Technology50+ TV
Source: Store visits and company websites