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Not time to declare the winner in consumer electronics retailing just yet [ClearOnMoney]
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Not time to declare the winner in consumer electronics retailing just yet

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Commentary

Not time to declare the winner in consumer electronics retailing just yet

30 Sep 2012 by Jim Fickett.

Amazon is the leading online retailer of consumer electronics, and the sales of web-only retailers are growing much faster than both the total sales and the online sales of brick-and-mortar chains. Nevertheless, Best Buy still has a commanding lead in total consumer electronic sales, its web sales are growing at a pace of 20% per year, and the web-only retailers are losing their sales tax advantage. Further, Best Buy is maintaining its overall market share, and physical stores do have some intrinsic advantages. Amazon is a formidable rival, but the race is not over yet.

Before delving further into Best Buy internals, I'd like to assess the context a bit by looking at consumer electronics retailing in general. What are the big trends? Who are the big players? Where is Best Buy in the standings?

Online sales are growing rapidly, but are still relatively small

The clearest data are for the whole retail trade sector, collected by the Census Bureau. In the retail sector as a whole, online sales have increased from about 2% in 2003 to about 5% in 2012. There is no doubt that online sales continue to increase as a share of the market, but also no doubt that physical stores still play, for now, the main role.

When it comes to consumer electronics it is somewhat harder to get a clear picture, as most data are proprietary and definitions are fuzzy (for example some people include digital cameras in consumer electronics and some don't; some lump computers in and some separate them). It is pretty clear that the same trend obtains but is somewhat further along. The total online share in consumer electronics is probably in the neighborhood of 20%:

  • According to TWICE, Amazon had about 5% of the consumer electronics market in the period Apr 2010 - Mar 2011, and according to compete.com, Amazon had 39% of the online consumer electronics market in Q4 2011; putting the two together suggests that the total online share in 2010-2011 was about 13%.
  • According to NPD, in 2011 “Sales through online, direct mail, and TV shopping channels … accounted for 24 percent of all [consumer electronics] sales” (the point of lumping direct mail and TV shopping channels with online is that they also bypass physical stores).

The exact number is not important. The point is that online sales are (1) a much bigger share of the consumer electronics market than of retail overall, and (2) they are still a minority of sales.

As with retail in general, the online share of consumer electronics continues to grow:

  • According to TWICE, in 2011 “online sales of CE and PC products (excluding peripherals) grew at least 15 percent year over year”; and similarly, according to Internet Retailer, ”[US] Online sales of computers and consumer electronics will increase [from 2011 to 2012] 15.9%”
  • In contrast, according to Cognizant, growth in the consumer electronics industry overall was 3.5% or less each year 2006-2010.

Since both online sales overall and online sales in consumer electronics are rapidly gaining market share, clearly no consumer electronics retailer can afford to do a poor job of online selling. On the other hand the common assumption that the whole story is one of online sales is a bit exaggerated. Even in consumer electronics, probably 75% of all sales take place in stores and, while online sales are growing rapidly now, it is not obvious that they will become even the majority of sales. Physical stores have some important advantage – you don't have to sit at home all day in order not to miss your Fedex delivery; you can see and touch the merchandise and receive it the same day; and you can speak with a human who might be able to answer some questions intelligently (particularly if you are making coordinated purchases of several items).

Retail chains should be thinking very carefully about both store sales and online sales, and have a strategy that builds on the advantages of each. Instead of worrying so much that Amazon shoppers will take advantage of physical stores to see the merchandise and then buy online, why should retail stores not take advantage of Amazon, providing free wifi and setting up terminals where shoppers can read Amazon reviews and then get instant gratification in the store? They need not be afraid; Deloitte reports that “Shoppers who use their mobile devices in the store are 6% more likely to make an in-store purchase.”

The top four players are Best Buy, Walmart, Apple, and Amazon

According to the Consumer Electronics Association (CEA) and The Stevenson Company’s TraQline shopper surveys, via TWICE, in the period April 2010 to March 2011, “In the 12 short years since [Amazon] added CE to its assortment, Amazon has grown into the fourth-largest consumer electronics merchant, behind only Best Buy, Walmart and Apple. … Amazon’s share of total CE dollars [was] 5.1 percent … Best Buy still commands the lion’s share of CE sell-through at 26.1 percent, followed by Walmart’s 11.7 percent share of CE revenue”.

What is scaring the physical-store retailers is Amazon's rate of growth: “Amazon’s share of total CE dollars spent rose 27.5 percent over the 12-month period ended March 31 … compared with a 0.7 percent decline in share for Best Buy and essentially flat results for Walmart during the same period.”

So Amazon is already a major player, and is growing fast, but note that as of 2011 Best Buy still had sales 5 times bigger than Amazon. If the retail chains can get their act together, they still have a commanding lead to use to their advantage.

Why are people choosing Amazon? “Driving that traffic are the aforementioned factors of price, selection and shopping experience, which were cited by consumers as the chief motivations for purchasing their electronics where they do. Amazon was tops in all three areas, shoppers said, while Walmart and Target were a close tie for second in pricing but ranked low for store experience, and Best Buy placed fourth in product selection.” In other words, it is not just online versus physical store. Again, the retail chains have a chance here, if they can learn from Amazon's – and Apple's – leadership in designing a helpful shopping experience.

Clearly, any company can, if it chooses, match Amazon's great website design and strong online selection. What is less obvious is that brick-and-mortar retailers can probably come close to Amazon's prices. According to Adam Levine-Weinberg, “The worry is that Amazon (AMZN) will be able to undercut Best Buy's prices, because it does not have to support the overhead of over 1000 big box stores. As I have written before, I think the fear of showrooming is overblown. If you compare Best Buy's and Amazon's earnings statements for last year side by side, it turns out that SG&A [selling, general and administrative expenses] for Best Buy was 20.2% of sales, while the comparable figure for Amazon was 20.6% of sales. Simply put, Amazon does not have a lower overall cost structure. Rather, the fact that Amazon does not charge sales tax in most jurisdictions has artificially lowered its prices compared to physical retailers by as much as 10%. But Amazon recently began collecting sales tax in Texas, and it will begin collecting sales tax in Pennsylvania and California in September. This will allow Best Buy to compete with Amazon on price in many of the most populous states in the U.S., going forward.”

Online, Amazon is the leader but the retail chains also show strong growth

According to Compete.com, Amazon takes the lead when one looks at online sales only; here the market shares are Amazon 39%, Walmart 33%, Best Buy 23%, and Target 4%. Note, though, that the three brick and mortar chains together still have 60% of the online market. So here again the common perception that Amazon is driving other retailers out of the market is somewhat exaggerated.

It is a similar story with growth. According to Internet Retailer, the chains grew their combined web sales by 15% from 2010 to 2011 (with Best Buy, in particular, growing online revenue 20% from Q1 2011 to Q1 2012), while the web-only sellers grew their combined sales by 32%. So, yes, the web-only sellers' growth is phenomenal and frightening for the retail chains. But 15% is also strong growth, and it is certainly possible that they could still do well in this race.

Best Buy is doing better than you might expect

It has been very widely reported that same-store sales are declining at Best Buy. In fact, this is a broader phenomenon, affecting the retail chain store sector as a whole. NPD reports that for the whole consumer electronics sector, “in-store sales fell about 2.5 percent in 2011”.

Nevertheless, a separate NPD study shows that Best Buy is preserving or growing market share overall and in many key areas:

Despite the massive upheaval in the technology business Best Buy has actually done pretty well in coping with, and managing, the changes to its business, preserving its legacy strengths while moving as rapidly as possible towards a future of which no one has an exceptionally clear vision. In 2011, Best Buy’s share of consumer technology revenue stood at 19 percent of hardware sales, according to NPD’s Consumer Tracking Service, exactly what it was in 2010 … Best Buy also was the number one brick-and-mortar retailer online and gained almost one point in revenue share, now 22.4 percent, among retailers on the Web.

… Best Buy is the number one non-manufacturer seller of Windows notebooks on the Web and gained almost 2 points in market share in 2011. …

Despite an overall decline in the TV market Best Buy’s brick-and-mortar stores gained one point in market share in 2011. Best Buy grew revenue share as well and accounted for nearly one-in-three dollars spent on flat-panel TVs. In the fast-growing TV segment of 50” and above, Best Buy’s market share was 31 percent and more than 3x higher than any other retailer. On the Web Best Buy gained 1.5 points of market share in TV sales in 2011.

… Best Buy saw its unit share of the cell phone sales grow by 25 percent in 2011 and its share of smartphone sales increase by 50 percent. Best Buy sold one-in-four smartphones sold through multi-carrier, multi-brand stores in 2011, an increase of 50 percent. …

… The retail stores gained market share in both point-and-shoot (up almost one point) and the fast-growing DSLR camera segment up more than a quarter of a point) … In MP3 players Best Buy gained 2 points of unit share, and in headphones, another fast-growing emerging category, Best Buy’s revenue share increased by more than one-third of a point.

In all of the most important product categories, ones which represent more than 50 percent of U.S. consumer technology revenue, Best Buy by any objective measure is either gaining share rapidly or maintaining its industry leading position. While there are challenges ahead, Best Buy remains the dominant retailer and in the best position to succeed in the coming years.

Conclusion

In general, online retailing is growing faster than in-store retailing, and this trend is accentuated in consumer electronics. Amazon is already a major force and is growing faster than its rivals. Nevertheless, Best Buy is still, by far, the overall revenue leader and remains several times as big, in consumer electronics, as Amazon. Further, the brick and mortar retailers are not standing still; they have online businesses that are also growing fast, if not as fast, currently, as Amazon. If current trends continue, Amazon will indeed win the race, swallowing up all the business of physical stores. On the other hand, physical stores do have some advantages, like human contact and instant gratification, and, if the chain retailers can take advantage of those assets and their current leadership position, there is still a reasonable chance that they have a bright future.

Currently Amazon is at a trailing 12-month P/E of 310. Best Buy's 12-month P/E is not defined because of a loss from an extraordinary item, but its price-to-10-year-free-cash-flow is 9. I agree that Amazon is turning in an amazing performance. But 310 to 9? That overstates the case.

Previously on Best Buy