How Wal-Mart’s TV Prices Crushed Rivals (and the Consumers Gonads)

The Article: How Wal-Mart’s TV Prices Crushed Rivals by Pallavi Gogoi in Business Week. You’ve heard of Walmart wooing the proletariat with cheap wares and bright lights, cripple local enterprise, destroying all sense of local ownership and community in rural areas, and slowly but surely sucking the worlds soul away in with low prices. And now, they’re doing it to other huge multinational corporations and electronic formats:

The Text: Last “Black Friday,” for its annual post-Thanksgiving sales blitz, Wal-Mart Stores (WMT) decided to slash the price of one of the hottest electronics items for the holidays—the 42-inch flat-panel TV—to $988. The world’s largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing’s “low-price leader.” In turn, Wal-Mart’s move caused a freefall in prices of flat-panel televisions at hundreds of retailers—to the glee of many people who were then able to afford their first big-screen plasma or liquid-crystal-display model.

Now, it is becoming apparent that Wal-Mart’s calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.

The fallout is evident: After closing 70 stores in February, Circuit City Stores (CC) on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group (TWTR), the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores (RSC) is boarding up dozens of outlets, as well as selling 94 of its 211 stores. “The tube business and big-screen business just dropped off a cliff,” says Stuart Rose, chief executive officer of Dayton-based Rex Stores. “We expected a dropoff, but nowhere near the decline that we had.” Clearly, these retailers are taking such drastic measures because they don’t see any respite in sight.
The ‘Wal-Mart Effect’

Since early February, when the companies first started closing stores and announcing layoffs, most of their stock prices also have been battered. Circuit City shares have fallen 24%, to $18.76, since the end of November, when the price war started. In the same period, Tweeter’s shares declined 32%, to $1.72, near a 52-week low, and Best Buy’s (BBY) stock is down 9%, to $48.73. Shares of Rex Stores have been flat, down 0.7%, to $16.98 (see BusinessWeek.com, 4/9/07, “Stop the Bullying, Wal-Mart”).

The carnage has one phrase written all over it: the “Wal-Mart effect.” For many electronics competitors, the experience with flat panels has been a replay of what happened in other businesses over the past two decades as Wal-Mart’s business stature grew dramatically. The Bentonville (Ark.) juggernaut’s entry into the grocery business in the late 1980s and its ability to offer deep discounts led to the bankrupting of dozens of regional supermarkets over the next 15 years, including Florida-based Winn-Dixie Stores, Eagle Foods from Illinois, and Penn Traffic in Pennsylvania.

And Wal-Mart’s discounting of popular toys sent FAO Schwartz and KB Toys into bankruptcy. Now, Wal-Mart has clearly turned its gaze to electronics. “We recommitted to our customers that we would be their low-price leader, especially on those products that were rising in popularity, such as flat-screen and high-definition TVs,” says Kevin O’Connor, Wal-Mart vice-president and general merchandise manager.

Manufacturers Still Smarting

None in the industry doubted that flat-panel television prices would fall or that Wal-Mart would offer heavy promotions. But most expected the promotions to be limited to lesser-known brands like the Viore TV that Wal-Mart was selling at $988. What caught competitors off guard was that Wal-Mart also cut the price of a top brand name—the 42-in. Panasonic high-definition TV—by $500, to $1,294. That sent dozens of retailers across the country scrambling, and many rushed to match prices: Circuit City offered the same Panasonic TV at $1,299, while Best Buy sold a Westinghouse 42-in. LCD for $999. Others tried to lure customers to larger TVs—CompUSA gave a $500 rebate on its 50-in. Panasonic plasma for $2,499.

Panasonic executives are still smarting from Wal-Mart’s decision to drop the price on its 42-in. model. Panasonic officials won’t discuss the issue. “I’m not going to comment on what Wal-Mart did,” says Andrew Nelkin, president of Panasonic Professional Display Co. in Secaucus, N.J.

Along with Wal-Mart’s determination to lower prices, two other factors played key roles in last winter’s 40%-to-50% flat-panel price drop and the ensuing turmoil. For one, many more retailers such as Sears (SHLD) and CompUSA were starting to stock a wider selection of flat-panel TVs after seeing demand soar over the previous two years. Also, manufacturers like Samsung, Sony (SNE), Panasonic, and Westinghouse had ramped up production last year with new factories in Asia and the U.S. They began flooding the market with new TVs in the latter half of 2006. All these forces combined to make a commodity of what just six months earlier had been a solidly high-end, high-margin entertainment product. “It’s Econ 101: Best Buy and Circuit City had seen fat margins from flat-panel TVs for a while, and as it happens with any product, eventually the margins come down and the music stops,” says David Abella, a portfolio manager at New York-based Rochdale Investment Management, with assets of $2 billion.
Little to Lose

Wal-Mart is the second-largest electronics retailer today, behind Best Buy, which has fared relatively well compared to many of its rivals. But it has done so by imitating some of Wal-Mart’s best practices, most notably an efficient supply chain, by the admission of CEO Brad Anderson himself. It also has more diversified merchandise than other specialty-electronics retailers.

Despite its bold move last year, Wal-Mart currently is not the largest seller of flat-panel TVs. In fact, even though Wal-Mart set in motion the price drops, it has actually been a bit player in the high-definition TV segment. By most accounts, Wal-Mart had little to lose by dropping the price on the Panasonic TVs because it sold out its inventory nearly instantly.

However, for Circuit City, which was in the midst of a turnaround and sells thousands more flat-panel televisions than Wal-Mart, the new price landscape represented a massive hit to its margins. The Richmond (Va.) company lost $12.2 million in its fiscal fourth quarter ended Feb. 28, compared to a net income of $141.4 million in the same period last year. At Tweeter, where flat-panel TVs make up more than 51% of sales, the price declines hurt badly. Sales in its fiscal second quarter ended Mar. 31 declined 12%, to $139 million. The Canton (Mass.) company plans to release earnings on May 10. “We desperately hope that sanity reigns and that the lessons of the past holiday season are not lost on anybody in the industry,” says Joe McGuire, CEO of Tweeter Home Entertainment Group.
Luring the Technophiles

Despite shoppers paying lower prices, Circuit City CEO Phil Schoonover is hoping customers will continue to want their TVs installed and will use the company’s Firedog service, a competitor to Best Buy’s Geek Squad that launched last October. Sales at Firedog grew 80%, to $200 million last year, and Schoonover says he expects them to double this year. He admits, however, that the environment couldn’t be more uncertain. “I’m not here to say that we’re sure what the second half looks like because we have 96 suppliers of flat-panel TVs who market their products in the U.S.,” he says. “With production facilities all over the world and brands from China, we don’t know what their real marketing strategies are. We think it’s going to be a competitive marketplace for the flat-panel TV business.”

As new technology emerges and as LCD TVs with crisper images hit the market this May, some retailers are hoping to lure the technophiles. However, if consumer-electronics purveyors are hoping to maintain sky-high prices on new products, they’d better not count on it. After all, they have no idea what Wal-Mart has in store.

Analysis: Asking me if I feel sorry that Walmart is putting a dent into Best Buy and Circuit City is akin to feeling sorry for Stalin when he was attacked by Hitler. Sorry, I done did it.