During the holiday season the ads were inescapable and the content a bit befuddling. There was Staples, not just hawking its office wares, but imploring people to come in for all their “holiday shopping needs,” including digital cameras, televisions and other products that would be hard to classify as office supplies. Meanwhile, Wal-Mart fancied itself as the source for HDTVs, running endless ads pitching its low cost and lack of haughty salespeople. Meanwhile home improvement chains Lowe's and Home Depot — hurting from the slowdown in housing — continue to devote floor space to consumer electronics.
Once the domain of consumer electronics retailers like Best Buy, today other big-box retailers ranging from discount club chains and office supply and home improvement stores to food and drugstore chains are trying to get in on the act.
As a result, the “category killers” aren't exactly that anymore. Some have come to dominate their own spaces. Others are trying to compensate for shortfalls in their sectors. In either case, increasingly, big-box operators are encroaching upon one another's territory to boost sales.
“We are in an era of retailing where it is crucial for retailers to tap into new opportunities,” says Steve Spiwak, senior consultant for Retail Forward, a retail management consulting firm. Why consumer electronics? The reason: It is the sector that continues to grow.
The Consumer Electronics Association figures forecast 2007 total sales of consumer electronics to grow 7 percent to $155 billion. Sales are being fueled by flat panel televisions and further accelerated with pricing declines for plasma and LCD sets. Video game sales are expected to generate $16 billion, up 23 percent over last year; and MP3 players will continue to drive the audio market this year accounting for 90 percent of the projected $6 billion in sales.
Industry analysts cite consumers' insatiable appetites for big-screen televisions, CD and DVD players and iPod accessories for nontraditional electronics sellers. Retailers purchase the audio and video components at deep discounts, fueling high profit margins.
For example, Framingham, Mass.-based Staples has expanded beyond its core offering of paper, pencils and paper clips to include the marketing of electronics, including MP3 players and digital cameras. “These consumables provide incremental sales from existing customers,'' says David Figler, vice president and divisional merchandise manager for Staples.
Its strategy is not to jump in with both feet and compete directly with Circuit City and Best Buy. Instead, it's carrying a limited selection predominantly made up of the best-selling models. Staples offers 24 models of digital cameras — that's less than half the 60 models that can be found at the big-box chains who specialize in electronics. However, the limited models Staples carries, Figler says, represent 85 percent of all digital cameras sold in the United States.
In part, the strategy is meant to serve Staples' core office product customers who are shopping the store and may want a digital camera for professional purposes. The challenge, says Figler, “Can I convince the customer is to buy the camera from Staples, versus having to make another stop?”
Howard Davidowitz, chairman of Davidowitz & Co., a New York City-based retail consultancy firm notes enhancing sales from the stores' existing foot traffic makes sense for retailers. Even moreso, he says, for an industry that is mature and one whose market is saturated.
“When you've got transient retail traffic the best thing you can do is to sell customers additional categories of merchandise,” Davidowitz says.
According to Figler, while Staples strategy of offering consumer electronics is to serve as a convenience to its core customer base, that extended product offering also brings in new customers as well.
“We use them (digital cameras) to drive sales around the holidays, Mother's Day, and Father's Day,” says Figler.
Davidowitz agrees consumables are a major add-on business that can drive consumer foot traffic.
Blurring lines
Other retail industry sectors that have adopted the add-on strategy include drugstores offering food items, supermarkets selling seasonal outdoor furniture and Starbuck's selling CDs. Macy's even has automated kiosks in some of its stores that sell iPods.
“Retailers are desperate to increase their sales per square foot,” Davidowitz says. “The pressure in retail to produce results right now is extraordinary.” As a result, the retail sector has become a sea of sameness with big-box stores becoming cookie-cutter, according to Spiwak, who says the consumer can go to any one and get the same thing.
To differentiate themselves from a growing roster of competitors, retailers are auditioning various products in their stores in the hope that they will complement its core offering and drive incremental sales.
“Some retailers take a scatter-shot approach, let's try it and see if it works,” says Spiwak. “Others do their research.”
That's at least partly being fueled by the recent privatization trend that has hit the retail sector. Weak retailers are seen as top takeover targets. And those that are taken over are often faced with immediate mandates to boost sales by new management.
In the big box world most of the operators are still publicly-run. But in the past two years PETCO, Linens N' Things and Toys ‘R' Us have all been taken private after hitting rough patches.
Retail executives and industry experts agree selecting products to complement a retailers' core offering is not an exact science.Industry expert Paco Underhill says retailers identifying successful ancillary products is a bit of a gamble.
“But, when it pays off, it pays off well,” Underhill says.
Figler characterized Staples's add-on offerings as a directional strategy that builds on its primary offering of paper, ink and business machines. Staples's secondary product tier consists of technology including telephones and PCs and its third is office furniture.
“We're constantly struggling with share-shift,” says Figler. “It's a continuing evolution to develop what our customers want.”
For example, he recalled, when Staples got into PDAs several years ago, it commanded a sizeable share of the market. However, its market share eroded as more and more retailers started marketing the devices.
“We're going through that now with GPS,” Figler says.
And, now that computer software has splintering to include high-demand video games, Staples's offering is narrowly focused on small and home office users' back-office operations.
“We realized we needed to be focused on productivity software, accounting software and anti-virus software,” he says.
Retail Forward's Spiwak notes retailers who stray too far from their target in an attempt to reach new markets could be subjected to a consumer backlash.
He recalled Wal-Mart's recent stumble when it tried to go after high-income consumers.
The world's largest retailer, known for its low, low prices, introduced premium-priced designer apparel to lure affluent shoppers. By marketing to both ends of the spectrum, analysts say, the retailer lost its core middle-income consumer.
“It confused consumers, which is why Wal-Mart has gotten back to low prices,” says Spiwak.
Home Depot too has back-peddled on its effort to expand beyond its core do-it-yourself market and the targeting of professional contractors to help shore up its sagging sales.
Last summer, Home Depot warned earnings for the second half of 2006 would fall short of expectations. In the third quarter, Home Depot's comparable store sales declined 5.1 percent, compared with its rival Lowe's Co.'s 4 percent drop.
To boost profits amid the housing slowdown, the home improvement giant has tested consumer electronics and a myriad of other products unrelated to home construction and repair.
This past holiday season, plasma televisions, digital cameras and iPod docking stations were just a few of the items that were on the shelves of Home Depot's 1,868 stores. A spokesperson for Home Depot says the offering was seasonal and that the home improvement chain has no plans to carry consumer electronics permanently.
In January, Home Depot's Chairman and CEO, Robert Nardelli, resigned after more than five years at the helm, in part due to the poor results from the firm's shifts in corporate strategy.
Candy gram
The world's largest home improvement chain has been struggling to maintain its waning market share in a fierce battle with its rival Lowe's Co. Home Depot launched higher-end merchandise and new private-label products in its stores. It also rolled out installation services.
To further sweeten its bottom line, Home Depot also sells candy in its stores' checkout aisles mimicking those of a grocery store.
“Home Depot has expanded into the pro market, construction stores and candy,” Spiwak says. “What has gotten lost in the shuffle is customer service.”
RETAILER EXPANSION LIST
ADVANCE AUTO PARTS INC.
Roanoke, VA
Public
Store count: 3,029
Net openings: 219
Change: 7.79%
Annual Revenues: $4,264.97
AUTOZONE INC.
Memphis, TN
Public
Store count: 3,812
Net openings: 200
Change: 5.54%
Annual Revenues: $5,948.35
BARNES & NOBLE INC.
New York, NY
Public
Store count: 692 (excluding B.Dalton)
Net openings: 11
Change: 1.62%
Annual Revenues: $5,103.00
BED BATH & BEYOND INC.
Union, NJ
Public
Store count: 795 (excluding Christmas Tree Shops & Harmon)
Net openings: 69
Change: 9.50%
Annual Revenues: $5,809.56
BEST BUY CO. INC.
Richfield, MN
Public
Store count: 771 (excluding Magnolia & Geek Squad)
Net openings: 100
Change: 14.90%
Annual Revenues: $30,848.00
BIG LOTS INC.
Columbus, OH
Public
Store count: 1,403
Net openings: 0
Change: 0.00%
Annual Revenues: $4,429.90
BJ'S WHOLESALE CLUB INC.
Natick, MA
Public
Store count: 171
Net openings: 8
Change: 4.91%
Annual Revenues: $7,949.93
BORDERS GROUP INC.
Ann Arbor, MI
Public
Store count: 487 (superstores only)
Net openings: 21
Change: 4.51%
Annual Revenues: $4,079.20
CIRCUIT CITY STORES INC.
Richmond, VA
Public
Store count: 641
Net openings: 16
Change: 2.56%
Annual Revenues: $11,597.69
COMPUSA INC.
Dallas, TX
Private
Store count: 229
Net openings: -11
Change: -4.58%
Annual Revenues: $4,700.00
COSTCO WHOLESALE CORP.
Issaquah, WA
Public
Store count: 371
Net openings: 25
Change: 7.23%
Annual Revenues: $60,151.23
DICK'S SPORTING GOODS INC.
Pittsburgh, PA
Public
Store count: 294
Net openings: 39
Change: 15.29%
Annual Revenues: $2,624.99
THE HOME DEPOT INC.
Atlanta, GA
Public
Store count: 2,127
Net openings: 115
Change: 5.72%
Annual Revenues: $81,511.00
IKEA
Leiden, The Netherlands
Public
U.S. store count: 29
U.S. net openings: 3
Change: 11.54%
Annual Revenues: $15,425.0 (global)
KOHL'S CORP.
Menomonee Falls, WI
Public
Store count: 817
Net openings: 85
Change: 11.61%
Annual Revenues: $13,402.22
LINENS ‘N THINGS INC.
Clifton, NJ
Private
Store count: 561
Net openings: 19
Change: 3.51%
Annual Revenues: $2,700.00
LOWE'S COMPANIES INC.
Mooresville, NC
Public
Store count: 1,325
Net openings: 150
Change: 12.77%
Annual Revenues: $43,243.00
MICHAELS STORES INC.
Irving, TX
Private
Store count: 923 (excluding Aaron Brothers, Recollections and Star Wholesale)
Net openings: 34
Change: 3.82%
Annual Revenues: $590.00
OFFICE DEPOT INC.
Delray Beach, FL
Public
Store count: 1,121
Net openings: 112
Change: 11.10%
Annual Revenues: $14,278.94
OFFICEMAX INC.
Naperville, IL
Public
Store count: 887
Net openings: -40
Change: -4.31%
Annual Revenues: $9,157.66
PETCO STORES.
San Diego, CA
Private
Store count: 800
Net openings: 40
Change: 5.26%
PETSMART INC.
Phoenix, AZ
Public
Store count: 885
Net openings: 85
Change: 10.63%
Annual Revenues: $3,760.50
RETAIL VENTURES INC. (VALUE CITY, FILENE'S BASEMENT & DSW)
Columbus, OH
Public
Annual Revenues: $2,913.37
Value City stores: 113
Net openings: -1
Change: -0.88%
Filene's Basement stores: 30
Net openings: 3
Change: 11.11%
DSW stores: 215
Net openings: 16
Change: 8.04%
ROSS STORES INC.
Pleasanton, CA
Public
Store count: 772
Net openings: 57
Change: 7.97%
Annual Revenues: $4,944.18
SHOPKO STORES INC.
Green Bay, WI
Private
Store count: 135
Net openings: -2
Change: -1.46%
Annual Revenues: $2,200.00
STAPLES INC.
Framingham, MA
Public
Store count: 1,888
Net openings: 108
Change: 6.07%
Annual Revenues: $16,078.85
TARGET CORP.
Minneapolis, MN
Public
Store count: 1,494
Net openings: 94
Change: 6.71%
Annual Revenues: $52,620.00
THE TJX COMPANIES INC.
Framingham, MA
Public
Annual Revenues: $16,057.93
T.J. Maxx stores: 826
Net openings: 24
Change: 2.99%
Marshalls stores: 751
Net openings: 32
Change: 4.45%
HomeGoods stores: 271
Net openings: 19
Change: 7.54%
A.J. Wright stores: 162
Net openings: 8
Change: 5.19%
Bob's stores: 36
Net openings: 1
Change: 2.86%
Winners stores: 184
Net openings: 10
Change: 5.75%
HomeSense stores: 68
Net openings: 10
Change: 17.24%
TOYS ‘R' US INC.
Wayne, NJ
Private
Annual Revenues: $11,100.00
Toys ‘R' Us stores: 587
Net openings: -84
Change: -12.52%
Babies ‘R' Us stores: 248
Net openings: 18
Change: 7.83%
WAL-MART STORES INC.
Bentonville, AR
Public
Annual Revenues: $315,654.00
Wal-Mart stores: 1,092
Net openings: -117
Change: -9.68%
Wal-Mart Supercenter stores: 2,195
Net openings: 215
Change: 10.86%
Sam's Club stores: 576
Net openings: 9
Change: 1.59%
All data compiled from company reports including financial releases and SEC filings. Store counts are as of Jan. 1, 2007. Annual revenues are in $ millions and reflect each company's last completed fiscal year.