http://www.msnbc.msn.com/id/18274443/

How Wal-Mart's TV prices crushed rivals
Retailer's holiday promotions proved disastrous for electronics stores

By Pallavi Gogoi

http://www.msnbc.msn.com/id/18274443/

How Wal-Mart's TV prices crushed rivals
Retailer's holiday promotions proved disastrous for electronics stores

By Pallavi Gogoi
Updated: 6:23 p.m. ET April 23, 2007
Business Week Online

Last "Black Friday," for its annual post-Thanksgiving sales blitz,
Wal-Mart Stores 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 on Mar. 28 laid off 3,400 employees and put its 800 Canadian
stores on the block. Tweeter Home Entertainment Group, 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 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.

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% since the end of November,
when the price war started. In the same period, Tweeter's shares
declined 32%, near a 52-week low, and Best Buy's stock is down 9%.

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.

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 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, 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.

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.

Copyright =A9 2007 The McGraw-Hill Companies Inc

--
Atheist n A person to be pitied in that he is
unable to believe things for which there is
no evidence, and who has thus deprived himself of
a convenient means of feeling superior to others.

-Chaz Bufe, The American Heretic's Dictionary

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.