Retail Traffic

RETAIL FACE OFF: Technological Warfare

2004 should be big for consumer electronics retailers. Analysts predict it will be the year that high-definition television becomes affordable to the mass market. And the popularity of digital technology is expected to step up the rate at which consumers upgrade their computers, televisions and cameras. But of the big-box electronics segment's dominant players — Best Buy and Circuit City — which is best positioned to profit from the technological advances? Best Buy came out the winner in the all-important holiday shopping season, with a 9.3 percent growth in comp sales for December. Circuit City's sales fell 2 percent that month. Best Buy's superior real estate, capital investments, customer service and inventory levels should help the Minneapolis-based retailer continue to grab market share from Circuit City throughout the year, analysts say.

Circuit City plans to open 65 to 70 new superstores by February 2005, more than half of which will replace underperforming stores that are being closed. It spent $130 million on capital expansion in 2003, but will have to spend more in 2004 if it expects to increase sales and market share, says Morgan Stanley analyst Gregory Melich. The Richmond, Va.-based chain has underspent Best Buy by at least $1.5 billion in the past five years. The retailer's merchandising systems continue to lag industry peers, and its stores aren't in the best locations, Melich says. The good news is that the upgrading and relocation works. Of 30 stores that have been replaced so far, sales have increased on average of about 28 percent. But the expansion comes at a cost — $1.8 million per relocation, says Deutsche Bank analyst Michael Baker.

The Prognosis: “Push back the recovery story one more year,” Melich says.

U.S. expansion possibilities are somewhat limited for Best Buy, and the chain's domestic square footage growth decelerated to 8.1 percent in the third quarter of 2003 compared to 10 percent for the third quarter of 2002. Expect to see the Best Buy storebase grow by about 8 percent annually through the next five years, says Suntrust Robinson Humphreys analyst Frank Brown. To expand sales and revenues, Best Buy is focusing future growth on providing services such as working with homebuilders to pre-wire homes for Internet, sound and video systems. Also, the company is testing what it calls “consumer centric” stores, which target a specific demographic and tailor the merchandise mix accordingly.

The prognosis: “Best Buy's ongoing consumer-centric and service initiatives, as well as heavy investments in labor, will help the retailer continue to win market share and customer loyalty,” Brown says.

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