Consumer Electronics Stores in the US

Transcription

1 Consumer Electronics Stores in the US June Plugged in: Product innovations and renewed spending will spur industry growth IBISWorld Industry Report Consumer Electronics Stores in the US June 2013 Natalie Everett 2 About this Industry 2 Industry Definition 2 Main Activities 2 Similar Industries 3 Additional Resources 4 Industry at a Glance 5 Industry Performance 5 Executive Summary 5 Key External Drivers 7 Current Performance 9 Industry Outlook 11 Industry Life Cycle 13 Products & Markets 13 Supply Chain 13 Products & Services 15 Demand Determinants 16 Major Markets 17 International Trade 18 Business Locations 20 Competitive Landscape 20 Market Share Concentration 20 Key Success Factors 20 Cost Structure Benchmarks 22 Basis of Competition 23 Barriers to Entry 24 Industry Globalization 25 Major Companies 25 Best Buy Co. Inc. 26 RadioShack Corporation 29 Operating Conditions 29 Capital Intensity 30 Technology & Systems 30 Revenue Volatility 31 Regulation & Policy 32 Industry Assistance 33 Key Statistics 33 Industry Data 33 Annual Change 33 Key Ratios 34 Jargon & Glossary info@ibisworld.com

2 Consumer Electronics Stores in the US June About this Industry Industry Definition Consumer electronics stores retail a range of appliances, electrical goods and home entertainment products, such as dishwashers, TVs and computers. Stores purchase goods from manufacturers or wholesalers and then sell them to consumers in stores or online. Stores mainly sell new products, but some stores do sell used goods. Many stores also offer repair services. This industry does not include stores that mostly sell computers (Computer and Software Stores, IBISWorld Report 44312). Main Activities The primary activities of this industry are Retailing new household appliances, such as refrigerators, washing machines and ovens Retailing new personal appliances, such as hair dryers, curling irons and electric razors Retailing consumer electronics, such as radios, televisions, digital cameras, video games and computers Retailing mobile phones, smartphones and accessories Offering repair services in conjunction with retail operations The major products and services in this industry are Audio equipment Computer hardware and software Major appliances Small electric appliances Telephones, including mobile phones TV and video equipment Other Similar Industries Computer Stores in the US Operators in this industry retail new computer peripherals, prepackaged computer software, and office equipment and supplies Camera Stores in the US Operators in this industry sell new cameras, and photographic equipment and supplies, often in conjunction with providing repair services and film developing Hobby & Toy Stores in the US Operators in this industry retail new electronic toys, games, and hobby and craft supplies (except needlecraft) Office Supply Stores in the US Operators in this industry retail new computers, accessories, prepackaged software, new stationery, school supplies, office supplies, and new office equipment, furniture and supplies Used Goods Stores in the US Operators in this industry retail a wide assortment of used goods, including used consumer electronics.

3 Consumer Electronics Stores in the US June About this Industry Similar Industries continued Electronic & Computer Repair Services in the US Services in this industry include repairing and maintaining consumer electronic equipment, computers and office equipment, and other electronic equipment Appliance Repair in the US Services in this industry include repairing and servicing home and garden equipment, and household appliances a E-Commerce & Online Auctions in the US Operators in this industry retail consumer electronics via the internet b Mail Order in the US Operators in this industry retail consumer electronics via catalogs or mail-order forms. Additional Resources For additional information on this industry ApplianceMagazine.com Consumer Electronics Association US Census Bureau IBISWorld writes over 700 US industry reports, which are updated up to four times a year. To see all reports, go to

4 Consumer Electronics Stores in the US June Industry at a Glance Consumer Electronics Stores in 2013 Key Statistics Snapshot Revenue $71.5bn Profit $1.9bn Annual Growth % Wages $8.4bn Annual Growth % Businesses 40,731 Market Share Best Buy Co. Inc. 44.0% RadioShack Corporation 4.5% % change Revenue vs. employment growth % change Per capita disposable income Year Year Revenue Employment Key External Drivers Per capita disposable income External competition Consumer sentiment index Number of households Price of household appliances p. 25 Products and services segmentation (2013) 11.9% Telephones, including mobile phones 9.9% Audio equipment 0.5% Small electric appliances 22.9% TV and video equipment SOURCE: % Major appliances 21.9% Computer hardware and software p % Other SOURCE: SOURCE: Industry Structure Life Cycle Stage Decline Revenue Volatility Medium Capital Intensity Medium Industry Assistance Low Concentration Level Medium Regulation Level Technology Change Barriers to Entry Industry Globalization Competition Level Light Medium Medium Low Medium FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 33

5 Consumer Electronics Stores in the US June Industry Performance Executive Summary Key External Drivers Current Performance Industry Outlook Life Cycle Stage Executive Summary Consumer electronics and appliances are staples in American households and include items such as DVD players and refrigerators. Prior to the recession, the Consumer Electronics Stores industry benefited from increasing household wealth and rising demand for discretionary electronics. However, the collapse of the US housing market and the subsequent recession dealt a blow to the industry near the end of Consumer confidence plummeted and, in 2009, per capita disposable income fell for the first time in 17 years, resulting in consumers increasingly delaying appliance purchases Demand for high-tech products like tablets and smartphones will drive industry growth and cutting back on discretionary electronic items. Meanwhile, the rise of online retailers added to the industry s already robust competition; operators in the Consumer Electronics Stores industry also compete with discount retailers and department stores. The bankruptcy and liquidation of Circuit City in 2009 illustrates the impact of reduced consumer sentiment and rising competition on this industry. In light of these conditions, IBISWorld estimates that revenue has fallen at an average annual rate of 4.6% to $71.5 billion in the five years to 2013, including a decline of 1.0% in In addition to falling sales, rising competition initiated pricing battles among companies during the period. To drive consumer traffic, many consumer electronics stores have been forced to lower price markups on merchandise. As a result, industry profitability has declined; IBISWorld estimates that margins have fallen from 3.2% of revenue in 2008 to 2.7% in With declining margins, many underperforming businesses have exited; IBISWorld estimates that the number of enterprises has declined 0.4% per year on average over the past five years to 40,731 businesses. Meanwhile, industry heavyhitters Best Buy and RadioShack have started shifting focus from large stores to smaller, more-specialized ones to reduce costs and to better cater to changing consumer interests. In the five years to 2018, the continued economic recovery will drive renewed consumer spending and carry the industry into a somewhat stunted comeback. Demand for tablet computers and mobile devices will drive some of this growth. The growing number of US households and the improving residential construction market will sustain sales of large appliances; however, competition will remain stiff. To this end, revenue is forecast to increase at an average annual rate of 1.8% to $78.0 billion in the five years to Key External Drivers Per capita disposable income Demand for goods sold by consumer electronics stores is often discretionary. Therefore, a rise in per capita disposable income increases the propensity for consumers to purchase more industry goods, leading to growth in demand. Per capita disposable income is expected to increase slowly in 2013, creating an opportunity for the industry. External competition External competition stems from department stores (including discount department stores), warehouse clubs, home improvement stores and online retailers. These operators sell consumer electronics and appliances, often at a lower price than consumer electronics stores, attracting customers away from industry players.

6 Consumer Electronics Stores in the US June Industry Performance Key External Drivers continued External competition is expected to increase in 2013, representing a potential threat to the industry. Consumer sentiment index The consumer sentiment index measures household perceptions of current economic conditions and expectations for the short-term and long-term future. Because sentiment changes have historically shown a direct correlation with spending behavior, the index is considered to be a key indicator of retail spending. When consumers perceive their income, employment and housing to be stable, they are more inclined to spend on big-ticket items like appliances and electronics. The consumer sentiment index is expected to increase in Number of households A rise in the number of households will lead to higher demand for consumer electronics. Recent societal trends have shown that consumers concerned with long-term growth in personal wealth tend to delay marriage until later in life and divorce at a higher rate. This has resulted in low-density living, increasing the volume of households. The number of households is expected to increase slowly in Price of household appliances The price of household appliances typically moves in accordance with demand fluctuations and the cost of major material inputs, such as steel and plastic. Manufacturers pass production cost increases to retail outlets, which are usually able to pass these increases on to their customers. As appliance prices rise, improving consumer sentiment and demand will buoy the price increases for retailers; this will drive revenue growth and enhance profitability. The price of household appliances is expected to increase during Per capita disposable income Consumer sentiment index % change 0 % change Year Year SOURCE:

7 Consumer Electronics Stores in the US June Industry Performance Current Performance Consumer electronics and home appliances are heavily integrated into the daily lives of Americans. A 2012 survey by the Consumer Electronics Association found that the average household owns about 24 different consumer electronics products and spends $1,100 annually on them. With such prevalence, the Consumer Electronics Stores industry expanded closely in line with the growing US economy throughout the past couple of decades. Consumers infrequently purchase this industry s durable goods. They are only really purchased when there is a strong incentive; such incentives include the need to replace a broken appliance or the desire to attain the latest technology or features. Therefore, the industry is susceptible to changes in consumer sentiment and per capita disposable income, both of which fell during the recession. Consumer sentiment took a nose-dive in 2008 and 2009, and per capita disposable income fell 3.6% in 2009, marking its first decline in two decades. Because of these declines, industry revenue fell during those years Consumer interest shifted from big-ticket items, like TVs, to smaller items as well. Industry operators reacted by cutting hours and pay for workers, resulting in wage declines each year until 2013 when wages are expected to rise 1.4%. However, the recession s impact only tells part of the industry s tale. Despite a generally improving economy between 2010 and 2012, sales continued to plummet. For example, shifts in consumer interest from big-ticket items like TVs to less-expensive tablet computers, and growing external competition from discount and online retailers, played large roles in the industry s declines during the past few years. As a result, industry revenue is expected to have fallen at an annualized 4.6% in the five years to 2013, including an estimated 1.0% drop to $71.5 billion in Product mix shifts While sales of industry products have declined overall in the five years to 2013, the consumer electronics segment has fared better than the home appliance segment. With declining discretionary spending money, consumers with old, working machines had little motivation to purchase big-ticket household appliances, such as washers, dryers and refrigerators because the features and functionality of these appliances do not change much from year to year. The electronics segment has fared slightly better but not as well as it has in the past. Innovation in TVs and personal computers, once the industry s major revenue generators, has slowed and dampened consumer demand in the industry s TV and video equipment, and computer hardware and software segments. However, the computer hardware and software segment has been buoyed by the introduction of the tablet computer and continued innovation of mobile phones and devices. For example, the comparable store sales of consumer electronics at Best Buy fell 6.3%, but this decline eventually slowed because of strong sales of e-readers and tablet computers. Meanwhile, the company s comparable store sales for the computing and mobile phone segments grew 3.6% thanks to increased mobile phone sales. CDs, DVDs, video games and their players have all suffered from changing technologies. For example, online streaming

8 Consumer Electronics Stores in the US June Industry Performance Product mix shifts continued allows consumers to listen to music and watch movies without purchasing CDs or DVDs. According to The Nielsen Company s 2012 Music Industry Report (latest data available), digital album sales were up 14.0% in 2012, compared to 2011, while CD sales declined 13.0%. Similarly, according to retail analysis organization NPD Group, video game sales were down 22.0% in Gaming hardware fell 27.0% during the same period. In response to the shift in consumer tastes, the industry s two largest players, Best Buy and RadioShack, are both opening smaller stores that primarily feature mobile devices. Best Buy opened 103 Best Buy Mobile stores in Meanwhile, RadioShack s partnership with Target expanded to include 1,500 Target Mobile kiosks within Target stores, allowing RadioShack to capitalize on the retailer s strong brand name and foot traffic. Already strong external competition grows Competition from department stores and discount retailers has been strong for some time; however, the prevalence of online retailers has increased price-based competition. This has contributed to lower profit for brick-and-mortar consumer electronics stores. Many consumers use showrooms at this industry s stores to browse consumer electronics in person and then purchase the products online, where prices are often cheaper. According to the US Census, in 2010, online retailers sold about $18.1 billion worth of electronics and appliances. In 2013, however, Best Buy and RadioShack are expected to account for 49.5% of the industry s revenue. A few regional operators and a large number of small operators characterize the remainder of the industry. These small players do not have the product selection, economies of scale or purchasing power enjoyed by department stores, discount retailers and large online retailers like Amazon.com, forcing these small operators to focus on a niche product segment. Also, the falling average price of appliances and consumer electronics has affected operators across the board since Much of that decline was in 2011 and 2012, when prices fell 12.4% and 13.2%, respectively, according to the US Bureau of Labor Statistics. These Competition from online retailers and discount department stores rose price declines have stemmed from steep drops in the manufacturing costs of products like flat-panel HDTVs, computers and laptops, digital cameras and other electronics. In addition, to generate foot traffic and compete with online shopping sites, stores have engaged in price promotions, and invested in advertising and reduced markups, which have dug into profitability. IBISWorld estimates that average profit has declined from about 3.2% of revenue in 2008 to 2.7% in With falling margins, many underperforming stores have been forced out of business. For example, Circuit City closed the last of its 155 retail stores in 2009 because of these adverse circumstances, when only a year earlier Circuit City had accounted for about 13.7% of market share. That same year industry employment fell 9.9% as the recession took hold and consumers cut back on discretionary spending. In the five years to 2013, employment is estimated to have fallen at an annualized rate of 2.7% to 334,709 workers.

9 Consumer Electronics Stores in the US June Industry Performance Industry Outlook The outlook for the Consumer Electronics Stores industry is somewhat positive, with revenue forecast to increase at an average annual rate of 1.8% to $78.0 billion in the five years to While economic conditions are gradually improving and will likely boost consumer spending, consumers are buying fewer big-ticket items that sustained rapid growth in the past. Consumers are now reaching for relatively less-expensive products, such as tablet computers and e-readers. External competition is also a growing threat, as consumer electronics stores jockey with discount retailers, department stores and online retailers for the electronics and appliances market. In 2014, the industry s recovery will begin as consumer sentiment and per capita disposable income are expected to increase 4.0% and 2.9%. This renewed confidence in the economy, along with % change Industry revenue Year low interest rates and improving employment, will drive retail purchases. As such, households are expected to increase their spending on new appliances and electronics that they delayed during recession. 19 SOURCE: Future product trends American consumers commitment to the environment is expected to play a larger part in their selection of home appliance products during the five years to Consumers have already started actively seeking out and purchasing new items that feature lower energy use, less water consumption and greater recyclability. The federal government s Energy- Efficient Appliance Rebate Program, which ended in February 2012, supported this trend. While no other governmentassisted rebate plan is scheduled to follow, this program has heightened consumers awareness of green appliances. As such, consumer electronics stores are anticipated to experience increased sales of energyefficient appliances in the coming years. For home entertainment systems, increased technological advancements, especially in the audio and video equipment sector, will contribute to the industry s future growth. For example, the TV market has been one of the industry s primary drivers throughout the past decade because of consumers shift in preference to HD flat-panel sets that are light weight with better picture quality than traditional TV sets. The introduction and growing popularity of 3-D, internet connectivity and organic LED (light-emitting diode) technologies will maintain and grow revenue in the display category, particularly toward the end of the five-year period. Further, increases in the number of households and recovering residential construction will raise demand for major appliances such as TVs. The evolution of the tablet trend and a new renaissance for video games and video game consoles will also occur in the five years to Tablet prices are expected to drop significantly during the period, with a $99.0 price point likely in the near future as more people seek to buy

10 Consumer Electronics Stores in the US June Industry Performance Future product trends continued these devices. In 2013 and 2014, major electronics manufacturers are expected to introduce highly anticipated new video game consoles in after a multiple-year lull, and consumer electronics stores will seek to capture significant portions of the sales of these products. Electronics convergence and saturated product market While the rising use of smartphones has aided industry sales to some extent, this rise has also sped up the convergence electronic capabilities. Smartphones typically combine mobile phone functions with other capabilities found in separate devices, such as GPS navigators, portable music and video players, portable game consoles and digital cameras. As such, the convergence of different functions into a singular device has led to a decline in sales of several other electronic products, such as MP3 players and digital cameras. Unfortunately for consumer electronics stores, as more consumers become familiar with smartphones and as technology further evolves, this trend will continue in the five years to Increased sales of smartphones and the renewed sales of video game consoles will only partially offset these declines. Innovation will become increasingly important in this saturated market Meanwhile, the Consumer Electronics Stores industry will continue to rely on the continuous innovation of products to stimulate demand and ensure growth in the five years to Consumer interest in big-ticket items like TVs and personal computers has waned because most consumers who want such products already own them, and innovation on such products has slowed. Therefore, demand will shift to include accessories and peripherals, as these goods are relatively inexpensive to produce, affordable to purchase and usually designed to be used with items that consumers already own. Profit squeezed Profit will decline slightly in the five years to 2018 to 2.5%, after falling at an estimated, annualized rate of 6.1% in the five years to Prices of consumer electronics and appliances will remain low or fall further in the five years to 2018 as competition remains stiff, hurting profit. As many companies struggle to adapt to the changing landscape for electronics sales, they will be forced to restructure their business models and incur the associated costs. For example, Best Buy recently embarked on a major restructuring effort that has shifted its focus from its traditional, large discount stores to smaller, more specialized stores. Best Buy has also closed some of its larger stores and plans to open more than 100 Best Buy Mobile stores in the near future. As large consumer electronics chains continue to increase the number of their locations and as some small players reenter the industry, the number of enterprises is expected to grow at an annualized rate of 1.4% to 43,721 by Therefore, companies will need to further differentiate themselves to stay competitive; this will require adding technical product consultants to help consumers choose electronic devices. As such, the number of employees is expected to rise at an annualized rate of 2.8% during the period, outpacing revenue.

11 Consumer Electronics Stores in the US June Industry Performance Life Cycle Stage Industry value added growth is below that of the overall US economy The number of enterprises will stagnate over the 10 years to 2018 In-store technological advances have had a marginal effect on industry performance % Growth in share of economy Maturity Company consolidation; level of economic importance stable Quality Growth High growth in economic importance; weaker companies close down; developed technology and markets Key Features of a Decline Industry Revenue grows slower than economy Falling company numbers; large firms dominate Little technology & process change Declining per capita consumption of good Stable & clearly segmented products & brands 10 5 Quantity Growth Many new companies; minor growth in economic importance; substantial technology change 0 Hobby & Toy Stores 5 Computer Stores Camera Stores Computer Manufacturing Consumer Electronics Stores Decline Shrinking economic importance Audio & Video Equipment Manufacturing % Growth in number of establishments SOURCE:

12 Consumer Electronics Stores in the US June Industry Performance Industry Life Cycle This industry is Declining The Consumer Electronics Stores industry is entering a slow state of decline as external competition grows and many industry products wane in popularity. TVs, refrigerators and other products traditionally sold by this industry s operators are increasingly sold throughout the retail sector at department stores, discount retailers and online, creating intense competition. In addition, some of the industry s core products, such as HDTVs, video game consoles and digital cameras, have been experiencing major price declines and saturation in the market. The industry s decline is evident in its shrinking industry value added (IVA), which is a measure of the industry s contribution to the US economy. The Consumer Electronics Stores industry is estimated to underperform the growth of the US economy. In the 10 years to 2018, IVA is expected to rise at an average annual rate of 0.3%. Meanwhile, the US economy is projected to increase at an average annual rate of 2.1% during the same period. As a result, the industry s share of the overall economy is contracting, and this decline can be partially attributed to declining profitably. Since the recession, consumers have become increasingly price sensitive and have started using technological means to easily compare prices with discount retailers, department stores and online retailers. Therefore, consumer electronics stores have been forced to attract consumers using aggressive discounting, hurting margins. The stagnant growth in the number of companies is also evidence of the industry s decline. The number of enterprises is estimated to rise at an annualized rate of 0.5% in the 10 years to 2018; however this includes an annualized drop of 0.4% in the five years to During this period, the industry also lost major player Circuit City, which held a 13.7% market share in Also, many nonemployers that make up a large portion of this industry have been forced to exit the industry.

13 Consumer Electronics Stores in the US June Products & Markets Supply Chain Products & Services Demand Determinants Major Markets International Trade Business Locations Supply Chain KEY BUYING INDUSTRIES 99 Consumers in the US Households are the primary buyers for consumer electronics stores. Purchases are made for private use in homes, rather than resale. KEY SELLING INDUSTRIES 33411a Computer Manufacturing in the US This industry supplies computers and computer accessories Audio & Video Equipment Manufacturing in the US Operators in this industry manufacture stereo equipment, video cameras, DVD players and other products that are sold at consumer electronics stores Vacuum, Fan & Small Household Appliance Manufacturing in the US This industry manufactures small household appliances such as vacuums, fans and irons that are later sold in consumer electronics stores TV & Appliance Wholesaling in the US This industry supplies household electrical appliances, including gas clothes dryers, video cameras and electric toothbrushes Electronic Part & Equipment Wholesaling in the US This industry supplies blank CDs and DVDs, telephone equipment and radar equipment, among other things. Products & Services Products and services segmentation (2013) 0.5% Small electric 9.9% appliances Audio equipment 11.9% Telephones, including mobile phones 22.9% TV and video equipment Total $71.5bn 16.4% Major appliances 16.5% Other 21.9% Computer hardware and software SOURCE: The Consumer Electronics Stores industry retails an assortment of appliances and consumer electronics that are generally used in consumer households. The industry s two largest product segments, TV and video equipment, and computer hardware and software, have been facing shifting consumer interests during the five years to For example, during Black Friday 2012, a touchstone of this industry s largest revenue-generating quarter, flat-panel TV sales were down 6.0%, while Android tablet sales were up 91.0%, according to consumer-research firm NPD Group.

14 Consumer Electronics Stores in the US June Products & Markets Products & Services continued TV and video equipment TV and video equipment make up the largest product market for the industry, accounting for about 22.9% of revenue in Specific products in this industry include: flat-screen, plasma, LCD and LED TV sets; DVD and Blu-ray players; digital cameras; video recorders; and video games and their consoles. During the past decade, this segment s share of revenue increased considerably due to new technology developments and rapid introductions of new products. However, these trends have slowed in the five years to 2013, and product innovation in this segment fallen as well. The convergence of electronic capabilities has slowed demand for some products included in this industry. For instance, smartphones have replaced digital cameras for many people, while video-streaming services have started to replace portable DVD players and discs. As such, this segment s share of revenue has declined and will continue to do so as multifunction electronics gain in popularity. Falling TV prices also pose a threat to this segment as stores have been forced to lower prices to compete with e-tailers and discount department stores. Computer hardware and software The computer hardware and software segment rose in the past five years, thanks to the introduction of tablet computers such as the ipad. Without tablets, growth in this product segment might be stagnant as laptop and desktop computer prices have fallen, driven by lower manufacturing costs, slowing product innovation and falling consumer demand. In fact, the price of computer equipment is estimated to have declined at an average annual rate of 6.0% in the five years to Although hardware sales have risen in the past five years, software sales have decreased due to competition from the internet s direct downloads, online retailers and software piracy. Major appliances Major appliances are expected to make up 16.4% of industry revenue in 2013 and are especially important to large-format chains like Best Buy. However, some chains, such as Radio Shack, do not sell appliances at all. This group includes large household appliances such as refrigerators, freezers, washing machines, ovens and stovetops. Because products in this group are considered big-ticket purchases, when consumer sentiment and disposable income fell during the recession, sales of major appliances declined significantly. Furthermore, stagnant growth in the number of US households during and after the recession created reduced demand for new major appliances. Audio equipment This product segment includes digital music players (e.g. MP3 players, the Apple ipod), radios, stereos, compact disc players, tape recorders, audio books, electronic musical instruments and other associated accessories. This product group has experienced considerable declines in the past five years, falling from about 15.0% of industry revenue in 2008 to an estimated 9.9% in Much of this decline has been due to the proliferation of nontraditional competitors, such as Amazon.com, that have diluted demand because their products are cheaper. In addition, many of this segment s products, such as Apple ipods, are often sold through multiple channels, including manufacturer-owned retail stores and mass merchandisers, which leads to lower sales at consumer electronic stores. Revenue generated from audio equipment that is sold through manufacturer-owned retail stores (e.g. Apple and Sony stores) and discount department and warehouse

15 Consumer Electronics Stores in the US June Products & Markets Products & Services continued stores (e.g. Walmart and Costco) is excluded from the industry because these stores do not specialize in the sale of consumer electronics. Other products Other products sold at consumer electronics stores include kitchen countertop appliances such as mixers, blenders and toasters, as well as home-office equipment such as fax machines, copy machines, calculators, telephones and typewriters. Additional revenue is derived from labor costs for repairing appliances and electronics, and the sale of kitchenware, books and magazines. Nonetheless, this segment faces strong external competition from online retailers, mass merchandisers, the Home Furnishing Stores industry (IBISWorld report 44229) and the Office Supplies Stores industry (IBISWorld report 45321). Demand Determinants Consumer electronics and appliances are often considered discretionary, so the level of demand is sensitive to changes in consumer confidence and household disposable income. Growth in income enables consumers to demand a broader range of goods and increases the quality and price of goods purchased. While a number of products retailed in this industry are small-ticket items (e.g. toasters and coffee machines), big-ticket items (e.g. flat-screen TVs and computers) require a substantially larger portion of consumers disposable income. As a result, periods of economic uncertainty and labor market weakness are met with a decline in demand. A drop in income levels may lead consumers to either delay purchases of industry goods or lead consumer to purchase secondhand items, reducing industry demand. The prices a store charges for appliances, TVs and other electronic goods affects demand for these items. Prices of many consumer electronics like HDTVs and laptop computers have been falling during the past several years, due to lower component and manufacturing costs, and maturing technologies. Given the highly saturated and crowded consumer electronics market, consumers are able to shop around for the best price possible, both inside and outside the Consumer Electronics Stores industry. Traditionally, stores have faced competition from mass merchandisers and department stores; however, online retail is a new, growing threat. In recent years, storeowners have started fighting competition from e-tailers with lower prices and lobbying efforts to impose local and state taxes on items purchased online.

16 Consumer Electronics Stores in the US June Products & Markets Major Markets Major market segmentation (2013) 11.5% Consumers aged 65 and older 13.2% Consumers aged 24 and younger 39.5% Consumers aged 35 to % Consumers aged 25 to 34 Total $71.5bn 18.5% Consumers aged 55 to 64 SOURCE: Consumer electronics stores sell their merchandise to two key markets: the replacement market (40.0% of sales) and the new purchases market (60.0%). The replacement market consists of consumers who replace merchandise that is old, outdated or no longer functions correctly. The new purchases market is comprised of consumers that purchase new appliances, TVs or electrical goods, often to furnish new homes. As such, the new purchases market is often sensitive to the number of housing starts and the rate of household formations. Because more consumers use the internet for shopping, regardless of age, online competition is an equal threat to the industry throughout these market segments. Consumers aged 35 to 54 Consumers aged 35 to 54 are estimated to represent the largest market segment for the industry in 2013, accounting for 39.5% of total revenue. The majority of consumers in this category are employed individuals with steady incomes. As such, they are able to freely spend on big-ticket items that make up a significant share of industry products. In addition, consumers in this group typically have their own families and homes, making them an ideal market for the industry. Consumers in this group purchase items across this industry s product spectrum, including TVs, major appliances and small electrical equipment, like blenders. Consumers aged 55 to 64 Consumers aged 55 to 64 are expected to account for 18.5% of revenue in People in this age group are often in their peak earning years and have relatively high disposable incomes. Small appliances that require minimum disposable income dominate industry purchases made by this market, followed by major appliances and TVs. Consumers in this group often replace old, existing equipment before entering retirement, leading to this segment s relatively high share of revenue. Consumers aged 25 to 34 Younger consumers are more likely to buy home entertainment systems, mobile telephones or computers than they are appliances. Many consumers aged 25 to 34 live with their parents or in rental housing, and both of these living situations tend to come with built-in appliances. While these consumers tend to have less income than older people, they are still willing to spend on

17 Consumer Electronics Stores in the US June Products & Markets Major Markets continued electronics for entertainment, particularly mobile devices. For example, consumers in this market are most likely to purchase tablets, one of the fastest-growing products in this industry. This age group makes up about 17.3% of total revenue. Consumers aged 24 and younger Consumers aged 24 and younger account for the second-smallest share of industry demand in 2013, estimated to represent 13.2% of the total market. Individuals in this age group typically have limited disposable income and live with relatives or in apartments with roommates, restricting their ability and desire to make big-ticket purchases. Nonetheless, these consumers are often very aware of changes in technology and constantly demand new product developments from the industry. Consumers aged 65 and older Consumers aged 65 and older make up 11.5% of the industry s market share. Most of these consumers have entered retirement and, therefore, have lower disposable income streams than those people in the younger, working demographics. In addition, these consumers have homes that are well equipped with appliances, and they are not as sensitive to technological changes, so they often opt to continue using old equipment. Consumers in this demographic stand apart from the other market segments in that they are less likely to shop online; about 35.0% of consumers aged 65 and older browse products online, compared with an average of 45.0% of all consumers, according to retail research firm NPD Group. International Trade Because merchandise trade is accounted for in the relevant upstream manufacturing industries, the Consumer Electronic Stores industry has no trade by convention. However, many of the products sold by industry operators are imported from overseas, and the manufacturing costs and exchange rates in the countries that source industry products heavily influence the prices of electronics and appliances. Refer to the Vacuum, Fan and Small Household Appliance industry (IBISWorld report 33521), Major Household Appliance Manufacturing industry (33522) and Audio and Video Equipment Manufacturing industry (33431) reports for specific figures on trade.

18 Consumer Electronics Stores in the US June Products & Markets Business Locations 2013 West AK 0.2 New England West CA 11.6 WA 1.9 MT 0.5 OR 1.3 NV 0.8 Rocky Mountains ID 0.7 UT 1.1 AZ 1.9 WY 0.3 CO 1.9 NM 0.6 ND Plains NE 0.5 MN WI SD 0.4 KS 1.1 Southwest TX 7.6 OK 1.3 MO 2.2 Great Lakes 2.0 MI 3.7 PA 3.8 IA OH IL IN VA WV KY 1.2 AR 1.0 MS 0.8 LA 1.3 TN 1.8 Southeast AL 1.4 Mid- Atlantic GA 3.0 NY NC 2.8 SC 1.3 FL ME West HI 0.3 Additional States (as marked on map) 1VT 2 NH 3MA 4 RI CT 6 NJ 7DE MD DC Establishments (%) Less than 3% 3% to less than 10% 10% to less than 20% 20% or more SOURCE:

19 Consumer Electronics Stores in the US June Products & Markets Business Locations As with many other retail industries, the location of consumer electronic stores falls broadly in line with each region s population level and consumer demand. Generally, when there are more residents in an area its demand for industry products is stronger. IBISWorld estimates that the Southeast region accounts for the largest share of stores (24.2%) and revenue (21.3%). This region accounts for the highest share of the national population in the United States at 25.4%. Florida is the largest state in the Southeast in terms of number of establishments; 6.6% of retailers are located there. The Southeast is followed by the West, with 16.1% of establishments; the Mid-Atlantic with 15.9% of establishments; and the Great Lakes with 15.8% of establishments. The West s population accounts for a relatively high share of the total US population at 17.0%, and California has 12.1% of the nation s population. % Establishments vs. population West Great Lakes Establishments Population Mid-Atlantic New England Plains Rocky Mountains Southeast Southwest SOURCE: Keeping with the industry s disbursement by population, California is home to 11.6% of consumer electronics stores.

20 Consumer Electronics Stores in the US June Competitive Landscape Market Share Concentration Key Success Factors Cost Structure Benchmarks Basis of Competition Barriers to Entry Industry Globalization Market Share Concentration Level Concentration in this industry is Medium Industry concentration measures the extent to which the industry s top players dominate an industry. IBISWorld estimates that the top four major players in this industry will account for 54.6% of revenue. However, much of that concentration is from the industry s largest player, Best Buy, which is expected to account for about 44.0% of revenue in These numbers indicate medium concentration for the Consumer Electronics Stores industry. In addition to the two prominent national players, the industry has a number of companies with strong regional operations; the two largest are hh gregg inc. and P.C. Richard & Son. With 228 stores in the eastern United States, hh gregg holds an estimated 3.5% market share, while P.C. Richard & Son holds a 2.6% market share with its 67 stores. The industry has become less concentrated in the five years to 2013, as deteriorating economic conditions resulted in the exit of major player Circuit City, which closed 155 consumer electronics outlets in the United States in In 2008, Circuit City was the industry s second-largest major player, capturing 13.7% of the market. However, when Circuit City fell, Best Buy was the main beneficiary, and the company s market share rose from 41.0% in 2008 to 44.0% in An estimated 81.4% of industry companies are small businesses with four or fewer employees. Key Success Factors IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are: Proximity to key markets Industry stores should be located in well-populated regions, and be easy to locate and access. Smaller operators should also consider locations with high foot traffic. Ability to control stock on hand Successful operators work to reduce inventory costs and the time it takes to turn over stock. Experienced work force Maintaining a highly skilled workforce that is known for its quality customer service and product expertise is a boon for this industry s operators. Staff turnover can be reduced with ongoing training and work-advancement programs. Attractive product presentation The store layout and stock display should be clear and well presented. Consumers should be able to easily locate desired products. Having links with suppliers Products sold by this industry often have high brand recognition. Stores should have links with suppliers of such brands to generate high sales. Cost Structure Benchmarks Profit Profit margins vary among consumer electronics and appliance retailers. Larger stores often buy merchandise in bulk to achieve more cost savings. On the other hand, smaller stores do not enjoy the same economies of scale and, therefore, incur higher purchasing costs, which can lower their profit margins. In the five years to 2013, increased competition from department stores, discount retailers and online retailers is estimated to have impaired average industry profitability. Since 2008, the average price of this industry s products has fallen an average rate of 6.1% annually, with significant declines in 2011 and 2012, according to the US Bureau of

21 Consumer Electronics Stores in the US June Competitive Landscape Cost Structure Benchmarks continued Labor Statistics. In 2011 and 2012, prices fell 12.4% and 13.5% respectively. This competition is most pronounced in the industry s appliances segment. Profit margins in household appliance stores will reach 1.2% of revenue in 2013, down from 2.7% in Profit margins for electronic stores will reach 3.0% of revenue in 2013, down from 3.3% in As a result, operators, especially small, independent stores, have seen falling sales revenue. Meanwhile, industry expenses like rent and wages remained fixed regardless of demand, resulting in higher costs per unit sold. IBISWorld estimates that industry operators will obtain profit margins averaging 2.7% of revenue in 2013, down from about 3.1% in Purchases Purchase costs are expected to remain the single largest expense for the industry in 2013, accounting for about 72.0% of revenue, up from about 68.2% in High purchase costs are typical of retail industries because stores must maintain a significant volume of inventory to meet consumer demand. Suppliers to this industry benefit from strong brand recognition; major suppliers for consumer electronics include Sony Electronics, Panasonic and Samsung, and major suppliers for appliances include Whirlpool, GE and Electrolux. While the cost of many products has declined, overall purchase costs in this industry have increased as a share of revenue during the past five years because retailers have padded their inventories in anticipation of higher sales as the economy improves. Wages Employee compensation, including payroll and benefits, is consumer electronics stores second-largest expense. Retailers heavily rely on Sector vs. Industry Costs Percentage of revenue Average Costs of all Industries in sector (2013) Industry Costs (2013) P r o fi t Wages Purchases Depreciation Marketing Rent & Utilities Other SOURCE:

22 Consumer Electronics Stores in the US June Competitive Landscape Cost Structure Benchmarks continued employees for daily operations such as customer service, maintenance of store displays and inventory checks. This expense has decreased slightly in the past five years as retail stores reduced labor forces and wages to cut costs during the recession. However, revenue fell at a slightly faster pace, leaving wages with a 11.5% share of revenue in 2013, compared to their 11.1% share in Depreciation Depreciation costs are estimated at 2.1% of revenue in Depreciable assets include computer inventory systems, cash registers and other point-of-sale computer systems. Other Operators in this industry also incur a variety of other expenses, including rent, utilities, advertising, administrative and insurance. Rent and utilities costs are expected to represent 5.5% of revenue. Marketing expenses are particularly important because stores often engage in advertising and promotional campaigns to drive foot traffic. Operators advertise via a range of media including TV, radio and print; however, the breadth of options available to players is largely controlled by their size and their cost constraints. On average, industrymarketing costs are expected to account for about 4.0% of revenue in Basis of Competition Level & Trend Competition in this industry is Medium and the trend is Increasing Consumer electronics stores compete with each other on the basis of price, product range, location, store promotions and customer service. By nature, consumers are relatively price conscious and will shop around to ensure that goods are purchased at the best price possible. Given the high price tag of some merchandise, operators aim to ensure that prices are in line with industry averages and that any reductions in purchase prices from suppliers are passed on to consumers. Products sold by this industry range in size and relative price. In an attempt to gain exposure to most of the consumer market, operators compete on the basis of the type and brand of products offered and their respective quality. Players in this industry want to appeal to consumers who are in the market for big-ticket items like refrigerators and flat-panel TVs, but they also want to attract consumers who are looking to purchase smaller home appliances, such as blenders and coffee makers. Consumers will also be attracted to particular stores based on the quality of products on offer. Customer service is also an important consideration. A store s retail staff must be well-versed in the functions of the technical products that consumer electronics stores offer. It also important that stores stand behind purchases with extended warranties and product-repair services. Customer service helps determine the number of buyers who return to shop at the same store. The level of customer service offered is, in part, a by-product of the number of employees who work at the store. Some other players aim to differentiate themselves from competitors by offering sophisticated custom-installation services with regard to their homeentertainment products. Other forms of internal competition include location and promotions. A store s location influences a retailer s popularity and the number of and type of potential clients it can reach. Operators compete for stores that are close to other retail premises because they often provide ample customer parking and are easily accessible for consumers. When located close to other popular stores, consumer electronics stores benefit from

23 Consumer Electronics Stores in the US June Competitive Landscape Basis of Competition continued an overflow of customers who were not originally planning on visiting them. Industry players also offer promotional deals such as coupons, discounts and add-ons in an attempt to boost sales. These are typically very effective during the final quarter of the calendar year, which is the busiest season for consumer electronics stores. External competition In the past several years, online stores have emerged as a serious threat to consumer electronics stores, adding to the industry s already significant external competition. For years, consumer electronics stores have faced competition from department stores, home improvement stores and warehouse clubs, and the addition of online retailers has only increased external competition. Department stores like Sears and Macy s offer appliances and electronics that are competitively priced and cover an extensive range of products available on the market. Discount retailers like Costco and Walmart have also challenged consumer electronics stores. Due to their sheer size and market power, these stores have the added advantage of being able to purchase larger quantities of goods at a discount; hence, they are often able to provide industry goods at lower prices, attracting price-conscious consumers. Home improvement stores like The Home Depot and Lowe s also retail large and small appliances, TVs and home electronics. Online appliance and electronics retailers are also growing their presence. Online stores compete with a wide selection, lower prices and the added convenience of shopping online. Online stores in most states also enjoy the advantage of not adding state sales taxes onto their consumers purchases. Some operators in this industry support legislation obliging online retailers to charge sales taxes on their products, and as of September 2012, such legislation had passed in eight states. Online stores like Amazon.com now charge sales taxes in New York, Texas, Pennsylvania, Washington, North Dakota, Kansas, Kentucky and California. By 2016, Amazon.com will be able to collect sales taxes from consumers in six more states. Barriers to Entry Level & Trend Barriers to Entry in this industry are Medium and Steady New operators planning to enter the Consumer Electronics Stores industry will need to overcome a number of barriers. The most significant of these will be the level of external competition industry players face from department stores, discount retailers and online retailers like Amazon.com. These largersized operators benefit from economies of scale, and they are able to purchase a wide variety of merchandise, often at discounted prices, which allows them to pass these cost savings on to consumers without significantly reducing their product margins. Prospective operators will also need to consider the level of market dominance exerted by the two largest players, which account for about 54.4% of the market. New entrants may find it difficult to compete with Best Buy and RadioShack in terms of brand awareness, product range and price, as well as efficient, scaled infrastructure. The product market for merchandise retailed by operators in this industry is largely saturated. The high-value price tag of some merchandise may also be considered a barrier to entry for prospective operators. Players planning to enter the industry must have a high volume of stock in order to replenish supplies as they are purchased. Larger players like RadioShack have established

24 Consumer Electronics Stores in the US June Competitive Landscape Barriers to Entry continued distribution centers, which house the company s massive amounts of stock until a specific store requires it. Some other players aim to differentiate themselves from competitors by offering sophisticated custom installation services for products like their home entertainment products. The initial cost of establishing or purchasing a retail outlet and its inventory can be expensive and may be a barrier for new entrants. In addition, operators require a line of credit for the purchase of store inventory, which can be extensive. Retailers also need to establish relationships with suppliers to guarantee a consistent and reliable supply of quality products, which may be Barriers to Entry checklist Competition Concentration Life Cycle Stage Capital Intensity Technology Change Regulation & Policy Industry Assistance a barrier for new entrants. Wellconnected, existing retailers may also have exclusivity agreements with some wholesalers, straining new entrants ability to secure supplies of some merchandise. Level Medium Medium Decline Medium Medium Light Low SOURCE: Industry Globalization Level & Trend Globalization in this industry is Low and the trend is Steady Globalization measures the extent of foreign activity by domestic operators in this industry and the dominance of foreign operators in the domestic market. Most participants in this industry are American-owned and gain their revenue from domestic operations. However, some larger players in the industry, including Best Buy, derive a small portion of their revenue from international operations in Canada, Europe, China and Mexico. Most of the industry s products are manufactured overseas, and globalization in upstream industries is covered in the Vacuum, Fan & Small Household Appliance Manufacturing industry report (IBISWorld report 33521).

25 Consumer Electronics Stores in the US June Major Companies Best Buy Co. Inc. RadioShack Corporation Other Companies Major players (Market share) RadioShack Corporation 4.5% 51.5% Other Best Buy Co. Inc. 44.0% SOURCE: Player Performance Best Buy Co. Inc. Market share: 44.0% Headquartered in Richfield, MN, Best Buy Co. Inc. is a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. The company operates brick-and-mortar retail stores and websites in the United States under a variety of brand names, such as Best Buy, Magnolia Audio Video and Pacific Sales. As of fiscal 2013 (ending February 2013), the domestic segment accounted for about 76.6% of consolidated sales and is made up of the company s US stores, a call center and online operations. The international segment spans operations in Canada, Europe, China and Mexico. Best Buy has sought to increase its market share in appliances, as evidenced by its 2007 acquisition of Pacific Sales Kitchen and Bath Centers Inc. Pacific Sales specializes in massmarket and premium kitchen appliances, plumbing fixtures and home entertainment products that target builders and remodelers. In addition, Best Buy has attempted to shift its focus from its large-format stores to smaller stores with merchandise that is more focused on specific, high-margin product segments. The company s shifted focus came to partial fruition in 2012, with the opening of 128 Best Buy Mobile standalone stores. The company hopes to increase its profitability with these stores because they have lower overhead costs and products that are higher margin. This change in expansion strategy follows the industry trend of large-format stores transitioning to smaller stores, allowing companies to tap into urban markets. Because of this shift in focus, Best Buy closed three large-format stores in In fiscal 2013, the company plans to close another 50 large-format stores and open 100 Best Buy Mobile stores as part of a larger restructuring effort. Financial performance Best Buy s domestic revenue is estimated to have declined in the five years to fiscal 2013 at an average annual rate of 1.0% to $32.1 billion. Because of their economies of scale, Best Buy was well positioned to weather the recession. Consequently, company revenue grew strongly in fiscal 2009 and 2010, as Best Buy s low prices appealed to cashstrapped consumers. Further, Best Buy benefited from the fall of major competitor Circuit City in 2010 because it was able to gain a sizable portion of Circuit City s market share. Despite steady sales during the period, the company has faced increased competition from online and discount department stores, as well as a drop in HDTV revenue; consequently, Best Buy s domestic revenue is forecast decline 4.7% in fiscal Even as consumer sentiment improves, changing consumer preferences and the short life cycles of electronic products will continue to impact the company. Consumer interest has shifted away from big-ticket items such as televisions, gaming consoles and notebook computers, to mobile phones and tablets.

26 Consumer Electronics Stores in the US June Major Companies Player Performance continued Despite the success of Best Buy Mobile, revenue trouble caused by ongoing competition from online retailers, department stores, and declines in the sales of televisions, gaming consoles and notebook computers have still largely affected the company. These factors will translate to lower profit for the company in 2013, when profit is projected to be 3.3% of company revenue, down decreased from 5.0% of company revenue in 2008 to a projected 3.3% of company revenue in Best Buy Co. Inc. (domestic segment) financial performance Year* Revenue ($ million) (% change) Operating Income ($ million) (% change) , , , , , , , , , , ** 32, , *Year-end February; **Estimate SOURCE: ANNUAL REPORT AND IBISWORLD Player Performance RadioShack Corporation Market share: 4.5% Headquartered in Fort Worth, TX, RadioShack Corporation is one of the country s largest consumer electronics and specialty retailers. The company sells a range of electronic products through its RadioShack-branded store chains and nonbranded kiosk operations. As of its latest annual report (ended December 31, 2011), it operated 4,476 RadioShack stores across the United States, Puerto Rico and the US Virgin Islands. The company s product lines are categorized into three main platforms: mobility, signature and consumer electronics, RadioShack Corporation (domestic, industry-specific segment) financial performance Year Revenue ($ million) (% change) Net Income ($ million) (% change) , , , , , , SOURCE: ANNUAL REPORT

27 Consumer Electronics Stores in the US June Major Companies Player Performance continued accounting for 50.6%, 31.2% and 18.2% of industry revenue respectively. After undergoing consolidation efforts and efficiency gains, the company is estimated to have had 34,000 employees in Financial performance In the five years to 2013, RadioShack s revenue is expected to have declined at an average annual rate of 2.1% to $3.2 billion, with a 7.0% decline in During this year, operating income is estimated to fall 6.0%. Consumers have started demanding higher quantities of lower margin products, and this factor, combined with reduced prices, caused profit to fall a significant 21.5% in The company posted strong growth of 4.3% in 2010 as the economy started to improve after the recession. This growth was mainly driven by wireless sales as smartphones gained popularity among consumers. In fact, the company s inclusion of T-Mobile as a postpaid wireless carrier increased store sales during the first nine months of the year, though the company ceased carrying T-Mobile products in September Other Companies Holding a medium level of concentration, the majority of the Consumer Electronics Store industry is made up of small to medium-size retailers. To this end, IBISWorld estimates that more than 40,000 businesses will actively compete for market share in 2013, and nearly one half of these are expected to be nonemployers (stores without any hired employees). Among operators that do have hired workers, more than 60.0% have fewer than five employees. hh gregg inc. Estimated market share: 3.5% The small appliances and electronics company hh gregg inc. was founded in 1955 in Indianapolis, IN, where its main headquarters are still located. Formerly known as Gregg Appliances, hh gregg has been aggressively growing, allowing its revenue to grow strongly in the past five years to about $2.6 billion in The company s 208 stores are located in the eastern United States in states including Alabama, Florida, Illinois, Indiana, Ohio, and Wisconsin. The specialty retailer of home appliances, televisions, computers, consumer electronics and consumer electronics recently introduced mobile phones and accessories into its product mix. The company focuses primarily on appliances and electronics in the medium-to-high price ranges, and most of its sales come from video equipment and appliances. P.C. Richard & Son Estimated market share: 2.6% Founded in 1909, P.C. Richard & Son is the largest private appliance and consumer electronics retailer in the country. The company sells goods such as vacuums, televisions, cameras, computers, mobile electronics and video games in its 67 stores throughout New York, Connecticut, New Jersey and Pennsylvania. The company helped usher now-common appliances like irons, washing machines and microwave ovens in to US households with innovative marketing techniques. These techniques included offering free trials and displaying playing televisions in storefront windows, which is an enduring feature of small, consumer-electronics stores. P.C. Richard & Son is in its fourth generation under family ownership and operation. As a private company, available financial data is limited, but IBISWorld estimates that the company will earn $1.9 billion in revenue in 2013.

28 Consumer Electronics Stores in the US June Major Companies Other Companies continued Circuit City Company exited in 2009 In 2008, Circuit City accounted for about 13.7% of the industry s market share; however, a year later the company fell victim to the recession. After a disappointing 2008 holiday season and a significant slowdown in product demand, Circuit City filed for Chapter 11 bankruptcy protection and closed its last US store in early The company s consolidated revenue fell 5.5% to $11.7 billion in fiscal 2008, while the company generated a net loss of $319.9 million. The revenue decline was associated with a 7.7% drop in comparable-store sales, implying that the company was unable to maintain sales growth despite the addition of 40 new stores. Furthermore, the weak performance of existing stores reflected poor operating conditions due to low consumer sentiment. Today, the company operates as an online-only retailer owned by the Systemax group of companies. In December 2012, the website merged with Systemax s TigerDirect.com, an online discount-electronics retailer.

29 Consumer Electronics Stores in the US June Operating Conditions Capital Intensity Technology & Systems Revenue Volatility Regulation & Policy Industry Assistance Capital Intensity Level The level of capital intensity is Medium The Consumer Electronics Stores industry has a medium level of capital intensity, with about $0.18 spent on capital for every dollar spent on wages. Capital includes items like fixtures and fittings, cash registers and point-of-sale (POS) systems. This industry s capital expenditure is spent when operators open new stores, as facilities or equipment are replaced or when stores are renovated or upgraded with new checkout (POS) or inventory control systems. Over the past decade, the industry has undergone considerable change with the implementation of computer scanning technology. Its implementation simplified labor tasks and minimized the level of human error in processing purchases. POS Capital intensity Capital units per labor unit Economy Retail Trade Consumer Electronics Stores Dotted line shows a high level of capital intensity SOURCE: systems have enabled operators to computerize their inventory, resulting in better stock control. Tools of the Trade: Growth Strategies for Success New Age Economy Recreation, Personal Services, Health and Education. Firms benefit from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation. Investment Economy Information, Communications, Mining, Finance and Real Estate. To increase revenue firms need superior debt management, a stable macroeconomic environment and a sound investment plan. Labor Intensive Camera Stores Traditional Service Economy Wholesale and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore firms must use new technology or improve staff training to increase revenue growth. Hobby & Toy Stores Computer Stores Consumer Electronics Stores Old Economy Computer Agriculture and Manufacturing. Audio & Video Manufacturing Equipment Traded goods can be produced Manufacturing using cheap labor abroad. To expand firms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products. Capital Intensive Change in Share of the Economy SOURCE:

30 Consumer Electronics Stores in the US June Operating Conditions Capital Intensity continued Workers in this industry provide customer service, maintain store displays, process purchases and maintain computer systems. This industry places high emphasis on labor as stores require highly knowledgeable employees to assist consumers with specific questions about technical subjects such as energy efficiencies or product performance. Employees are also required to provide exceptional customer service. Unlike capital costs, labor costs are integral to a store s operations. Therefore, labor costs for this industry are considerably larger than capital expenditure. Capital intensity has decreased slightly over the past five years. For every dollar spent on wages in 2008, $0.19 was spent on capital. This is because the industry s capital investment in new stores, remodeled stores, new distribution facilities and information technology upgrades has slowed due to the recession. Technology & Systems Level The level of Technology Change is Medium As with most retailing industries, the Consumer Electronics Stores industry continues to adapt to selling via the internet. The larger industry players have established websites and offer merchandise for sale online. However, delivery of consumer electronics and appliances presents a large challenge for online operators. While smaller items (e.g. computer software and various electronic accessories) are not difficult to ship, the large and often fragile nature of most products offered in this industry (e.g. TVs and refrigerators) brings about concerns of delivery through mail carrier services. Most of the other technological improvements in the industry have enabled better management of operations and inventory. These improvements include computer scanning cash registers and automated inventory equipment. Technology at the checkout has led to computerized point of sale (POS) equipment that controls and records merchandising, distribution, sales and stock markdowns. Barcode scanning increases labor productivity, ensures greater control over the distribution of goods and reduces errors along the supply chain. Radio frequency identification (RFID) provides real-time information on inventory. The technology tracks products from the time they leave the assembly line to the time they leave the store by releasing continuous signals from a chip. These chips have been inserted in the product at the manufacturing stage and are monitored by a radio frequency receiver. RFID reduces shrinkage problems (e.g., shoplifting, paperwork errors, supplier fraud) and improves efficiency. Other prevention advancements used by retailers include closed circuit TV cameras, source tagging, signaturecapture technology (this is used at the POS terminal for credit card transactions), and fingerprint scanning systems that verify customer identities. Revenue Volatility Level The level of Volatility is Medium Due to the discretionary nature of products in the industry, demand is influenced by variations in disposable income and consumer sentiment levels. Consumers are price conscious; therefore, their purchase of appliances and consumer electronics depends on the level of income at their disposal. Demand is also affected by fluctuations in the level of consumer sentiment. Retail spending generally rises when consumers are more confident about their financial position. Prior to the recession, a modest growth in income and high consumer confidence in

31 Consumer Electronics Stores in the US June Operating Conditions Revenue Volatility continued the economy provided a steady stream of demand for retailers and aided the low increase in industry revenue. However, a decrease in these drivers in 2008 and 2009 resulted in steep revenue declines. Revenue is also affected by the expansion of industry product offerings at large department stores and by online retailers. In recent years, these external players have placed increasing pressure on the industry by offering consumers a broad range of products at competitive prices. This factor has offset some revenue growth during times of strong sales, while exacerbating declines during poor demand conditions. In the five years to 2013, the industry has exhibited moderate revenue volatility. Revenue declined as much as 11.3% in 2009, as the recession took hold. A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment. When a firm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly. Revenue volatility* (%) Volatility vs Growth 1, Hazardous Consumer Electronics Stores 0.1 Stagnant Blue Chip Five year annualized revenue growth (%) Rollercoaster * Axis is in logarithmic scale SOURCE: Regulation & Policy Level & Trend The level of Regulation is Light and the trend is Steady Operators of consumer electronics stores have kept an eye on changing environmental regulations and legislation over the past five years, though these actions do not have a direct effect on the industry s revenue. For example, industry operators anticipate tightened vehicle emissions standards and other energy-related mandates that may have an impact on costs incurred by the industry via merchandise delivery cost increases. Other issues being advocated by the Consumer Electronics Retailers Coalition, a nonprofit trade association, include consumer choice in cable access devices (as opposed to renting such devices from a service provider), product safety and energy and water efficiency. Generally speaking, regulations relevant to the retail sector vary by each state. States have enacted their own antitrust laws to ensure that the general public is provided with the best prices, quality and choice. Companies must comply with the Fair Labor Standards Act and various state laws governing matters such as minimum wage, overtime and other working conditions. Store owners must also comply with the provisions of the Americans with Disabilities Act of 1990, as amended, which generally requires that stores be accessible to customers with disabilities.