Unlike Best Buy, hhgregg Quickly Changes Its Focus
March 8, 2009 was the last day Circuit City operated brick and mortar stores. Two months later Systemax purchased its intellectual properties including its website. In late 2012, Systemax announced the end of circuitcity.com as it was folded into tigerdirect.com along with compusa.com.
During Circuit City’s final weeks as a brick and mortar operator, many retail prognosticators were oozing predictions of how the loss of Circuit City would result in the biggest gain for Best Buy. It seems that Best Buy believed its own press clippings. Unfortunately a rosy prediction doesn’t always result in a like outcome. Rather than offering incentives to gain Circuit City loyalists, a number of Best Buy stores which had survived nearby Circuit City locations, simply offered Circuit City shoppers a simple hand-made sign offering Geek Squad services to those in need of repairs or tech help. This stingy effort at outreach almost seemed a form of gloating rather than the offering of a helping hand. Here, like many industry experts had thought, it was assumed that Best Buy had eliminated its most threatening competitor.
At the same time a regional consumer electronics chain was beginning to flex its competitive, expansion muscles. hhgregg was operating a chain of 76 locations in March 2008, according to Chain Store Guide’s database of Consumer Electronics Retailers. By March 2009, the month of Circuit City’s official demise, CSG indicates that hhgregg had expanded to a chain of 100 stores with eyes toward further aggressive expansion and several vacated Circuit City stores in its sights. The next year we see that hhgregg opened 26 more locations. During the first three quarters of the current fiscal year the company opened 20 locations to reach a total of 228 stores.
Until recently, this growth had pretty much been trouble-free. While Best Buy has suffered a series of troubling financial reports, for the most part hhgregg continued on its merry road of continuous, unobstructed growth.
Through recent years Best Buy twice announced decisions to shrink its prototype, sublet parts of stores and dismiss its long-time, homegrown CEO after a scandal involving inappropriate behavior with an associate. At the time of the dismissal Best Buy was reporting all kinds of financial pressures and suffering from competition seemingly from all sides, including Amazon, distinct regional and local CE retailers with a wide and loyal following including on the web, and discounters including Walmart, Target and Costco. Despite these corporate threats, many still believe that only questionable social behavior actually forced former CEO Brian Dunn and ultimately company funder Dick Schulze to leave the company. Apparently weak financials and a shrinking loss of market share didn’t frighten the company’s board of directors.
Unfortunately recent hhgregg financials have disappointed its board as well as Wall Street. What is the hhgregg response? The company has quickly decided to redirect its energies and focus on products it sees as currently more viable. Thus video is being deemphasized as a category as are innovative consumer electronics. In the current market this is simply a most logical move. For years this industry has been plagued by a pricing model which welcomes new and especially innovative products at notably high initial prices. As the uniqueness of the product wears off or the innovativeness becomes more commonplace, prices fall at a fairly rapid rate, often as the next latest and greatest comes in at the top of the pricing and margin charts, likely awaiting their fall. And so on and so on.
For much of this century this cycle stabilized as innovative CE products came to be perceived as necessities and replaced technologies that consumers saw as, inferior, outdated, inefficient and much more costly to operate. Here DVD players replaced VCRs and even the software was seen as a major upgrade and necessity. Shipping charges were reduced with the more efficient compact discs and the phenomenon of movie rentals by mail came into its own. Digital cameras replaced film cameras as tiny digital cards efficiently replaced film. Groundbreaking large, flat screen TVs replaced long-conventional tube TVs. Laptops essentially supplanted desktops which are now challenged by tablets. Cellphones replaced landlines for many consumers and now smart phones increasingly gain market share.
Once dominant cell phone manufacturer Nokia is struggling for survival and hoping that its Windows based smartphone can save the company. Research In Motion just changed its corporate name to BlackBerry as it issued its newest BlackBerry smartphone. Through this latest device, the company hopes to approach its one-time dominant position in the fierce competition that has consumers clamoring for the greatest in smartphone technology. This, after numerous corporate missteps which almost eliminated RIMs once most popular smart devices from the scene.
All of these new technologies began their retail lives at high retail prices with accompanying high markups. As consumers increasingly perceived the values offered by new technologies as necessities the diminishing returns formula for prices and margins stabilized and allowed dealers to ride a wave of strong profits even as the economy became troubled.
Now however, innovation in these technologies has slowed. 3D TVs have yet to take hold and smart TVs have limitations which have slowed down consumer interest. New TV models offer only small increases in size. The craze for ever greater numbers of megapixels in cameras has essentially stopped as it is now understood that somewhat fewer megapixels allow for greater flexibility in in-camera processors and ultimately in better quality photos. At the same time camera prices have come way down from the pioneer days when consumers paid $100 per megapixel and typically purchased a 3MP device with 3X optical zoom.
As new-technology no longer strongly leads consumer demand in CE, prices and margins have aggressively dropped, then drooped. Recognizing this, hhgregg has decided to deemphasize these once stalwarts of the industry in favor of dissimilar product categories which the company already sells with expertise. The company recently announced plans to focus on promoting its established strength in major appliances and relatively new categories, furniture and fitness equipment. This in lieu of video and ‘innovative consumer electronics’. The company expects to continue to refine its product mix as sales results and feedback from its highly trained sales force indicate.
Hhgregg’s response to a financial slump has been rapid and logical in terms of dealing with natural market conditions. The company sees no need to go to the added expense of diminishing its store prototype or going to a less costly/less knowledgeable sales force a la Best Buy. When hhgregg first entered the Florida market, a manager told me the retailer would if anything undercut the prices of the nearby Best Buy. I asked how they could manage this with a highly paid sales force. The manager remarked that Best Buy sends its profits to corporate, while hhgregg proudly pays for expertise of performance.