Cognizant Reports

Understanding U.S. Consumer

Electronics Retailing
Executive Summary
The U.S. consumer electronics (CE) retail industry
has endured severely fluctuating fortunes in
the last decade. A swiftly changing CE market
landscape, continually reshaped by the forces
of continuous product innovation and change, is
forcing the entire CE retail industry to confront
challenges across multiple fronts. These issues
include the following:

The advent of the frugal and sophisticated U.S.

consumer, thanks to the Great Recession.

Debilitating price wars fought by three distinct

retail trade formats discount vs. pure-play vs.
online retail.

Significant competitive advantage enjoyed by

online retailers due in part to lower overhead

and tax laws that have not caught up with the
new rules of the retail game.

Ever-changing and demanding millennial

consumer preferences.

consumer regardless of shopper location to

deliver the complete shopping experience.

Optimize retail floor space through increased

store inside of a store concepts and reduction
of future store size footprints.

Use in-store space for increased demonstra-

tion of connected shopper solutions, showing

how all elements of a complete basket can
work together prior to a shopper exiting the
premises.

Save precious capital and reduce operational

costs by embracing emerging service delivery

models to transition select commoditized
business processes to cloud computing-enabled
business process as a service (BPaaS).
U.S. GDP Growth Rate (%)

U.S. CE Industry Growth

vs. GDP Growth
Millions
$200,000

These forces have left CE retailers scrambling for

cover under their onslaught. In the recent past, we
have witnessed the bankruptcy of a large player,
Circuit City, as well as the less-than-stellar growth
of other key players. It is clear that CE retailers or
CE retail divisions of organizations such as Best
Buy, Target, Walmart, RadioShack, etc. will need
to re-evaluate and re-align their strategies to face
the new realities of the marketplace.
In our view, winning CE retailers must:

Create integrated channels a store without

boundaries that offer all capabilities to the

cognizant reports | december 2011

6%
4%

$175,000

2%
0%

$150,000

-2%
-4%

$125,000

-6%
$100,000

2006

2007

2008

2009

2010

2011

-8%

(estimated) (projected)

U.S. CE Industry Growth Rate

U.S. GDP Growth Rate (%)

Source: CEA 2011; U.S. Bureau of Economic Analysis;

Goldman Sachs Estimates 2011
Figure 1

The Current State of U.S. Electronics Retailing

Key
Categories

Key Product
Categories

Key
Retailers

Video Products
(Television, navigation
products, digital cameras and
accessories, digital camcorders
and accessories, e-Readers,
DVD and Blu-ray players, etc.)

Best Buy
Walmart
Costco
Sears
hhgregg
Amazon

TV market growth has diminished on category maturation,

Audio Products
(MP3 players and accessories,
home theater audio systems
and components, musical
instruments and mobile
electronics, etc.)

Best Buy
Walmart
Costco
Sears
hhgregg
Amazon

Stand-alone MP3 players have seen a significant dent in sales due to the

PC/Notebook/Netbook
(Related subscription service
commissions, hard drives,
networking equipment and
related accessories such
as printers.)

Best Buy
Apple
Dell
Walmart
Staples
Officemax
OfficeDepot
Amazon

Continuing margin erosion due to commoditization of category

Tablets

Apple
Best Buy
Amazon
RadioShack

Tablet market opportunity: FY12E $12B U.S. market (+50%).

Apple remains the leader in the tablet PC market with a 54% share.
RadioShack is expected to be the net winner due to its sharp over-index in

Mobile Phones and

Connections

Communications
service providers
Best Buy
Amazon
RadioShack

FY12E $34B U.S. market (+6%)

Estimated channel mix: 65% of total points of purchase

Appliances and
Small Electronics

Sears
Lowes
The Home Depot
Best Buy
hhgregg

$14B appliances industry.

Gaming Hardware
and Software
(DVDs, Blu-rays, CDs, digital
downloads and computer
software.)

Game Stop
Walmart
Best Buy
Amazon

FY12E $23.5B U.S. market (-2%).

$15B gaming software value chain.
15M trade-in units across industry.
$2B console-based market opportunity

Consumer
Electronics

Home Office

Characteristics
lack of catalyst from 3D/connected TVs.

TVs greater than 46 average size are expected to garner

55% of total sales in FY 2012.

TV barely re-emerges when penetration hits ~30%, as sales tend to flatten.

An estimated addressable market of 17M annual transactions/connections.
Largest percentage of all photos will be taken through digital still cameras,
at 51% in 2010, followed by mobile phone, at 42%.

adoption of phones as a personal music device. The dominant market

leader Apple has seen iPod sales decline 6% year-over-year and account
for less than 8% of Apples revenue.

(except Apple products) because of product proliferation and

product cycle time compression.

tablets vs. other more PC-centric competitors.

(77,000 in 2010) are direct channels.

Among indirect channels, retailers constitute 56% of the share.

For the first time, a majority (54%) of all new mobile phone handsets
purchased by U.S. consumers are smartphones.

Appliances

Entertainment

(console subscription points card + downloadable content).

Source: Cognizant Research Center analysis

Figure 2

The Market Landscape

The U.S. retail electronics market tallied revenues
of $180 billion in 2010 across five key categories:
consumer electronics (video and audio products);
home office (PCs, notebooks, netbooks, tablets,
mobile phones, etc.); appliances; entertainment
hardware and software (see Figures 1 and 2); and
services.
Total sales of the Top 10 electronics retailers
are expected to grow by 6% in 2011 to reach
$110 billion (see Figure 3). Absent Apples stellar
performance, the previous two business cycles
(2008-2010) have been characterized by anemic
revenue growth, the demise of Circuit City and
flatlining in the key category of TVs. After experi-

cognizant reports

encing market share gains following Circuit Citys

demise, the major players have essentially seen
flat growth a year after the fact, indicating that
revenue increases in 2009 for some major players
were purely a result of the redistribution of Circuit
City sales rather than incremental business gains
(see Figure 4, next page).
Reality struck in 2010 and continued in 2011, with
revenues of major players growing only by 4.5%;
marginal revenue growth was driven primarily by
new product introductions, such as tablets and
netbooks, and not from existing product lines, as
well as from an increase in store fronts and retail
floor space. It is clear that shifting consumption patterns and product distribution models,

Top 10 Players: Store-Based CE Retailing by Domestic Revenues

$40

Billions

$30
$20
$10
$0
Best Buy

Walmart

2008

2009

Apple

Staples

Game Stop

Target

Costco

Sam's Club RadioShack OfficeMax

2010

Source: Dealerscopes Top 101 CE Retailers, March 2011

Figure 3

especially from physical to online sales, have had

a major, across-the-board impact on the electronics retailing space.

Market Forces
We see four distinct forces that will cause further
upheaval in the industry landscape over the next
few years. The ability of current players to respond
nimbly to these challenges and seize opportunities arising from rapid change will be the key to
long-term competitive advantage. These forces
include: Consumer sophistication and frugality,
increased regulatory scrutiny, cut-throat competition and millennial consumer behavior (see
Figure 5).
Consumer Sophistication and Frugality
The shift of retailer-oriented product categories
from highly considered to near commodity
status (the result of increasing shopper sophistication) reduces the advantage of sales staff

in providing differentiated customer advice.

Furthermore, consumer reliance on third-party
intermediaries for offers and pricing information
threatens to convert retail stores into little more
than physical showrooms for online merchants.
Additionally, U.S. consumers continue to reel
from a depressed job market and rising prices,
especially in key consumption items such as
fuel. Conspicuous consumption is on the decline;
premium brand substitution with cheaper variants
and even postponement of consumption are the
order of the day. According to the Consumer Electronics Association, spending on CE products by
the average U.S. consumer household fell 14.5%
between 2009 and 2010, or $1,380 per household
in 2009 vs. $1,179 in 2010.1 Falling consumer
demand is also indicated by the recent uptick
in the U.S. savings rate, which has traditionally trended downward during the last few years
(see Figure 6, page 5).
Key operational challenges for CE retailers
include:

Market Share Gains:

The Circuit City Impact

Margins: Prices of key product categories like

TVs and PCs (notebook, netbook and desktop)

have consistently declined or remained at
bargain basement levels over the last few
years, creating pressure on margins for retailers.2 Sales of these products are essentially
replacement or extension sales, as these are
mature and near-ubiquitous categories. These
product categories typically have the highest
rate of high-margin warranty and services
attachments, which are also declining due to
flat sales, creating additional challenges for
retailers.

Retailer Dollar Share Increases by Category

(March December 2009)
Best Buy

Walmart

Flat-Panel TVs

5.2%

3.2%

Notebook PCs

5.5%

2.3%

Desktop PCs

4.7%

0.3%

Digital Cameras

5.5%

2.7%

Source: NPD Estimates

Figure 4

cognizant reports

Forces Shaping the U.S. CE Retail Industry

Forces

Drivers

Changes

Consumer frugality: Consum-

Consumer
sophistication
and frugality

ers trading down (moving

away from premium brands),
opting for lower priced
alternatives, deferring
discretionary spend.
Deleveraging: Declining
consumer debt levels,
higher savings rates, lower
consumption.
Availability of shopping
technologies for instant price
discrimination, product information and comparison.

E-Fairness momentum.
State budget deficit and
Regulations

uncollected sales tax.

Price differentiation across

Competition
(Online vs.
store-based
retailers, making margin a
bigger risk
than market
share.)

categories between
online and store-based retail
models.
Walmart has a strong advantage based on its size, giving
it massive economies of scale
in procurement and, hence,
the ability to pass on price
benefits to the consumer.

Emergence of Gen X and

Shifting client
preference
and changing
product cycle

millennials as core franchise.

Multi-channel strategy for
consistent customer exerience acoss channels.
E-commerce: Reduce selling
cost, compete on price and
maintain margins.

Impact

Anemic growth in the sector

with negative comp sales.

Fall in operating margins
across some key categories.
SG&A cost escalation due
to higher store expenses,
promotional offer lead by price
competition.
Multi-channel strategy: Reduce selling cost, compete on
price and maintain margins.

Five states have enacted laws

in recent years (NY, RI, NC, OK,

CO); four states passed laws in
2011 in the first two quarters
(IL, SD, CA, AR); and 20 states
have legislation or similar
discussions underway.

Pricing pressure.
Margin reduction.
Focus on supply chain and

Change in revenue mix from lower margin notebook PCs, TVs,

etc. to higher margin products like smartphones, tablets.

Selling these from small-format stores, which cuts down selling

costs and paves the way for greater attachment of services to the
sale, leading to higher margins.
Importance of the online channel for store-based retailers with
an expanded assortment, giving them pricing power.
Customers using offline retail establishments as storefronts for
online sellers.

Level playing field for brick-and-mortar and online retailers.

Online-only assortment by store-based retailers.
Online-only assortment also disaffects offline shoppers because
of the presence of different pricing strategies.

Online retailers have been able to take advantage of the con-

sumer frugality phenomenon in a big way by competing on price.

Large discounters like Walmart have taken full advantage of

failure of Circuit City by garnering market share in key categories.

right assortment.

Relationship with Apple for iPad and iPhone sales will drive the
ecosystem.

Reducing product cycle lead times to increase pressure on

accurate demand forecasting to get in and out of products before

margins are completely eradicated. The proliferation of new
products necessitates buyers to increase their market awareness
and research in order to identify where to place their bets.
Working capital must be released sooner for non-working capital
by exploring non-traditional methods to move product through
third-party providers or intermediaries.
Pricing pressure makes it increasingly difficult to wring savings
out of the value chain at the same speed at which retailers are
experiencing pricing pressure, thereby enhancing margin erosion
trends.
Compared with baby boomers,
Gen X and Gen Y are:
More tech/finance savvy.
More autonomous in their
purchasing decisions.
Demand greater transparency.
Demand tailored service offerings; desire a seamless/social
purchasing experience.

Retailers need to:

Invest in client-friendly IT platforms.
Offer a solid online transactional platform.
Build a mobile strategy.
Create a social purchasing experience.

Source: Cognizant Research Center Analysis

Figure 5

Large CE retailers are, therefore, moving their

revenue mix from lower-margin items such
as notebook PCs and TVs, to higher-margin
products like smartphones and tablets. They
are also selling these devices from small-format
stores, which reduces selling costs and paves
the way for greater attachment of services to
the sale, leading to higher margins.

and store-within-a-store), increased promotional spend and the need to hire knowledgeable workers who can engage customers in a
sales and advisory relationship rather than a
strict sales interaction.
Additionally, customers are increasingly using
a mix of offline and digital channels for transactions, which requires retailers to offer more
options, increasing the importance of an
effective online channel for brick-and-mortarbased retailers.

Distribution:

Consumer electronics retailers

face rising expenses primarily due to expansion
into different retail formats (stand-alone store

cognizant reports

U.S. Personal Savings Rate

Competing for Hearts and Pocketbooks

CE retailing has always been fraught with difficult
issues, but the challenges are even greater
today. For example, CE retailers face increasing
competition from discounters (e.g., Walmart)
that can leverage massive economies of scale,
both on the purchase side (by striking deals on
bulk purchases) and on the consumer side, by
realigning floor space dedicated to electronics
according to demand (typically during the holiday
shopping season).

%
15
12.5
10
7.5
5
2.5
0
1950

1960

1970

1980

1990
Year

2000

2010

2020

U.S. Recessions

Source: U.S. Department of Commerce, Bureau of

Economic Analysis
Figure 6

Essentially, the quest for consistently improving

financial performance compels single-channel
retailers to move to a multi-channel strategy. In
spite of real-world concerns such as negative
spill-over and cannibalization, the advantage of
low-cost access to new consumer segments and
potential increases in customer retention and
loyalty a multichannel strategy makes sense
from the vantage point of a retail CFO.

A new and interesting dynamic is also at play:

The increasing inability to distinguish competitor
from supplier. Apple is a case in point; it designs
and manufactures some of the most in-demand
consumer electronics products in the U.S. and
sells them through its chain of speciality stores
and online. Apples policy of limited distribution,
especially in the new and highly lucrative tablet
market, effectively penalizes other retailers
outside the Apple ecosystem.
Since their introduction in 2010, tablets have
proved to be a disruptive force in the computing
segment; market researchers predict that tablet
shipments will outstrip PC shipments by 2011 and
result in the reduction of notebook PC sales by
30% to 35% in 2011 and 2012, successively (see
Figure 7). Retailers with significant PC revenue
streams will be negatively impacted by this
momentum switch (see Figure 8).3

Global Unit Shipments of Desktop PCs and Notebooks

vs. Smartphone and Tablets

Global Unit Shipments (B)

800,000

Q4 2010 Inflection Point

Smartphones + Tablets > Total PCs 2013

600,000
400,000
200,000
0

2005

2006

Desktop PCs

2007

2008

Notebook PCs

2009

Smartphones

Note: Notebook PCs include Netbooks

Source: Katy Huberty, Ehud Gelblum, Morgan Stanley Research
Data and Estimates as of 2/11
Figure 7

cognizant reports

2010

2011E

2012E

Tablets

2013E

Impact of Tablet Sales on

CE Retailers

Apple has created a storm in the CE market

and bounced back from a 5.3% decline in
revenue growth from CE sales in 2009 to
a 51.5% spike in 2010. How did Apple pull
it off? The answer: The Apple ecosystem.
For instance:

4.3%

%
5

Apples Stranglehold

4
3

-1

0.1%

0%
0.1%

0.4%

0.1%

0.3%

0.1%

0.1%
0.1%
0%

0.1%

Best Buy Office Depot OfficeMax

2010

Apples deep and intricate supply chain

relationship. In the case of the iPad, this
results in a $50 to $60 advantage in
input costs for the memory and display
components of the iPad 2 over competing
tablet products.

- 0.2%

- 0.1%

0.3%

2011E

Radio
Shack

Staples

2012E

Source: Company data, IDC, Goldman Sachs Equity

Research, 2011
Figure 8

A limited distribution policy of products

to retailers, especially at launch, when
the hype cycle for the product is typically
at its highest. This creates a shortfall of
in-demand stock at other retail establishments.

Online retailers have been in play for some time

now. However, it is only in the last few years that
they have emerged as viable challengers to brickand-mortar behemoths. Online retailers have been
able to take advantage of the consumer frugality
phenomenon in a significant manner by competing
primarily on price (see Figure 9, page 7). Sales of
CE products online grew by 17% in 2010, to $13.6
billion (see Figure 10). This represents only 14%
of the total market for CE products, suggesting
significant room for growth.

The carefully-crafted Apple Store purchase experience, with its focus on

maximizing customer convenience, from
feature education, to purchase, to product
activation.
These factors make it exceedingly challenging for other retailers to grab a slice
of Apples share of the pie, especially in
the tablet market.

Impending Regulatory Changes

Online sellers enjoy the twin advantages of lower
overhead and tax laws that have not caught up
with the new rules of the retail game. Most states
in the U.S. do not have a sales tax regime in place
to extract revenue from online sales. This has
created an unequal playing field between offline
and online players.
As Best Buy CEO Brian J. Dunn said in a recent
investor presentation, Taxing all online sites
equally would be a major, but not complete,
closure in the pricing difference. It will also significantly hurt small, online retailers that compete
completely on price.4
Moves are afoot to address this gap, with five
states passing E-Fairness laws in recent years,
four states doing the same in 2011 and another 20
states holding discussions on similar legislation
(see Figure 11, page 8).
Millennial Consumer Behavior
The always-on, always-connected lifestyle of
millennial consumers is driving frenetic change in
cognizant reports

product lifecycles, with time-to-market for product

releases compressed to levels unforeseen just a
few years ago. This has also created demand for
a slew of allied services, ranging from connectivity solutions and service plans, to accessories.
The millennial pattern of media consumption on
multiple connected devices has also required
pure-play retailers to get into the content delivery
business. Millennials are now armed with instant
access to pricing information across channels and
also rely on online reviews much more than traditional consumers for their purchase decisions.
This leads to a lower reliance on store employees
as a preferred source of product information.
The social purchasing experience, with the
ability to engage in instant feedback and rapid
price-comparison, will be a significant factor in
the market dynamic for CE products, especially
among millennials.

Average Price Differential vs. Amazon

Average price dierence above Amazon*
30%

28%
19%

Walmart

Target

Specialty
Retailers

* Assumes no sales tax on Amazon purchases and free shipping;

Source: Wells Fargo. Photo: Getty Images.

An Amazon fulfillment center

Sources: Faber Novel, The Hidden Empire 2011

Figure 9

Winning Strategies

extensively use shopping technology, whether

PCs for detailed research or smartphones for
rapid, on-the-go comparison (see Figure 12).
Price, convenience and selection are the most
important factors for millennials to arrive
at an optimal purchase decision. This demographic does not distinguish between channels
but expects an interactive, consistent and
seamless experience across channels.

To succeed, CE retailers must consider the

following plans of attack:

Engage profitably with millennial consumers:

The defining characteristic of millennials is
that as digital natives, they adapt to computer
and Internet technologies very swiftly. They
are demanding and technologically savvy,
craving instant access to product information and reviews from third-party sources,
especially from their social networks. They

CE retailers will need to embrace unified

strategies across processes such as supply

Online Commerce Gaining Share vs. Offline

%
e-Commerce as % of Total Retail Sales

e-Commerce penetration
4% in Q2, 2010

6
5
4

Mobile e-Commerce
penetration

3
2
1
0
Q3:00

Q3:01

Q3:02

Q3:03

e-Commerce penetration

Q3:04

Q3:05

Q3:06

Q3:07

Q3:08

Q3:09

Q3:10

Linear trendline (y=0.094x + 0.9895, R 2=0.9599)

Note: Adjusted for eBay by adding back eBay U.S. gross merchandise volume.
Source: U.S. Department of Commerce (Q2-2010), Morgan Stanley Research
Figure 10

cognizant reports

Q3:11

Q3:12

E-Fairness Momentum: 2011 State Activity

$260B in online revenue and $26B in annual uncollected sales tax,
or 13% of states budget gap.

Five states have enacted

laws in recent years
(NY, RI, NC, OK, CO)
Four states passed laws
in 2011 (IL, SD, AR, CA)
Twenty have legislation or
similar discussions underway

Laws already enacted

Legislation or other
activity underway
Law enacted 2011
No state sales tax
Amazon collects sales tax

Source: Best Buy Investor Presentation 2011; Wells Fargo Report on The State and Local Budget Squeeze, Feb 2011
Figure 11

chain, merchandising, pricing, inventory

management and customer service to
ensure a boundary-less store experience
across channels. The mobile store is one way
of interacting with consumers to keep them
engaged. It will play a significant part in the
future of CE retail, by ensuring uniformity of
product information across all channels, be it
in-store, online or mobile.

Mobile Shopping Preferences

If a retailer offered the following services for
a mobile device, indicate how likely you would
be to use them on a scale of 1 to 10.
4.6
5.3

Coupons
3.7

Product and
price lookup

4.7

6.3

5.9

7.3

CE retailers will need to invest significantly in

equipping their sales forces with the latest and
greatest sales tools and technologies, as traditional hard sales pitches do not cut it with millennials, who in many cases have access to as
much information as sales staff do. Enabling
sales staff with technology will deliver an
even more meaningful in-store interaction, as
evidenced by recent research:5

7.0

4.3
4.9
5.7
6.4
3.9
4.7
5.7
6.7
3.9
4.6
5.8
6.7
4.2
4.7
5.5
6.1
3.8
4.4
5.5
6.2
3.6
4.2
5.1
6.0

Ability to instantly
use loyalty program
awards/offers
Product comparisons
Store locator
Ability to place
an order
View your status/
points in the store
loyalty program
Ability to receive location,
personalization or
time-based product offers
0

Very unlikely to use

>> 57%

of shoppers want improved interactions with store associates.

>> 58%

of shoppers want engagement with

store associates in the aisle, with mobile
check-out capabilities.

>> 64% of shoppers want store associates with

mobile technology to provide improved instore customer service.

Very likely to use

N Emerging Elders N Baby Boomers N Gen X N Gen Y

Adapt

to emerging distribution formats:

Research indicates that U.S. online retail sales
will directly account for 8% of total retail sales
and, more importantly, will influence 53% of
all retail sales by 2014 (see Figure 13). Mobile
commerce is likely to deliver $17 billion in sales
by that time (see Figure 14).

Source: Retail Info Systems/Cognizant Technology

Solutions 2011 Shopper Experience Study
Figure 12

cognizant reports

U.S. Consumer Shopping Online

U.S. Mobile Commerce Growth

Two research firms project rapid growth in
mobile commerce revenue from 2009 to 2015.

The number of consumers researching or

shopping online is steadily growing and
will surpass 200 million by 2015, eMarketer
says. But the research firm says most of the
projected sales growth will come from
veteran Web shoppers.

172.3M

178.5M

184.3M

189.6M

Billions

$25

$23.8

$20

195.4M

$17.5

201.1M

$15

$11.7

$10

163.1M

87.1%

87.5%

88.1%

89.4%

88.7%

90.1%

$5
$0

$7.4

2009

85.0%

2009

2010

$2.4

$1.2
$1.2

$2.1
2010

$5.8

$3.9

$3.2
2011

2012

2013

Coda Research Consultancy

2011

2012

2013

2014

2015

Percentage of shoppers expected to be

veteran Web shoppers

Source: eMarketer, March 2011

Figure 13

It is, therefore, imperative for CE retailers to not

only embrace but also get full leverage from
emerging mobile and maturing e-commerce
channels. Online and mobile channels will allow
retailers that rely primarily on their physical
presence to remain visible across the spectrum,
push promotions, provide detailed product information and be visible to consumers when they
engage in price comparison. Online channels
also enable retailers to play the price game
with pure-play e-tailers by stocking online-only
product assortments and one-upping them with
buy online and pick up in-store options, an
advantage that appeals to impulse buyers who
crave instant gratification.
The introduction and rapid growth of innovative
products such as tablets, e-readers and next-generation smart devices needs to be addressed by
retailers. They can accomplish this by appearing
omnipresent across multiple sales channels,
such as offering consumers allied content,
accessories and services in the most convenient
manner possible. Persistent connectedness to
the customer is the cornerstone of this strategy
a CE retailer can conceivably even be agnostic
about store format, as long as the customer is
engaged across all fronts. Best Buy, for example,
is attempting to create traction for its smaller
store formats, most notably by expanding its Best

cognizant reports

$10.7

$8.0

$4.4

2014

2015

ABI Research

Source: Coda Research Consultancy & ABI Reasearch.

Figure 14

Best Buy Store Strategy:

The Move to Small Box
$910

50
40

40.5

39.7
32.5

30

910
39
32.7

38.6

38.7
31.6
27.6

$888

31.3

880

$878

20

895

865

10
$856

$851

850

Average store size ('000 sq ft)

New store average size ('000 sq ft)

Sales per sq ft (in $)

Source: Best Buy Company Report;
GS Equity Research 2011
Figure 15

Buy Mobile stand-alone stores, which is expected

to increase the retail giants presence and allow
it to reduce its large-format store footprint
(see Figure 15).

Technology and Global Sourcing

The rapid growth of smartphone connections
(overall) and the high-percentage of influential
millennials already riding the always-connected wave make it imperative for CE retailers to
prepare for a time when a large proportion of
their customers will be digitally enabled. They will

Key Third-Party Services

for U.S. Retailers

The Future of Shopping

IT consulting

In the future, CE retail establishments

will eliminate all boundaries between
the retailer and the shopper. All capabilities, (pricing, order management, fulfillment, customer service, returns, etc.)
will be available to consumers regardless
of location (aisle three, checkout, in the
home, jogging in Central Park).

58.2%

Web site development, maintanance or hosting

54.5%

Custom application development

45.5%

Packaged app implementation or integration

37.3%

Mobility initiatives

36.4%

Social media initiatives

35.5%

Telecommunications or networking

30.0%

Training

29.1%

Application maintenance

29.1%

Data center operations

23.6%

Business process outsourcing

Consumer behavior purchase patterns

and offers will be integrated across
channels. Mobile offers will be distributed
to shoppers in real-time based on time,
location, customer segment and category
position. To get there, CE retailers must
consider the following:

12.7%

Entire IS organization

5.5%

Energy reduction and/ or sustainability

4.6%

Currently not outsourcing

3.6%

Percent of respondents

Cloud-enabled

shopper interaction:
Retailers must integrate third-party
offers and services in order to reduce
shopper decision models and re-establish their authority as a credible source
of information. These services can be
delivered through the cloud and linked
to a shoppers mobile device to deliver
a contextual shopping experience.

Source: RIS Retail Tech Study, April 2011

Figure 16

Key Retail Software Architectures

Best-of-breed software

57.7%

Integrated solutions suites

52.3%

In-house IT resources to develop software

Third-party services to help
develop software

content across channels:

Products and promotions must be
consistent, leveraging emerging capabilities in content and digital asset
management.

44.1%
33.3%

On-demand or SaaS models

Cloud computing solutions

Linking

50.4%

15.3%

Adoption

of mobile devices for

store associates to enable a richer
shopper interaction: Equip storebased employees with mobile devices
to improve in-aisle customer service
and check-out capabilities.

Percent of respondents

Source: RIS Retail Tech Study, April 2011

Figure 17

need to create services that allow such connected

customers to get a view of hitherto unseen store
processes, such as inventory status, deeper and
richer product information and, ultimately, even
self-checkout.
Today, the top two categories of external sourcing
of technology for CE retailers are IT consulting and
Web site development/maintenance/hosting (see
Figure 16). Mobility services and social media integration, meanwhile, are rapidly gaining ground.
Deployment of these relatively new and quickly
evolving technology domains requires expertise
that is not available in-house. Other best-practice

cognizant reports

technology areas that CE retailers will need to

implement to stay viable are:

Next-generation customer analytics that

incorporate data gathered from social media.

Predictive supply chain management

solutions.

Customer

management suites that enable

consistent customer recognition, tracking and
rewards across channels.

Multi-channel fulfilment technologies.

10

CE retailers must also find ways to manage costs,

a difficult challenge given persistent low margins
across key categories and the heavy investment
needed in new technologies to keep pace with
their always-connected consumers. A key to
the cost management conundrum would be the
conversion of Cap-Ex to Op-Ex by using cloud
services for SaaS (software as a service) and
BPaaS (business process as a service). Significant
cost reductions could also be gained by transitioning some commoditized business processes
to a BPaaS model (see Figure 17).
We believe CE retailers will find these services
attractive, even indispensible, due to factors such
as on-demand delivery, compression of implementation time, withdrawal of supporting infrastructure, negation of application testing, reduced
training, reduction in ongoing business process
change management and greater accounting
transparency for such costs.
Another important element of cloud-based
services is the scalability factor, allowing retailers
to quickly extend solutions in new stores or
channels, as well as rapidly withdraw from stores
or channels that are not performing at desired
levels. Another attraction is the utility concept
of pay-as-you-use, which enables adopters to
variabalize their cost base.

The Road Ahead

CE retailers are uniquely positioned to capitalize
on emerging opportunities across the technology
and business spectrum to fortify their operating
models, as well as profitably engage and stay
connected with consumers.
Winning players will do the following:
1. Become retail format agnostic and use
multiple channels to stay connected with their
customers, profitably.
2. Focus on and fortify their unique strengths
(e.g., superior customer service, lowest price).
3. Partner and source talent and services globally
in a virtualized environment and rein in their
expenses.
4. Save precious capital and variabalize their cost
base by actively adopting new cloud-enabled
service delivery models such as BPaaS.
In short, CE retailers need to reinvent their
corporate operating models and dig deeper
competitive moats to profitably tap into the fast
emerging future of the CE retail market.

Footnotes
1

American Households Spend More Than $1,100 Annually on Consumer Electronics,

CEA Study Finds, Consumer Electronics Association, May 23, 2011.
http://www.ce.org/Press/CurrentNews/press_release_detail.asp?id=12100

In fact, gross margins for TVs have dropped from 27% in 2007 to 22% in 2009, while PC margins have
remained stagnant at around the 13% mark, according to Goldman Sachs Equity Research, April 2011.

According to Goldman Sachs research, RadioShack is expected to be the net winner among other sellers
from the proliferation of tablet technology, as the company derives significantly lower sales from PCs
and notebooks, which are being cannibalized by tablet sales. Analysts feel there will be a net neutral
effect for Best Buy in 2011, as its core PC business continues to suffer from tablet cannibalization, but its
competency in wireless and close relationship with Apple could help it absorb this disruption.

Best Buy Investor Relations: Presentations, Best Buy Analyst Day 2011.
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-presentations

2011 Shopper Experience Survey, Retail Info Systems News/Cognizant Technology Solutions, June 2011.

cognizant reports

11

Resources
Consumer Tech Revenues Will Reach Record High in 2011, Consumer Electronics Association,
January 2011. http://www.ce.org/Press/CurrentNews/press_release_detail.asp?id=12047
Best Buy and Walmart Capture Two-Thirds of Circuit Citys Total Dollar Share, NPD, April 2010.
http://www.npd.com/press/releases/press_100412.html
Forever Frugal? 2010 U.S. Consumer Survey Confirms Persistent Frugality, Booz & Co., 2010.
http://www.booz.com/media/uploads/Forever_Frugal.pdf
Inside the Apple Store, Dealerscope, June 2011. http://www.dealerscope.com/article/
inside-applestore/1#utm_source=dealerscope.com&utm_medium=search_results_page&utm_
campaign=search_result
U.S. Online Retail Forecast, 2009 To 2014: Online Retail Hangs Tough For 11% Growth in A Challenging
U.S. Economy, Forrester Research, Inc., November 2010. http://www.internetretailer.com/2010/03/08/
e-retail-will-influence-53-of-purchases-by-2014-forrester-says
The State and Local Budget Squeeze, Wells Fargo Securities Research, February 2011.
https://www.wellsfargoresearch.com/disclosures/Documents/TRACS%20vol%205%20-%20RETAIL.pdf
Best Buy: Framing the Issues: Newer Stores Smaller than the Average Box, Suggesting Need for
Downsizing, GS Equity Research, April 2011.
2011 Retail Technology Trends Study, RIS News, April 2011.
http://risnews.edgl.com/retail-research/2011-Retail-Technology-Trends-Study71782

Author
Nitin Bajaj
Cognizant Research Center

Research Analyst
Durgesh Patel
Cognizant Research Center

Subject Matter Expert

Steven Skinner, Vice President, Cognizant Business Consulting, Retail and Consumer Goods Practice

About Cognizant
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