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Best Buy vs. Wal-Mart: Is There Room for Both, and Others?
Published : April 01, 2009 in Knowledge@Wharton

Is this a David vs. Goliath battle, or should it be more of a truce in an industry where, rather than one foe slaying the other, there is space for both adversaries to co-exist? With the demise of electronics retailer Circuit City, Best Buy and Wal-Mart Stores are ramping up their struggle to capture added share of the consumer electronics market. Best Buy, the nation's largest specialty electronics retailer, is positioning itself as the provider of quality service and sales help to consumers who are often baffled by high-tech merchandise. The company is focusing on more high-end products and new interactive features to differentiate itself from the big box atmosphere at Wal-Mart.

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Wal-Mart, the world's largest retailer, is using its dominance in the global marketplace across all retail categories to position itself as the low-price option in consumer electronics. The chain also has massive reach with consumers. More than 800 million people a year visit a Wal-Mart store to buy everything from groceries to sweatpants to gasoline. In what's seen as an attempt to compete with Best Buy, the chain is adding a new emphasis on electronics, including big-screen televisions and Apple iPods. Wharton faculty and industry analysts say instead of fighting to the death, both stores can coexist if they follow clearly defined strategies focusing on service and price. "The good thing, the consumer electronics market is big enough that one doesn't have to grow at the expense of the other. They can find their own space in the marketplace and prosper together," says Wharton marketing professor John Zhang. He and other Wharton faculty predict that Best Buy is likely to gain the biggest share of sales left behind following Circuit City's liquidation in March. After 60 years in business, the Richmond, Va.-based retailer, which peaked with 700 stores and sales of roughly $10 billion, became a casualty of the current recession and competition from Best Buy, Wal-Mart and others. Best Buy, which announced surprisingly strong full-year sales of $45 billion in March, has 900 U.S. stores and is the nation's largest electronics seller, according to market research firm NPD. Wal-Mart, with total sales of more than $400 billion, does not release figures for individual categories, but NPD estimates that last year it was second to Best Buy in consumer electronics sales, followed by Dell, Circuit City and Apple. Wharton marketing professor David Reibstein suggests that the key to Best Buy's strategy is offering customers knowledgeable service from a youthful, somewhat geeky sales force identified by their bright blue shirts. He imagines how a consumer confused about whether to buy an LCD or plasma screen television would approach the purchase: "Would I go to Wal-Mart or Best Buy? The answer -- no doubt about it -- is Best Buy. Best Buy has the personnel who [can] help advise me." Some customers, he says, may have the product knowledge to feel confident about buying electronics off the shelf at Wal-Mart. But for those who do not buy new electronics frequently, the purchase is viewed as expensive and risky. "It's critical to get the right item; for [those people], it turns out that Best Buy is the only real option," says Reibstein. Another key element of Best Buy's strategy is that it will install some of today's more complex electronics systems. "For the person who is risk adverse, the depth of knowledge and the Geek Squad format at Best Buy is a really important component."
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Even though Wal-Mart's price is not always lowest. you have to go where the rubber meets the road.Best Buy vs. To do that. according to Zhang. along with an extraordinary customer reach that allows the mass merchandiser to compete effectively in nearly every retail category.upenn. just about every cashier is pushed to try and sell a warranty. "As leverage. Raju. but also many models of LG's home appliances and computers. For example. says Wharton marketing professor Peter Fader. 'Let's go see what's going on at the Best Buy. price becomes a key consideration. they really care about what the customer is doing and thinking. another Wharton marketing professor. Zhang notes that an emphasis on service over price led to the demise of Tweeter. the high-end electronics retailer whose 94 stores closed in December. "If I were Best Buy. Under this strategy. the big issue is simply size. given that Wal-Mart is moving in a big way into consumer electronics. As a result. Because electronics retailers typically earn strong profit margins from warranty sales. Best Buy could use micromarketing techniques to compete against Wal-Mart on a store-by-store basis depending on the distance of its stores to the nearest Wal-Mart. particularly during the current economic downturn. Zhang says. and Others?: Knowledge@Wharton (http://knowledge. For example. Meanwhile. Wal-Mart: Is There Room for Both. Wal-Mart can say. says Zhang.'" Best Buy should try to avoid the common retailing mistake of making its stores totally uniform. The same dynamic could work against Best Buy in its bid to compete with Wal-Mart.wharton." In that case. Zhang notes.                    Page 2 of 3  . and consumers were unwilling to pay a premium for Tweeter. but don't recall the many more times the product performs as expected. Wal-Mart has the scale and a huge customer base. with consumers typically visiting two or three stores before making a purchase. he notes. Zhang advises Best Buy to provide a different product mix than its discount competitor. said the key to his company's success will be engaging the customer. For a consumer buying a new television set. electronics technology tends to become commoditized over time. Wal-Mart carries considerable sway with manufacturers because it can offer floor space for myriad products. I would be a little bit scared. who started there as a salesman. Wal-Mart Wal-Mart's strong suit is its highly efficient operations and supply chain systems. not the differences in technology that are hard to detect to the untrained eye. Wal-Mart can offer space to LG for consumer electronics. although he says consumers generally pay more for that protection than the risk of a product failure justifies. Tweeter lost ground to Best Buy because.cfm?articleid=2191) Jagmohan S. people will look for price. Best Buy could develop multiple versions of products with manufacturers that are just slightly different. the sales floor.   All materials copyright of the Wharton School of the University of Pennsylvania. Best Buy might even be considered a "lifestyle" retailer that is able to build a level of intimacy with customers by matching them with gadgets that suit their particular psychic needs.' You don't go to Wal-Mart for fun. Zhang adds. To compete against Wal-Mart. Best Buy's incoming chief executive officer. "At Best Buy. he says. Best Buy stores closer to Wal-Mart locations should pay closer attention to price than others with the luxury of more distance. Consumers. Wal-Mart's scale and its ability to negotiate sharp prices from its vendors will allow it to pass along substantial savings to shoppers. 'I will let you sell other products if you give me a better deal on the electronics." In an interview with the Wall Street Journal on March 16. most consumers perceive that to be the case. [They] want to make their stores into an experience so that customers might say on a Saturday night. thereby making Wal-Mart the choice for price-conscious consumers. Raju adds. Brian Dunn. in that way.edu/article. "Given that most of the technology is more or less standardized. their model numbers could not be directly compared to those at Wal-Mart by shoppers online. "We want our stores to morph into a series of experiences." The consumer electronics market is fluid. tend to buy electronics warranties because they remember vividly when a product breaks." Advantage. points out that Best Buy warranties are another way to comfort nervous buyers.

"The truth is the bulk of retail is outside the channel. he says.flat panel televisions -. Wal-Mart could offer points for purchases of groceries and other necessities that could then be put toward big-ticket consumer electronics. in its early days. For multiple copies. The company falls short in developing these connections because it does not emphasize loyalty programs. The retail distribution channel may also change as manufacturers become a more important part of the landscape -. Fader says most consumers are not likely to do that. "That's what happened at Circuit City.edu/article. could become even stronger if it began to develop better relationships with customers." He says that technology enthusiasts are willing to buy at a specialty retailer and pay top prices early in the product cycle. "That would be mutually assured destruction. a managing director at Stifel Nicolaus Equity Research. and Others?: Knowledge@Wharton (http://knowledge. That's what makes their business thrive. as another potential factor. Best Buy. GPS systems are a current business driver.'" Raju points out that the fate of all electronics retailers is often tied to the product development cycle in the industry.                    Page 3 of 3  . lightweight netbooks and reading devices. and then drive across town to actually purchase items at Wal-Mart. "Now they are banking on wide screen televisions. in practice. Buying from the Blue Shirts While it is possible that customers will soak Best Buy salespeople for their knowledge and advice. but they couldn't match the relationship aspects of Best Buy.com P.   All materials copyright of the Wharton School of the University of Pennsylvania. posters or plaques." He points to Fry's Home Electronics. "This overall market has room for multiple players at the table. The world is big enough for both of them. which is still about five years away. he suggests." This is a single/personal use copy of Knowledge@Wharton. (212) 221-9595 x407. The danger is if one company attempts to beat the other at its own game. similar to the Kindle. rose to its current position largely on sales of the DVD player which. the guarantee would not have a major impact on margins because. please contact PARS International: reprints@parsintl. they are willing to buy them at mass merchandisers or online. e-prints. all retailers in the consumer electronics space must concentrate on their strengths and ignore the noise from competitors. should avoid the temptation to cut prices at the expense of quality sales and service. says Fader." says Zhang. which has opened its own chain of popular retail outlets. As a general rule. people think it's awkward to say.Best Buy vs." According to faculty.wharton. They would do well to ignore each other. For example. they can expand the total pie rather than carve it up. the West Coast retailer with a strong reputation for service. David Schick. [which brings] people into their stores. which provides peace of mind to consumers most concerned with price. custom reprints. "If they each stick to their piece and grow that piece.will continue to become commoditized through 2010. Wal-Mart: Is There Room for Both. "Wal-Mart has a lot of touch points with the consumer and could leverage the other products in the store.cfm?articleid=2191) In addition. Target. He predicts the next revolutionary technology will be 3DTV. Best Buy should make the most of its low-price guarantee. Costco. As time goes on and many consumers become familiar with a new gadget.following the same path as Apple. and Wal-Mart should be wary of adding salespeople who are not fully able to compete with Best Buy." Best Buy. "If you really develop a relationship with a good salesperson in the blue shirt. only about 15% of shoppers actually make an effort to find a lower price elsewhere. who follows Best Buy. says the last major product -. 'I'll come back next week' or 'I'll think about it some more. was a breakthrough product that initially cost up to $800. he says. there's going to be a strong inclination to buy from that person. especially if they find ways to draw lines among each other. BJ's Wholesale and online retailer Amazon are also competitors in the consumer electronics market. for its part. Often.upenn." Fader states. says Zhang. They rely on innovation from the industry. Wal-Mart. At the same time. Schick points out that while Best Buy and Wal-Mart are the leaders in consumer electronics retailing. while low-priced. It was neither fish nor fowl. are potential big sellers in the future. They couldn't match the efficiency of Wal-Mart.

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