Description
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.
Understanding U.S. Consumer
Electronics Retailing
•
Cognizant Reports
Executive Summary
The U.S. consumer electronics (CE) retail industry
has endured severely fuctuating 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.
Signifcant 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.
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
consumer regardless of shopper location to
deliver the complete shopping experience.
Optimize retail foor 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).
cognizant reports | december 2011
U.S. CE Industry Growth
vs. GDP Growth
$200,000
$175,000
$150,000
$125,000
$100,000
2006 2007 2008 2009 2010
(estimated)
2011
(projected)
6%
4%
2%
0%
-2%
-4%
-6%
-8%
U.S. CE Industry Growth Rate
U.S. GDP Growth Rate (%)
U.S. GDP Growth Rate (%)
Millions
Source: CEA 2011; U.S. Bureau of Economic Analysis;
Goldman Sachs Estimates 2011
Figure 1
The Market Landscape
The U.S. retail electronics market tallied revenues
of $180 billion in 2010 across fve key categories:
consumer electronics (video and audio products);
home offce (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 Apple’s stellar
performance, the previous two business cycles
(2008-2010) have been characterized by anemic
revenue growth, the demise of Circuit City and
fatlining in the key category of TVs. After experi-
encing market share gains following Circuit City’s
demise, the major players have essentially seen
fat 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
foor space. It is clear that shifting consump-
tion patterns and product distribution models,
cognizant reports 2
Key
Categories
Key Product
Categories
Key
Retailers
Characteristics
Consumer
Electronics
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, •
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 ?atten. •
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%.
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 signi?cant dent in sales due to the •
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 Apple’s revenue.
Home Offce
PC/Notebook/Netbook
(Related subscription service
commissions, hard drives,
networking equipment and
related accessories such
as printers.)
Best Buy
Apple
Dell
Walmart
Staples
Of?cemax
Of?ceDepot
Amazon
Continuing margin erosion due to commoditization of category •
(except Apple products) because of product proliferation and
product cycle time compression.
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 •
tablets vs. other more PC-centric competitors.
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 •
(77,000 in 2010) are direct channels.
Among indirect channels, retailers constitute 56% of the share. •
For the ?rst time, a majority (54%) of all new mobile phone handsets •
purchased by U.S. consumers are smartphones.
Appliances
Appliances and
Small Electronics
Sears
Lowe’s
The Home Depot
Best Buy
hhgregg
$14B appliances industry. •
Entertainment
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 •
(console subscription points card + downloadable content).
Source: Cognizant Research Center analysis
Figure 2
The Current State of U.S. Electronics Retailing
cognizant reports 3
especially from physical to online sales, have had
a major, across-the-board impact on the electron-
ics 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 opportuni-
ties 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 com-
petition 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 sophis-
tication) 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 Elec-
tronics 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 tradition-
ally trended downward during the last few years
(see Figure 6, page 5).
Key operational challenges for CE retailers
include:
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 retail-
ers.
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
fat sales, creating additional challenges for
retailers.
Top 10 Players: Store-Based CE Retailing by Domestic Revenues
Best Buy Walmart Apple Staples Game Stop Target Costco Sam's Club RadioShack OfficeMax
$40
$30
$20
$10
$0
B
i
l
l
i
o
n
s
? 2008 ? 2009 ? 2010
Source: Dealerscope’s Top 101 CE Retailers, March 2011
Figure 3
Market Share Gains:
The Circuit City Impact
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
4 cognizant reports
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.
Distribution:
•
Consumer electronics retailers
face rising expenses primarily due to expansion
into different retail formats (stand-alone store
and store-within-a-store), increased promo-
tional spend and the need to hire knowledge-
able 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 offine and digital channels for trans-
actions, which requires retailers to offer more
options, increasing the importance of an
effective online channel for brick-and-mortar-
based retailers.
Forces Drivers Changes Impact
Consumer
sophistication
and frugality
Consumer frugality: Consum- •
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 infor-
mation and comparison.
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: Re- •
duce selling cost, compete on
price and maintain margins.
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 of?ine retail establishments as storefronts for •
online sellers.
Regulations
E-Fairness momentum. •
State budget de?cit and •
uncollected sales tax.
Five states have enacted laws •
in recent years (NY, RI, NC, OK,
CO); four states passed laws in
2011 in the ?rst two quarters
(IL, SD, CA, AR); and 20 states
have legislation or similar
discussions underway.
Level playing ?eld for brick-and-mortar and online retailers. •
Online-only assortment by store-based retailers. •
Online-only assortment also disaffects of?ine shoppers because •
of the presence of different pricing strategies.
Competition
(Online vs.
store-based
retailers, mak-
ing margin a
bigger risk
than market
share.)
Price differentiation across •
categories between
online and store-based retail
models.
Walmart has a strong advan- •
tage based on its size, giving
it massive economies of scale
in procurement and, hence,
the ability to pass on price
bene?ts to the consumer.
Pricing pressure. •
Margin reduction. •
Focus on supply chain and •
right assortment.
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.
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 dif?cult to wring savings •
out of the value chain at the same speed at which retailers are
experiencing pricing pressure, thereby enhancing margin erosion
trends.
Shifting client
preference
and changing
product cycle
Emergence of Gen X and •
millennials as core franchise.
Multi-channel strategy for •
consistent customer exeri-
ence acoss channels.
E-commerce: Reduce selling •
cost, compete on price and
maintain margins.
Compared with baby boomers,
Gen X and Gen Y are:
More tech/?nance savvy. •
More autonomous in their •
purchasing decisions.
Demand greater transparency. •
Demand tailored service offer- •
ings; 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
Forces Shaping the U.S. CE Retail Industry
55
Global Unit Shipments of Desktop PCs and Notebooks
vs. Smartphone and Tablets
2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Q4 2010 Inflection Point
Smartphones + Tablets > Total PCs 2013
800,000
600,000
400,000
200,000
0
G
l
o
b
a
l
U
n
i
t
S
h
i
p
m
e
n
t
s
(
B
)
? Desktop PCs ? Notebook PCs ? Smartphones ? Tablets
Note: Notebook PCs include Netbooks
Source: Katy Huberty, Ehud Gelblum, Morgan Stanley Research
Data and Estimates as of 2/11
Figure 7
cognizant reports
Essentially, the quest for consistently improving
fnancial 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.
Competing for Hearts and Pocketbooks
CE retailing has always been fraught with diffcult
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 foor space dedicated to electronics
according to demand (typically during the holiday
shopping season).
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. Apple’s 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 signifcant PC revenue
streams will be negatively impacted by this
momentum switch (see Figure 8).
3
U.S. Personal Savings Rate
15
12.5
10
7.5
5
2.5
0
1950 1960
U.S. Recessions
1970 1980
Year
1990 2000 2010 2020
%
Source: U.S. Department of Commerce, Bureau of
Economic Analysis
Figure 6
cognizant reports 6
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 brick-
and-mortar behemoths. Online retailers have been
able to take advantage of the consumer frugality
phenomenon in a signifcant 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
signifcant room for growth.
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 feld between offine
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 signif-
icantly hurt small, online retailers that compete
completely on price.”
4
Moves are afoot to address this gap, with fve
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
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 connectiv-
ity 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 tra-
ditional 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 signifcant factor in
the market dynamic for CE products, especially
among millennials.
Impact of Tablet Sales on
CE Retailers
-1
0
1
2
3
4
5
Best Buy
0
.3
%
0
.1
%
0
.1
%
0
.1
%
0
%
0
%
0
.1
%
0
.1
%
0
.4
%
4
.3
%
%
0
.1
%
0
.1
%
0
.3
%
-
0
.1
%
-
0
.
2
%
Staples Radio
Shack
OfficeMax Office Depot
? 2010 ? 2011E ? 2012E
Source: Company data, IDC, Goldman Sachs Equity
Research, 2011
Figure 8
Apple’s Stranglehold
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:
Apple’s 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.
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 establish-
ments.
The carefully-crafted Apple Store pur-
chase experience, with its focus on
maximizing customer convenience, from
feature education, to purchase, to product
activation.
These factors make it exceedingly chal-
lenging for other retailers to grab a slice
of Apple’s share of the pie, especially in
the tablet market.
cognizant reports 77
Winning Strategies
To succeed, CE retailers must consider the
following plans of attack:
Engage proftably with millennial consumers:
•
The defning 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 informa-
tion and reviews from third-party sources,
especially from their social networks. They
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 demo-
graphic does not distinguish between channels
but expects an interactive, consistent and
seamless experience across channels.
CE retailers will need to embrace unifed
strategies across processes — such as supply
Average Price Differential vs. Amazon
30%
28%
19%
Walmart Target Specialty
Retailers
Average price di?erence above Amazon*
* 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
Online Commerce Gaining Share vs. Offine
Q3:00 Q3:01 Q3:02 Q3:03 Q3:04 Q3:05 Q3:06 Q3:07 Q3:08 Q3:09 Q3:10 Q3:11 Q3:12
e
-
C
o
m
m
e
r
c
e
a
s
%
o
f
T
o
t
a
l
R
e
t
a
i
l
S
a
l
e
s
7
6
5
4
3
2
1
0
%
Mobile e-Commerce
penetration
e-Commerce penetration Linear trendline (y=0.094x + 0.9895, R 2=0.9599)
e-Commerce penetration
4% in Q2, 2010
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 8
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 signifcant part in the
future of CE retail, by ensuring uniformity of
product information across all channels, be it
in-store, online or mobile.
CE retailers will need to invest signifcantly in
equipping their sales forces with the latest and
greatest sales tools and technologies, as tradi-
tional hard sales pitches do not cut it with mil-
lennials, 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
57% of shoppers want improved interac-
>
tions 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 in-
store customer service.
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 infuence 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).
Mobile Shopping Preferences
0 2 4 6 8
6.0
6.2
6.1
6.7
6.7
6.4
7.0
7.3
5.1
5.5
5.5
5.8
5.7
5.7
5.9
6.3
4.2
4.4
4.7
4.6
4.7
4.9
4.7
5.3
3.6
3.8
4.2
3.9
3.9
4.3
3.7
4.6
Emerging Elders Baby Boomers Gen X Gen Y
Coupons
Product and
price lookup
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
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.
Very likely to use Very unlikely to use
Source: Retail Info Systems/Cognizant Technology
Solutions 2011 Shopper Experience Study
Figure 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
cognizant reports 99
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 infor-
mation 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 gratifcation.
The introduction and rapid growth of innovative
products such as tablets, e-readers and next-gen-
eration 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
Buy Mobile stand-alone stores, which is expected
to increase the retail giant’s 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 infuential
millennials already riding the always-connect-
ed 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
Best Buy Store Strategy:
The Move to Small Box
50
40
30
20
10
0
910
895
880
865
850
40.5
32.5
$910
$888
39.7
32.7
39
31.6
27.6
38.7 38.6
31.3
$856
$878
$851
? 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
U.S. Mobile Commerce Growth
$1.2
$1.2
$3.2
$3.9
$5.8
$8.0
$10.7
$2.4
$2.1
$4.4
$7.4
Coda Research Consultancy ABI Research
$11.7
$17.5
$23.8
$25
$20
$15
$10
$5
$0
2009 2010 2011 2012 2013 2014 2015
Two research firms project rapid growth in
mobile commerce revenue from 2009 to 2015.
Billions
Source: Coda Research Consultancy & ABI Reasearch.
Figure 14
U.S. Consumer Shopping Online
163.1M
2009 2010 2011 2012 2013 2014 2015
172.3M
178.5M
184.3M
189.6M
195.4M
201.1M
85.0%
87.1%
87.5%
88.1%
88.7%
89.4%
90.1%
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.
Percentage of shoppers expected to be
veteran Web shoppers
Source: eMarketer, March 2011
Figure 13
cognizant reports 10
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 inte-
gration, 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
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 fulflment technologies.
•
The Future of Shopping
In the future, CE retail establishments
will eliminate all boundaries between
the retailer and the shopper. All capabili-
ties, (pricing, order management, fulfll-
ment, customer service, returns, etc.)
will be available to consumers regardless
of location (aisle three, checkout, in the
home, jogging in Central Park).
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:
Cloud-enabled shopper interaction:
•
Retailers must integrate third-party
offers and services in order to reduce
shopper decision models and re-estab-
lish their authority as a credible source
of information. These services can be
delivered through the cloud and linked
to a shopper’s mobile device to deliver
a contextual shopping experience.
Linking content across channels:
•
Products and promotions must be
consistent, leveraging emerging capa-
bilities in content and digital asset
management.
Adoption of mobile devices for
•
store associates to enable a richer
shopper interaction: Equip store-
based employees with mobile devices
to improve in-aisle customer service
and check-out capabilities.
Key Third-Party Services
for U.S. Retailers
IT consulting
Web site development, maintanance or hosting
Custom application development
Packaged app implementation or integration
Mobility initiatives
Social media initiatives
Telecommunications or networking
Training
Application maintenance
Data center operations
Business process outsourcing
Entire IS organization
Energy reduction and/ or sustainability
Currently not outsourcing
58.2%
54.5%
45.5%
37.3%
36.4%
35.5%
30.0%
29.1%
29.1%
23.6%
12.7%
5.5%
4.6%
3.6%
Source: RIS Retail Tech Study, April 2011
Figure 16
Key Retail Software Architectures
Best-of-breed software
Integrated solutions suites
In-house IT resources to develop software
Third-party services to help
develop software
On-demand or SaaS models
Cloud computing solutions
57.7%
52.3%
50.4%
44.1%
33.3%
15.3%
Source: RIS Retail Tech Study, April 2011
Figure 17
Percent of respondents
Percent of respondents
cognizant reports 11 11
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
2
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.
3
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 signifcantly 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.
4
“Best Buy Investor Relations: Presentations,” Best Buy Analyst Day 2011.
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-presentations
5
“2011 Shopper Experience Survey,” Retail Info Systems News/Cognizant Technology Solutions, June 2011.
CE retailers must also fnd ways to manage costs,
a diffcult 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). Signifcant
cost reductions could also be gained by transi-
tioning some commoditized business processes
to a BPaaS model (see Figure 17).
We believe CE retailers will fnd these services
attractive, even indispensible, due to factors such
as on-demand delivery, compression of imple-
mentation time, withdrawal of supporting infra-
structure, 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 proftably engage and stay
connected with consumers.
Winning players will do the following:
Become “retail format agnostic” and use 1.
multiple channels to stay connected with their
customers, proftably.
Focus on and fortify their unique strengths 2.
(e.g., superior customer service, lowest price).
Partner and source talent and services globally 3.
in a virtualized environment and rein in their
expenses.
Save precious capital and variabalize their cost 4.
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 proftably tap into the fast
emerging future of the CE retail market.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member of
the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
World Headquarters
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Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
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© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
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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
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 City’s Total Dollar Share,” NPD, April 2010.
http://www.npd.com/press/releases/press_100412.html
“Forever Frugal? 2010 U.S. Consumer Survey Confrms 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-infuence-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
doc_270404756.pdf
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.
Understanding U.S. Consumer
Electronics Retailing
•
Cognizant Reports
Executive Summary
The U.S. consumer electronics (CE) retail industry
has endured severely fuctuating 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.
Signifcant 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.
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
consumer regardless of shopper location to
deliver the complete shopping experience.
Optimize retail foor 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).
cognizant reports | december 2011
U.S. CE Industry Growth
vs. GDP Growth
$200,000
$175,000
$150,000
$125,000
$100,000
2006 2007 2008 2009 2010
(estimated)
2011
(projected)
6%
4%
2%
0%
-2%
-4%
-6%
-8%
U.S. CE Industry Growth Rate
U.S. GDP Growth Rate (%)
U.S. GDP Growth Rate (%)
Millions
Source: CEA 2011; U.S. Bureau of Economic Analysis;
Goldman Sachs Estimates 2011
Figure 1
The Market Landscape
The U.S. retail electronics market tallied revenues
of $180 billion in 2010 across fve key categories:
consumer electronics (video and audio products);
home offce (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 Apple’s stellar
performance, the previous two business cycles
(2008-2010) have been characterized by anemic
revenue growth, the demise of Circuit City and
fatlining in the key category of TVs. After experi-
encing market share gains following Circuit City’s
demise, the major players have essentially seen
fat 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
foor space. It is clear that shifting consump-
tion patterns and product distribution models,
cognizant reports 2
Key
Categories
Key Product
Categories
Key
Retailers
Characteristics
Consumer
Electronics
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, •
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 ?atten. •
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%.
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 signi?cant dent in sales due to the •
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 Apple’s revenue.
Home Offce
PC/Notebook/Netbook
(Related subscription service
commissions, hard drives,
networking equipment and
related accessories such
as printers.)
Best Buy
Apple
Dell
Walmart
Staples
Of?cemax
Of?ceDepot
Amazon
Continuing margin erosion due to commoditization of category •
(except Apple products) because of product proliferation and
product cycle time compression.
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 •
tablets vs. other more PC-centric competitors.
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 •
(77,000 in 2010) are direct channels.
Among indirect channels, retailers constitute 56% of the share. •
For the ?rst time, a majority (54%) of all new mobile phone handsets •
purchased by U.S. consumers are smartphones.
Appliances
Appliances and
Small Electronics
Sears
Lowe’s
The Home Depot
Best Buy
hhgregg
$14B appliances industry. •
Entertainment
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 •
(console subscription points card + downloadable content).
Source: Cognizant Research Center analysis
Figure 2
The Current State of U.S. Electronics Retailing
cognizant reports 3
especially from physical to online sales, have had
a major, across-the-board impact on the electron-
ics 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 opportuni-
ties 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 com-
petition 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 sophis-
tication) 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 Elec-
tronics 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 tradition-
ally trended downward during the last few years
(see Figure 6, page 5).
Key operational challenges for CE retailers
include:
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 retail-
ers.
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
fat sales, creating additional challenges for
retailers.
Top 10 Players: Store-Based CE Retailing by Domestic Revenues
Best Buy Walmart Apple Staples Game Stop Target Costco Sam's Club RadioShack OfficeMax
$40
$30
$20
$10
$0
B
i
l
l
i
o
n
s
? 2008 ? 2009 ? 2010
Source: Dealerscope’s Top 101 CE Retailers, March 2011
Figure 3
Market Share Gains:
The Circuit City Impact
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
4 cognizant reports
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.
Distribution:
•
Consumer electronics retailers
face rising expenses primarily due to expansion
into different retail formats (stand-alone store
and store-within-a-store), increased promo-
tional spend and the need to hire knowledge-
able 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 offine and digital channels for trans-
actions, which requires retailers to offer more
options, increasing the importance of an
effective online channel for brick-and-mortar-
based retailers.
Forces Drivers Changes Impact
Consumer
sophistication
and frugality
Consumer frugality: Consum- •
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 infor-
mation and comparison.
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: Re- •
duce selling cost, compete on
price and maintain margins.
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 of?ine retail establishments as storefronts for •
online sellers.
Regulations
E-Fairness momentum. •
State budget de?cit and •
uncollected sales tax.
Five states have enacted laws •
in recent years (NY, RI, NC, OK,
CO); four states passed laws in
2011 in the ?rst two quarters
(IL, SD, CA, AR); and 20 states
have legislation or similar
discussions underway.
Level playing ?eld for brick-and-mortar and online retailers. •
Online-only assortment by store-based retailers. •
Online-only assortment also disaffects of?ine shoppers because •
of the presence of different pricing strategies.
Competition
(Online vs.
store-based
retailers, mak-
ing margin a
bigger risk
than market
share.)
Price differentiation across •
categories between
online and store-based retail
models.
Walmart has a strong advan- •
tage based on its size, giving
it massive economies of scale
in procurement and, hence,
the ability to pass on price
bene?ts to the consumer.
Pricing pressure. •
Margin reduction. •
Focus on supply chain and •
right assortment.
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.
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 dif?cult to wring savings •
out of the value chain at the same speed at which retailers are
experiencing pricing pressure, thereby enhancing margin erosion
trends.
Shifting client
preference
and changing
product cycle
Emergence of Gen X and •
millennials as core franchise.
Multi-channel strategy for •
consistent customer exeri-
ence acoss channels.
E-commerce: Reduce selling •
cost, compete on price and
maintain margins.
Compared with baby boomers,
Gen X and Gen Y are:
More tech/?nance savvy. •
More autonomous in their •
purchasing decisions.
Demand greater transparency. •
Demand tailored service offer- •
ings; 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
Forces Shaping the U.S. CE Retail Industry
55
Global Unit Shipments of Desktop PCs and Notebooks
vs. Smartphone and Tablets
2005 2006 2007 2008 2009 2010 2011E 2012E 2013E
Q4 2010 Inflection Point
Smartphones + Tablets > Total PCs 2013
800,000
600,000
400,000
200,000
0
G
l
o
b
a
l
U
n
i
t
S
h
i
p
m
e
n
t
s
(
B
)
? Desktop PCs ? Notebook PCs ? Smartphones ? Tablets
Note: Notebook PCs include Netbooks
Source: Katy Huberty, Ehud Gelblum, Morgan Stanley Research
Data and Estimates as of 2/11
Figure 7
cognizant reports
Essentially, the quest for consistently improving
fnancial 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.
Competing for Hearts and Pocketbooks
CE retailing has always been fraught with diffcult
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 foor space dedicated to electronics
according to demand (typically during the holiday
shopping season).
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. Apple’s 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 signifcant PC revenue
streams will be negatively impacted by this
momentum switch (see Figure 8).
3
U.S. Personal Savings Rate
15
12.5
10
7.5
5
2.5
0
1950 1960
U.S. Recessions
1970 1980
Year
1990 2000 2010 2020
%
Source: U.S. Department of Commerce, Bureau of
Economic Analysis
Figure 6
cognizant reports 6
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 brick-
and-mortar behemoths. Online retailers have been
able to take advantage of the consumer frugality
phenomenon in a signifcant 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
signifcant room for growth.
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 feld between offine
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 signif-
icantly hurt small, online retailers that compete
completely on price.”
4
Moves are afoot to address this gap, with fve
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
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 connectiv-
ity 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 tra-
ditional 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 signifcant factor in
the market dynamic for CE products, especially
among millennials.
Impact of Tablet Sales on
CE Retailers
-1
0
1
2
3
4
5
Best Buy
0
.3
%
0
.1
%
0
.1
%
0
.1
%
0
%
0
%
0
.1
%
0
.1
%
0
.4
%
4
.3
%
%
0
.1
%
0
.1
%
0
.3
%
-
0
.1
%
-
0
.
2
%
Staples Radio
Shack
OfficeMax Office Depot
? 2010 ? 2011E ? 2012E
Source: Company data, IDC, Goldman Sachs Equity
Research, 2011
Figure 8
Apple’s Stranglehold
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:
Apple’s 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.
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 establish-
ments.
The carefully-crafted Apple Store pur-
chase experience, with its focus on
maximizing customer convenience, from
feature education, to purchase, to product
activation.
These factors make it exceedingly chal-
lenging for other retailers to grab a slice
of Apple’s share of the pie, especially in
the tablet market.
cognizant reports 77
Winning Strategies
To succeed, CE retailers must consider the
following plans of attack:
Engage proftably with millennial consumers:
•
The defning 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 informa-
tion and reviews from third-party sources,
especially from their social networks. They
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 demo-
graphic does not distinguish between channels
but expects an interactive, consistent and
seamless experience across channels.
CE retailers will need to embrace unifed
strategies across processes — such as supply
Average Price Differential vs. Amazon
30%
28%
19%
Walmart Target Specialty
Retailers
Average price di?erence above Amazon*
* 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
Online Commerce Gaining Share vs. Offine
Q3:00 Q3:01 Q3:02 Q3:03 Q3:04 Q3:05 Q3:06 Q3:07 Q3:08 Q3:09 Q3:10 Q3:11 Q3:12
e
-
C
o
m
m
e
r
c
e
a
s
%
o
f
T
o
t
a
l
R
e
t
a
i
l
S
a
l
e
s
7
6
5
4
3
2
1
0
%
Mobile e-Commerce
penetration
e-Commerce penetration Linear trendline (y=0.094x + 0.9895, R 2=0.9599)
e-Commerce penetration
4% in Q2, 2010
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 8
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 signifcant part in the
future of CE retail, by ensuring uniformity of
product information across all channels, be it
in-store, online or mobile.
CE retailers will need to invest signifcantly in
equipping their sales forces with the latest and
greatest sales tools and technologies, as tradi-
tional hard sales pitches do not cut it with mil-
lennials, 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
57% of shoppers want improved interac-
>
tions 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 in-
store customer service.
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 infuence 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).
Mobile Shopping Preferences
0 2 4 6 8
6.0
6.2
6.1
6.7
6.7
6.4
7.0
7.3
5.1
5.5
5.5
5.8
5.7
5.7
5.9
6.3
4.2
4.4
4.7
4.6
4.7
4.9
4.7
5.3
3.6
3.8
4.2
3.9
3.9
4.3
3.7
4.6
Emerging Elders Baby Boomers Gen X Gen Y
Coupons
Product and
price lookup
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
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.
Very likely to use Very unlikely to use
Source: Retail Info Systems/Cognizant Technology
Solutions 2011 Shopper Experience Study
Figure 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
cognizant reports 99
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 infor-
mation 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 gratifcation.
The introduction and rapid growth of innovative
products such as tablets, e-readers and next-gen-
eration 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
Buy Mobile stand-alone stores, which is expected
to increase the retail giant’s 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 infuential
millennials already riding the always-connect-
ed 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
Best Buy Store Strategy:
The Move to Small Box
50
40
30
20
10
0
910
895
880
865
850
40.5
32.5
$910
$888
39.7
32.7
39
31.6
27.6
38.7 38.6
31.3
$856
$878
$851
? 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
U.S. Mobile Commerce Growth
$1.2
$1.2
$3.2
$3.9
$5.8
$8.0
$10.7
$2.4
$2.1
$4.4
$7.4
Coda Research Consultancy ABI Research
$11.7
$17.5
$23.8
$25
$20
$15
$10
$5
$0
2009 2010 2011 2012 2013 2014 2015
Two research firms project rapid growth in
mobile commerce revenue from 2009 to 2015.
Billions
Source: Coda Research Consultancy & ABI Reasearch.
Figure 14
U.S. Consumer Shopping Online
163.1M
2009 2010 2011 2012 2013 2014 2015
172.3M
178.5M
184.3M
189.6M
195.4M
201.1M
85.0%
87.1%
87.5%
88.1%
88.7%
89.4%
90.1%
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.
Percentage of shoppers expected to be
veteran Web shoppers
Source: eMarketer, March 2011
Figure 13
cognizant reports 10
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 inte-
gration, 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
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 fulflment technologies.
•
The Future of Shopping
In the future, CE retail establishments
will eliminate all boundaries between
the retailer and the shopper. All capabili-
ties, (pricing, order management, fulfll-
ment, customer service, returns, etc.)
will be available to consumers regardless
of location (aisle three, checkout, in the
home, jogging in Central Park).
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:
Cloud-enabled shopper interaction:
•
Retailers must integrate third-party
offers and services in order to reduce
shopper decision models and re-estab-
lish their authority as a credible source
of information. These services can be
delivered through the cloud and linked
to a shopper’s mobile device to deliver
a contextual shopping experience.
Linking content across channels:
•
Products and promotions must be
consistent, leveraging emerging capa-
bilities in content and digital asset
management.
Adoption of mobile devices for
•
store associates to enable a richer
shopper interaction: Equip store-
based employees with mobile devices
to improve in-aisle customer service
and check-out capabilities.
Key Third-Party Services
for U.S. Retailers
IT consulting
Web site development, maintanance or hosting
Custom application development
Packaged app implementation or integration
Mobility initiatives
Social media initiatives
Telecommunications or networking
Training
Application maintenance
Data center operations
Business process outsourcing
Entire IS organization
Energy reduction and/ or sustainability
Currently not outsourcing
58.2%
54.5%
45.5%
37.3%
36.4%
35.5%
30.0%
29.1%
29.1%
23.6%
12.7%
5.5%
4.6%
3.6%
Source: RIS Retail Tech Study, April 2011
Figure 16
Key Retail Software Architectures
Best-of-breed software
Integrated solutions suites
In-house IT resources to develop software
Third-party services to help
develop software
On-demand or SaaS models
Cloud computing solutions
57.7%
52.3%
50.4%
44.1%
33.3%
15.3%
Source: RIS Retail Tech Study, April 2011
Figure 17
Percent of respondents
Percent of respondents
cognizant reports 11 11
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
2
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.
3
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 signifcantly 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.
4
“Best Buy Investor Relations: Presentations,” Best Buy Analyst Day 2011.
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-presentations
5
“2011 Shopper Experience Survey,” Retail Info Systems News/Cognizant Technology Solutions, June 2011.
CE retailers must also fnd ways to manage costs,
a diffcult 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). Signifcant
cost reductions could also be gained by transi-
tioning some commoditized business processes
to a BPaaS model (see Figure 17).
We believe CE retailers will fnd these services
attractive, even indispensible, due to factors such
as on-demand delivery, compression of imple-
mentation time, withdrawal of supporting infra-
structure, 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 proftably engage and stay
connected with consumers.
Winning players will do the following:
Become “retail format agnostic” and use 1.
multiple channels to stay connected with their
customers, proftably.
Focus on and fortify their unique strengths 2.
(e.g., superior customer service, lowest price).
Partner and source talent and services globally 3.
in a virtualized environment and rein in their
expenses.
Save precious capital and variabalize their cost 4.
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 proftably tap into the fast
emerging future of the CE retail market.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member of
the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
World Headquarters
500 Frank W. Burr Blvd.
Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
Fax: +1 201 801 0243
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Email: [email protected]
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London W2 6BD
Phone: +44 (0) 20 7297 7600
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Phone: +91 (0) 44 4209 6000
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Email: [email protected]
© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
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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
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