Extra4/23/2007 2:01 PM ET
The 'Wal-Mart effect' strikes again
By slashing prices on flat-panel TVs, the retail giant has clobbered another sector -- this time, consumer-electronics stores.
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Last "Black Friday," for its annual post-Thanksgiving sales blitz, Wal-Mart Stores (WMT, news, msgs) decided to slash the price of one of the hottest electronics items for the holidays, the 42-inch flat-panel TV, to $988. The world's largest retailer had staked similarly audacious positions before, in numerous product categories, as part of its quest to remain U.S. retailing's "low-price leader."
In turn, Wal-Mart's move caused a free fall in prices of flat-panel televisions at hundreds of retailers -- to the glee of many people who were able to afford their first big-screen plasma or liquid-crystal-display (LCD) model.
Now, it is becoming apparent that Wal-Mart's calculated decision to break the $1,000 barrier for flat-panel TVs triggered a disastrous financial meltdown among some consumer-electronics retailers over the past four months.
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The fallout is evident: After closing 70 stores in February, Circuit City Stores (CC, news, msgs) on March 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group (TWTR, news, msgs), a high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores (RSC, news, msgs) is boarding up dozens of outlets, as well as selling 94 of its 211 stores.
"The tube business and big-screen business just dropped off a cliff," says Stuart Rose, chief executive officer of Rex Stores. "We expected a drop-off, but nowhere near the decline that we had."
Clearly, these retailers are taking such drastic measures because they don't see any respite in sight.
Since early February, when the companies first started closing stores and announcing layoffs, most of their stock prices also have been battered. Circuit City shares have fallen 24%, to $18.76, since the end of November, when the price war started. In the same period, Tweeter's shares declined 32%, to $1.72, near a 52-week low, and Best Buy's (BBY, news, msgs) stock is down 9%, to $48.73. Shares of Rex Stores have been flat, down 0.7%, to $16.98.
The carnage has one phrase written all over it: the "Wal-Mart effect." For many electronics competitors, the experience with flat panels has been a replay of what happened in other sectors over the past two decades as Wal-Mart's business stature grew dramatically.
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Competitors caught off guard
The Bentonville, Ark., juggernaut's entry into the grocery business in the late 1980s and its ability to offer deep discounts led to the bankrupting of dozens of regional supermarkets over the next 15 years, including Florida-based Winn-Dixie Stores, Eagle Foods from Illinois and Penn Traffic in Pennsylvania.
And Wal-Mart's discounting of popular toys sent FAO Schwartz and KB Toys into bankruptcy.
Now, Wal-Mart has clearly turned its attention to electronics. "We recommitted to our customers that we would be their low-price leader, especially on those products that were rising in popularity, such as flat-screen and high-definition TVs," says Kevin O'Connor, Wal-Mart vice president and general merchandise manager.
None in the industry doubted that flat-panel television prices would fall or that Wal-Mart would offer heavy promotions. But most expected the promotions to be limited to lesser-known brands like the Viore TV that Wal-Mart was selling at $988.
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Flat panels, thin margins
Syntax-Brillian, the maker of the Olevia brand of high-definition televisions, seeks to capitalize on the new dynamics of TV manufacturing in the age of globalization.What caught competitors off guard was that Wal-Mart also cut the price of a top brand name -- the 42-inch Panasonic high-definition TV -- by $500, to $1,294. That sent dozens of retailers across the country scrambling, and many rushed to match prices: Circuit City offered the same Panasonic TV at $1,299, while Best Buy sold a Westinghouse 42-inch LCD for $999. Others tried to lure customers to larger TVs -- CompUSA gave a $500 rebate on its 50-inch Panasonic plasma for $2,499.
Panasonic executives are still smarting from Wal-Mart's decision to drop the price on its 42-inch model, although company officials won't discuss the issue. "I'm not going to comment on what Wal-Mart did," says Andrew Nelkin, president of Panasonic Professional Display in Secaucus, N.J.