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By swapusa
December 24, 2003

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I like to kick start things off on this board writing about the electronics industry and retailing. But it is 2 AM and earlier today I posted a reply to someone on the Best Buy (BBY) board about the same exact thing. So I will just copy the same post here.

http://boards.fool.com/Message.asp?mid=20045966

Any body can give a little support.


Do you want support or reality? I shorted BBY on Dec. 1 at it's all time high and took my profit 4 days later when it dropped by $8 or so. Unfortunately, there are just too many cheerleaders of BBY in the analyst community and right here in the Fool community. But you should never listen to cheerleaders. Instead, you should look at the trends in the marketplace and the trend is telling me that BBY will see more and more competition from here on.

I am a retailer of video games and game systems, sort of related to consumer electronics, and I have been doing this or 10 years. Have seen the ups and downs and the changing market and the market for consumer electronics is going thru rapid fundamental changes right now. Changes that will put specialty consumer electronic stores in trouble for years to come.

Here is the problem: Look at the Sunday paper circulars and see who is selling things like Digital cameras, DVD players, MP3 players, TVs, or even big flat screen TVs. The big guys are the obvious ones, like Wal-Mart, Target, Sears, etc. But look closer. Look at CompUSA's ad and their store doesn't look like a PC or Software store any longer. As a matter of fact, this past Sunday 4-page newspaper size ad from CompUSA had only 3 or 4 software titles in it, a few PCs and the rest were other electronic gadgets including plasma TVs. Then look at Sears: Sears is making the biggest push into flat screen TVs and expanding its electronics offerings. The largest seller of Plasma TVs in the U.S. is now Gateway computer, the mail order PC company. And now Dell and HP are both entering the market for Plasmas, and as successful as Dell has been in direct marketing, they are going to get a big chunk of the market.

And those are just the big guys. But these days you can buy DVD players in places like Pep Boys and CVS pharmacy. USA Today's weekend edition had a piece in their Money section saying exactly the same thing, that nowadays you can buy DVD players same place you buy a box of Cheerios.

Of course, if you look at the brands of the cheap DVD players or digital cameras and MP3 players that places like Target, Wal-Mart, CVS, or Pep Boys sell, they are mostly Chinese made. And although Wal-Mart and Target also carry most famous brands like Sony and JVC, but it is the cheap Chinese brands that is eating into Best Buy's profits and drawing customers away from them. The point is that when things like DVD players or Digital cameras and MP3 players were novelty items and unfamiliar to most people, consumers wanted to go to places like Best Buy and Circuit City and learn about them and ask questions. But now, they are so commonplace that you just go to anywhere that sells them and pick one up.

If you take a couple of steps back and get away from all the cheerleaders and take a good look, you will see the same thing happening to other electronic items. The Chinese factories are busy, containers are being filled, shipped to the U.S., and prices are dropping. It is believed that within a few years the Chinese electronics industry will compete head to head in quality with the Japanese or Korean makes and models and at much lower prices. Other than the very high end, most everything electronics will be a commodity item, including big screen LCD TVs. The trend is there for everyone to see!

Of course this is not specific to the electronics industry. Just this morning, American Greeting warned of lower sales and the CNBC commentator attributed it to lower number of Christmas gifts that people are buying. I wish I could call them right away and tell them to drop by their local Dollar Store and see how fast they are selling out of their Chinese made 2-for-a-Dollar greeting cards, wrapping paper and gift bags. Compare that with $3-$4 that you would have to pay at Hal-Mark for identical items. It is China stupid!!!

This next piece is part of an earlier post to the Video & PC Games board on 12/1, dealing with the same issue:

http://boards.fool.com/Message.asp?mid=19929008

As for general retail, most everyone expected a gangbuster holiday season but the Wal-Mart report today has apparently had some people worried. Wal-Mart reported total sales increase of 6.3% compared with last year but that is not same stores sales. They open one store a day so total sales are expected to increase. Same store sales numbers come out Thursday and expected to see low single digits increase.

If you listen to CNBC and all the retail analysts, it seems like they are all very optimistic, especially when it comes to electronic retailers and particularly Best Buy. They say that Best Buy is the best at moving the high priced gadgets and Plasma TVs out the door and almost all have a buy rating on Best Buy. But I have to disagree. Not only because Best Buy stock is sitting at an all time high but also because of some other events happening in the electronics retail and the industry. I see 2 inter-related trends that are going to put long term pressure on the likes of Best Buy and Circuit City:

1- Check out the ads for large retailers like Wal-Mart and Target. They are entering the high tech electronics market and dedicating more and more floor space to the category. It used to be that stores like Wal-Mart and Target only carried the low-end cheap models but now they are getting into brand names with wide selection. It won't be long before they get into high-end audio and plasma TVs and put pressure on everybody's margins.

2- The second trend I see is even more troublesome not only for the likes of Best Buy and Circuit City but also for Japanese manufacturers like Sony. The Chinese are learning the business and they are coming with full force. Did you notice all the $20 and $30 DVD players in the ads this past few days? Or the $80 and $90 home theatre systems with DVD players? Within a year or 2 the Chinese will probably be in every major electronics category including high-end plasma TVs. They buy the components from the Japanese, Korean, and Taiwanese factories, get the TI chip, and assemble them in their ultra modern factories with ultra cheap labor, and export them to the USA, Europe, and the rest of the world. We should see major price drops in all electronic products in the coming years and that will only hurt the high end retailers like Best Buy and Circuit City. And who has years of experience and good relations with the Chinese? Wal-Mart!

Of course stores like Best Buy and Circuit City can also import the same products from China but the problem is that falling prices for these products puts them in even more direct competition with the likes of Wal-Mart and Target. Lower price points will also mean lower total profit dollars per sale; more important to a retailer than the profit margin. Another problem that has risen is that you no longer have to be a giant retailer or wholesaler to import electronics products, or any product for that matter, from China. You can't even approach someone like Sony to import products into this country unless you are someone as big as Best Buy. They wouldn't even sell to Amazon.com up to a couple of years ago. But with the Chinese factories you can order a container load of portable DVD players with a mere investment of $30K. How is that for competition? Mom and pop shops selling DVD players at every corner!

So, with all that I can't help but be negative on the future of electronics retailers, especially on someone like Best Buy who is trading at an all time high. It is only coincidental but this past Friday I was listening to CNBC's morning show in my car on XM Radio and they started talking about electronics retailers. Mark Haynes asked the following question: Has there ever been an electronics retailer in this country that hasn't eventually gone bankrupt?

Cheers,

Mehran,

SwapUSA


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