'Wal-Mart effect' hits flat-screen TVs
KAI RYSSDAL: There was news earlier this week that Wal-Mart's getting into the in-store health clinic business. The company said it's going to open as many as 400 clinics over the next two or three years. A nice convenience for shoppers with one of those nagging maladies you can't quite find time to get to the doctor for. But I'd be wary if was running my own in-store clinic operation. Because once Wal-Mart gets into the game, the rules change for everybody else.
It's called the Wal-Mart effect — smaller stores not being able to keep up with the retail giant's price cuts. It's happened in everything from toys to groceries. And now in one of the hottest items in consumer electronics.
Pallavi Gogoi writes for Business Week magazine.
PALLAVI GOGOI: The flat-panel TV — you know, the flat-panel, high-definition TV — has been one of the hottest items. And one of the most expensive electronic items I guess ever. It was selling at $7,000, $10,000. And then last year, I think, it went down to $3,000. And, you know, Wal-Mart decided to bring the price down on Black Friday — which as everybody knows is the post-Thanksgiving sort of sales blitz — down to $998 per TV.
RYSSDAL: What did that do to stores like Best Buy, Circuit City and some other smaller, maybe not as well known electronics retailers?
GOGOI: See, as soon as Wal-Mart did that, everybody felt the need to come and match that. The other thing that Wal-Mart did was bring down the price of a big brand-name TV like Panasonic . . . Panasonic's 42-inch TV down to $1,200 from selling at 17-something. That had a huge effect on all electronics retail stores over the next few months. In four months we had announcements after announcements.
I think everybody heard about Circuit City laying off 3,400 of its employees. And this came on top of closing down 70 stores. You have another Massachusetts chain called Tweeter Home Entertainment. They're shuttering down 49 of their 153 stores. So this had such a huge effect. I mean, this one product made up about 50 percent of sales and profits at a lot of these stores. So, clearly, it had a huge effect to both top and bottom line.
RYSSDAL: What did companies like Circuit City say when you went to talk to them?
GOGOI: Obviously, whenever Wal-Mart enters anything and decides that they're going to be aggressive in that category, people expect prices to go down. It's interesting that every single company I talked to did not expect prices to go down 40 percent, 50 percent in the span of two or three months. And, you know, I have in my story the CEO of Rex Stores. And, basically, he said that "they [sales] just dropped of a cliff and we just didn't know what to do."
RYSSDAL: Was there no risk to Wal-Mart, though? I mean, if they're cutting their margins on these things, aren't they looking at a comparable hit? Or is Wal-Mart so big that it just doesn't really matter?
GOGOI: This is exactly what Wal-Mart does. They go after the hottest product out there. They decide that they're going to take a small cut in margins. This is just one among thousands of products that they sell. It's definitely not 50 percent of the products that they sell at a store, like it is at some stores like Tweeter. So, you know, their ultimate aim is to basically commoditize the product — make it a product that's going to sell so many in the future that, even if they make smaller profit margins, Wal-Mart will make all that up in volume.
RYSSDAL: Pallavi Gogoi at Business Week magazine. Ms. Gogoi, thanks a lot for your time.
GOGOI: Thank you.