• Cognizant ReportsUnderstanding U.S. ConsumerElectronics Retailing   Executive Summary                                   ...
The Current State of U.S. Electronics Retailing      Key               Key Product                    Key                 ...
Top 10 Players: Store-Based CE Retailing by Domestic Revenues             $40  Billions   $30             $20             ...
Forces Shaping the U.S. CE Retail Industry       Forces                     Drivers                            Changes    ...
U.S. Personal Savings Rate                                                                   Competing for Hearts and Pock...
Impact of Tablet Sales onCE Retailers                                                                                     ...
Average Price Differential vs. Amazon                                                                                     ...
E-Fairness Momentum: 2011 State Activity                  $260B in online revenue and $26B in annual uncollected sales tax...
U.S. Consumer Shopping Online                                                U.S. Mobile Commerce Growth                  ...
Key Third-Party Servicesfor U.S. Retailers                                                            The Future of Shoppi...
CE retailers must also find ways to manage costs,           The Road Aheada difficult challenge given persistent low margi...
Resources“Consumer Tech Revenues Will Reach Record High in 2011,” Consumer Electronics Association,January 2011. http://ww...
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Understanding U.S. Consumer Electronics Retailing


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U.S. consumer electronics retailers need to reinvent their corporate operating models and hone their competitive edge to profitably tap into the fast emerging future of the market.

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Understanding U.S. Consumer Electronics Retailing

  1. 1. • Cognizant ReportsUnderstanding U.S. ConsumerElectronics Retailing Executive Summary consumer regardless of shopper location to deliver the complete shopping experience. The U.S. consumer electronics (CE) retail industry has endured severely fluctuating fortunes in • Optimize retail floor space through increased the last decade. A swiftly changing CE market “store inside of a store” concepts and reduction landscape, continually reshaped by the forces of future store size footprints. of continuous product innovation and change, is • Use in-store space for increased demonstra- forcing the entire CE retail industry to confront tion of “connected shopper solutions,” showing challenges across multiple fronts. These issues how all elements of a complete basket can include the following: work together prior to a shopper exiting the premises. • The advent of the frugal and sophisticated U.S. consumer, thanks to the “Great Recession.” • Save precious capital and reduce operational costs by embracing emerging service delivery • Debilitating price wars fought by three distinct models to transition select commoditized retail trade formats — discount vs. pure-play vs. online retail. business processes to cloud computing-enabled business process as a service (BPaaS). • Significant competitive advantage enjoyed by U.S. GDP Growth Rate (%) online retailers due in part to lower overhead and tax laws that have not caught up with the U.S. CE Industry Growth new rules of the retail game. vs. GDP Growth • Ever-changing and demanding “millennial” Millions consumer preferences. $200,000 6% These forces have left CE retailers scrambling for 4% $175,000 cover under their onslaught. In the recent past, we 2% have witnessed the bankruptcy of a large player, $150,000 0% Circuit City, as well as the less-than-stellar growth -2% of other key players. It is clear that CE retailers or $125,000 -4% CE retail divisions of organizations such as Best -6% Buy, Target, Walmart, RadioShack, etc. will need $100,000 -8% 2006 2007 2008 2009 2010 2011 (estimated) (projected) to re-evaluate and re-align their strategies to face U.S. CE Industry Growth Rate the new realities of the marketplace. U.S. GDP Growth Rate (%) In our view, winning CE retailers must: Source: CEA 2011; U.S. Bureau of Economic Analysis; Goldman Sachs Estimates 2011 • Create integrated channels — a “store without Figure 1 boundaries” — that offer all capabilities to the cognizant reports | december 2011
  2. 2. The Current State of U.S. Electronics Retailing Key Key Product Key Characteristics Categories Categories Retailers Video Products Best Buy • TV market growth has diminished on category maturation, (Television, navigation Walmart lack of catalyst from 3D/connected TVs. products, digital cameras and Costco • TVs greater than 46’’ average size are expected to garner accessories, digital camcorders Sears 55% of total sales in FY 2012. and accessories, e-Readers, hhgregg • TV barely re-emerges when penetration hits ~30%, as sales tend to flatten. DVD and Blu-ray players, etc.) Amazon • An estimated addressable market of 17M annual transactions/connections. Consumer • Largest percentage of all photos will be taken through digital still cameras, at 51% in 2010, followed by mobile phone, at 42%. Electronics Audio Products Best Buy • Stand-alone MP3 players have seen a significant dent in sales due to the (MP3 players and accessories, Walmart adoption of phones as a personal music device. The dominant market home theater audio systems Costco leader Apple has seen iPod sales decline 6% year-over-year and account and components, musical Sears for less than 8% of Apple’s revenue. instruments and mobile hhgregg electronics, etc.) Amazon PC/Notebook/Netbook Best Buy • Continuing margin erosion due to commoditization of category (Related subscription service Apple (except Apple products) because of product proliferation and commissions, hard drives, Dell product cycle time compression. networking equipment and Walmart related accessories such Staples as printers.) Officemax OfficeDepot Amazon Tablets Apple • Tablet market opportunity: FY12E $12B U.S. market (+50%). Home Office Best Buy • Apple remains the leader in the tablet PC market with a 54% share. Amazon • RadioShack is expected to be the net winner due to its sharp over-index in RadioShack tablets vs. other more PC-centric competitors. Mobile Phones and Communications • FY12E $34B U.S. market (+6%) Connections service providers • Estimated channel mix: 65% of total points of purchase Best Buy (77,000 in 2010) are direct channels. Amazon • Among indirect channels, retailers constitute 56% of the share. RadioShack • For the first time, a majority (54%) of all new mobile phone handsets purchased by U.S. consumers are smartphones. Appliances and Sears • $14B appliances industry. Small Electronics Lowe’s Appliances The Home Depot Best Buy hhgregg Gaming Hardware Game Stop • FY12E $23.5B U.S. market (-2%). and Software Walmart • $15B gaming software value chain. (DVDs, Blu-rays, CDs, digital Best Buy • 15M trade-in units across industry. Entertainment downloads and computer Amazon • $2B console-based market opportunity software.) (console subscription points card + downloadable content).Source: Cognizant Research Center analysisFigure 2The Market Landscape encing market share gains following Circuit City’s demise, the major players have essentially seenThe U.S. retail electronics market tallied revenues flat growth a year after the fact, indicating thatof $180 billion in 2010 across five key categories: revenue increases in 2009 for some major playersconsumer electronics (video and audio products); were purely a result of the redistribution of Circuithome office (PCs, notebooks, netbooks, tablets, City sales rather than incremental business gainsmobile phones, etc.); appliances; entertainment (see Figure 4, next page).hardware and software (see Figures 1 and 2); andservices. Reality struck in 2010 and continued in 2011, with revenues of major players growing only by 4.5%;Total sales of the Top 10 electronics retailers marginal revenue growth was driven primarily byare expected to grow by 6% in 2011 to reach new product introductions, such as tablets and$110 billion (see Figure 3). Absent Apple’s stellar netbooks, and not from existing product lines, asperformance, the previous two business cycles well as from an increase in store fronts and retail(2008-2010) have been characterized by anemic floor space. It is clear that shifting consump-revenue growth, the demise of Circuit City and tion patterns and product distribution models,flatlining in the key category of TVs. After experi- cognizant reports 2
  3. 3. Top 10 Players: Store-Based CE Retailing by Domestic Revenues $40 Billions $30 $20 $10 $0 Best Buy Walmart Apple Staples Game Stop Target Costco Sams Club RadioShack OfficeMax � 2008 � 2009 � 2010Source: Dealerscope’s Top 101 CE Retailers, March 2011Figure 3especially from physical to online sales, have had in providing differentiated customer advice.a major, across-the-board impact on the electron- Furthermore, consumer reliance on third-partyics retailing space. intermediaries for offers and pricing information threatens to convert retail stores into little moreMarket Forces than physical showrooms for online merchants.We see four distinct forces that will cause furtherupheaval in the industry landscape over the next Additionally, U.S. consumers continue to reelfew years. The ability of current players to respond from a depressed job market and rising prices,nimbly to these challenges and seize opportuni- especially in key consumption items such asties arising from rapid change will be the key to fuel. Conspicuous consumption is on the decline;long-term competitive advantage. These forces premium brand substitution with cheaper variantsinclude: Consumer sophistication and frugality, and even postponement of consumption are theincreased regulatory scrutiny, cut-throat com- order of the day. According to the Consumer Elec-petition and millennial consumer behavior (see tronics Association, spending on CE products byFigure 5). the average U.S. consumer household fell 14.5% between 2009 and 2010, or $1,380 per householdConsumer Sophistication and Frugality in 2009 vs. $1,179 in 2010.1 Falling consumerThe shift of retailer-oriented product categories demand is also indicated by the recent uptickfrom “highly considered” to near commodity in the U.S. savings rate, which has tradition-status (the result of increasing shopper sophis- ally trended downward during the last few yearstication) reduces the advantage of sales staff (see Figure 6, page 5). Key operational challenges for CE retailers include:Market Share Gains:The Circuit City Impact • Margins: Prices of key product categories like TVs and PCs (notebook, netbook and desktop) Retailer Dollar Share Increases by Category have consistently declined or remained at (March – December 2009) bargain basement levels over the last few Best Buy Walmart years, creating pressure on margins for retail- ers.2 Sales of these products are essentially Flat-Panel TVs 5.2% 3.2% replacement or extension sales, as these are Notebook PCs 5.5% 2.3% mature and near-ubiquitous categories. These Desktop PCs 4.7% 0.3% product categories typically have the highest rate of high-margin warranty and services Digital Cameras 5.5% 2.7% attachments, which are also declining due toSource: NPD Estimates flat sales, creating additional challenges forFigure 4 retailers. cognizant reports 3
  4. 4. Forces Shaping the U.S. CE Retail Industry Forces Drivers Changes Impact • Consumer frugality: Consum- • Anemic growth in the sector • Change in revenue mix from lower margin notebook PCs, TVs, ers trading down (moving with negative comp sales. etc. to higher margin products like smartphones, tablets. away from premium brands), • Fall in operating margins • Selling these from small-format stores, which cuts down selling opting for lower priced across some key categories. costs and paves the way for greater attachment of services to the alternatives, deferring • SG&A cost escalation due sale, leading to higher margins. Consumer discretionary spend. to higher store expenses, • Importance of the online channel for store-based retailers with • Deleveraging: Declining promotional offer lead by price an expanded assortment, giving them pricing power. sophistication consumer debt levels, competition. • Customers using offline retail establishments as storefronts for and frugality higher savings rates, lower • Multi-channel strategy: Re- online sellers. consumption. duce selling cost, compete on • Availability of shopping price and maintain margins. technologies for instant price discrimination, product infor- mation and comparison. • E-Fairness momentum. • Five states have enacted laws • Level playing field for brick-and-mortar and online retailers. • State budget deficit and in recent years (NY, RI, NC, OK, • Online-only assortment by store-based retailers. uncollected sales tax. CO); four states passed laws in • Online-only assortment also disaffects offline shoppers because Regulations 2011 in the first two quarters of the presence of different pricing strategies. (IL, SD, CA, AR); and 20 states have legislation or similar discussions underway. • Price differentiation across • Pricing pressure. • Online retailers have been able to take advantage of the con- categories between • Margin reduction. sumer frugality phenomenon in a big way by competing on price. online and store-based retail • Focus on supply chain and • Large discounters like Walmart have taken full advantage of models. right assortment. failure of Circuit City by garnering market share in key categories. Competition • Walmart has a strong advan- • Relationship with Apple for iPad and iPhone sales will drive the tage based on its size, giving ecosystem. (Online vs. it massive economies of scale • Reducing product cycle lead times to increase pressure on store-based in procurement and, hence, accurate demand forecasting to get in and out of products before retailers, mak- the ability to pass on price margins are completely eradicated. The proliferation of new ing margin a benefits to the consumer. products necessitates buyers to increase their market awareness bigger risk and research in order to identify where to place their bets. Working capital must be released sooner for non-working capital than market by exploring non-traditional methods to move product through share.) third-party providers or intermediaries. • Pricing pressure makes it increasingly difficult to wring savings out of the value chain at the same speed at which retailers are experiencing pricing pressure, thereby enhancing margin erosion trends. • Emergence of Gen X and Compared with baby boomers, Retailers need to: millennials as core franchise. Gen X and Gen Y are: • Invest in client-friendly IT platforms. Shifting client • Multi-channel strategy for • More tech/finance savvy. • Offer a solid online transactional platform. consistent customer exeri- • More autonomous in their • Build a mobile strategy. preference ence acoss channels. purchasing decisions. • Create a “social purchasing experience.” and changing • E-commerce: Reduce selling • Demand greater transparency. product cycle cost, compete on price and • Demand tailored service offer- maintain margins. ings; desire a seamless/social purchasing experience.Source: Cognizant Research Center AnalysisFigure 5 Large CE retailers are, therefore, moving their and store-within-a-store), increased promo- revenue mix from lower-margin items such tional spend and the need to hire knowledge- as notebook PCs and TVs, to higher-margin able workers who can engage customers in a products like smartphones and tablets. They sales and advisory relationship rather than a are also selling these devices from small-format strict sales interaction. stores, which reduces selling costs and paves Additionally, customers are increasingly using the way for greater attachment of services to a mix of offline and digital channels for trans- the sale, leading to higher margins. actions, which requires retailers to offer more• Distribution: Consumer electronics retailers options, increasing the importance of an face rising expenses primarily due to expansion effective online channel for brick-and-mortar- into different retail formats (stand-alone store based retailers. cognizant reports 4
  5. 5. U.S. Personal Savings Rate Competing for Hearts and Pocketbooks CE retailing has always been fraught with difficult % issues, but the challenges are even greater 15 today. For example, CE retailers face increasing competition from discounters (e.g., Walmart) 12.5 that can leverage massive economies of scale, both on the purchase side (by striking deals on 10 bulk purchases) and on the consumer side, by realigning floor space dedicated to electronics 7.5 according to demand (typically during the holiday shopping season). 5 A new and interesting dynamic is also at play: The increasing inability to distinguish competitor 2.5 from supplier. Apple is a case in point; it designs and manufactures some of the most in-demand 0 1950 1960 1970 1980 1990 2000 2010 2020 consumer electronics products in the U.S. and Year sells them through its chain of speciality stores U.S. Recessions and online. Apple’s policy of limited distribution, especially in the new and highly lucrative tabletSource: U.S. Department of Commerce, Bureau of market, effectively penalizes other retailersEconomic AnalysisFigure 6 outside the Apple ecosystem. Since their introduction in 2010, tablets haveEssentially, the quest for consistently improving proved to be a disruptive force in the computingfinancial performance compels single-channel segment; market researchers predict that tabletretailers to move to a multi-channel strategy. In shipments will outstrip PC shipments by 2011 andspite of real-world concerns — such as negative result in the reduction of notebook PC sales byspill-over and cannibalization, the advantage of 30% to 35% in 2011 and 2012, successively (seelow-cost access to new consumer segments and Figure 7). Retailers with significant PC revenuepotential increases in customer retention and streams will be negatively impacted by thisloyalty — a multichannel strategy makes sense momentum switch (see Figure 8).3from the vantage point of a retail CFO.Global Unit Shipments of Desktop PCs and Notebooksvs. Smartphone and Tablets 800,000 Q4 2010 Inflection Point Smartphones + Tablets > Total PCs 2013 Global Unit Shipments (B) 600,000 400,000 200,000 0 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E � Desktop PCs � Notebook PCs � Smartphones � TabletsNote: Notebook PCs include NetbooksSource: Katy Huberty, Ehud Gelblum, Morgan Stanley ResearchData and Estimates as of 2/11Figure 7 cognizant reports 5
  6. 6. Impact of Tablet Sales onCE Retailers Apple’s Stranglehold % Apple has created a storm in the CE market 5 and bounced back from a 5.3% decline in 4.3% revenue growth from CE sales in 2009 to 4 a 51.5% spike in 2010. How did Apple pull 3 it off? The answer: The Apple ecosystem. 2 For instance: Apple’s deep and intricate supply chain 0.4% 1 0.3% 0.3% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0% 0% relationship. In the case of the iPad, this 0 - 0.1% - 0.2% results in a $50 to $60 advantage in -1 input costs for the memory and display Best Buy Office Depot OfficeMax Radio Staples Shack components of the iPad 2 over competing � 2010 � 2011E � 2012E tablet products.Source: Company data, IDC, Goldman Sachs Equity A limited distribution policy of productsResearch, 2011 to retailers, especially at launch, whenFigure 8 the hype cycle for the product is typically at its highest. This creates a shortfall ofOnline retailers have been in play for some time in-demand stock at other retail establish-now. However, it is only in the last few years that ments.they have emerged as viable challengers to brick-and-mortar behemoths. Online retailers have been The carefully-crafted Apple Store pur-able to take advantage of the consumer frugality chase experience, with its focus onphenomenon in a significant manner by competing maximizing customer convenience, fromprimarily on price (see Figure 9, page 7). Sales of feature education, to purchase, to productCE products online grew by 17% in 2010, to $13.6 activation.billion (see Figure 10). This represents only 14% These factors make it exceedingly chal-of the total market for CE products, suggesting lenging for other retailers to grab a slicesignificant room for growth. of Apple’s share of the pie, especially inImpending Regulatory Changes the tablet market.Online sellers enjoy the twin advantages of loweroverhead and tax laws that have not caught upwith the new rules of the retail game. Most statesin the U.S. do not have a sales tax regime in placeto extract revenue from online sales. This has product lifecycles, with time-to-market for productcreated an unequal playing field between offline releases compressed to levels unforeseen just aand online players. few years ago. This has also created demand for a slew of allied services, ranging from connectiv-As Best Buy CEO Brian J. Dunn said in a recent ity solutions and service plans, to accessories.investor presentation, “Taxing all online sites The millennial pattern of media consumption — onequally would be a major, but not complete, multiple connected devices — has also requiredclosure in the pricing difference. It will also signif- pure-play retailers to get into the content deliveryicantly hurt small, online retailers that compete business. Millennials are now armed with instantcompletely on price.”4 access to pricing information across channels andMoves are afoot to address this gap, with five also rely on online reviews much more than tra-states passing “E-Fairness” laws in recent years, ditional consumers for their purchase decisions.four states doing the same in 2011 and another 20 This leads to a lower reliance on store employeesstates holding discussions on similar legislation as a preferred source of product information.(see Figure 11, page 8). The “social purchasing” experience, with the ability to engage in instant feedback and rapidMillennial Consumer Behavior price-comparison, will be a significant factor inThe always-on, always-connected lifestyle of the market dynamic for CE products, especiallymillennial consumers is driving frenetic change in among millennials. cognizant reports 6
  7. 7. Average Price Differential vs. Amazon Average price difference above Amazon* 30% 28% 19% Walmart Target Specialty Retailers * Assumes no sales tax on Amazon purchases and free shipping; An Amazon fulfillment center Source: Wells Fargo. Photo: Getty Images.Sources: Faber Novel, “The Hidden Empire” 2011Figure 9Winning Strategies extensively use shopping technology, whether PCs for detailed research or smartphones forTo succeed, CE retailers must consider the rapid, on-the-go comparison (see Figure 12).following plans of attack: Price, convenience and selection are the most• Engage profitably with millennial consumers: important factors for millennials to arrive The defining characteristic of millennials is at an optimal purchase decision. This demo- that as digital natives, they adapt to computer graphic does not distinguish between channels and Internet technologies very swiftly. They but expects an interactive, consistent and are demanding and technologically savvy, seamless experience across channels. craving instant access to product informa- CE retailers will need to embrace unified tion and reviews from third-party sources, strategies across processes — such as supply especially from their social networks. TheyOnline Commerce Gaining Share vs. Offline % 7 e-Commerce penetration e-Commerce as % of Total Retail Sales 6 4% in Q2, 2010 5 4 Mobile e-Commerce 3 penetration 2 1 0 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-Commerce penetration Linear trendline (y=0.094x + 0.9895, R 2=0.9599)Note: Adjusted for eBay by adding back eBay U.S. gross merchandise volume.Source: U.S. Department of Commerce (Q2-2010), Morgan Stanley ResearchFigure 10 cognizant reports 7
  8. 8. 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 taxSource: Best Buy Investor Presentation 2011; Wells Fargo Report on The State and Local Budget Squeeze, Feb 2011Figure 11Mobile Shopping Preferences chain, merchandising, pricing, inventory management and customer service — to ensure a “boundary-less store” experience If a retailer offered the following services for across channels. The mobile store is one way a mobile device, indicate how likely you would of interacting with consumers to keep them be to use them on a scale of 1 to 10. engaged. It will play a significant part in the 4.6 future of CE retail, by ensuring uniformity of Coupons 5.3 6.3 product information across all channels, be it 7.3 in-store, online or mobile. 3.7 Product and 4.7 price lookup 5.9 CE retailers will need to invest significantly in 7.0 equipping their sales forces with the latest and Ability to instantly 4.3 use loyalty program 4.9 greatest sales tools and technologies, as tradi- 5.7 awards/offers 6.4 tional hard sales pitches do not cut it with mil- 3.9 lennials, who in many cases have access to as Product comparisons 4.7 5.7 much information as sales staff do. Enabling 6.7 3.9 sales staff with technology will deliver an Store locator 4.6 even more meaningful in-store interaction, as 5.8 6.7 evidenced by recent research:5 4.2 Ability to place an order 4.7 5.5 > 57% of shoppers want improved interac- 6.1 tions with store associates. View your status/ 3.8 points in the store 4.4 5.5 > 58% of shoppers want engagement with loyalty program 6.2 store associates in the aisle, with mobile 3.6 check-out capabilities. Ability to receive location, 4.2 personalization or time-based product offers 5.1 6.0 > 64% of shoppers want store associates with mobile technology to provide improved in- 0 2 4 6 8 store customer service. Very unlikely to use Very likely to use • Adapt to emerging distribution formats: Emerging Elders Baby Boomers Gen X Gen Y Research indicates that U.S. online retail sales will directly account for 8% of total retail sales and, more importantly, will influence 53% ofSource: Retail Info Systems/Cognizant Technology all retail sales by 2014 (see Figure 13). MobileSolutions 2011 Shopper Experience Study commerce is likely to deliver $17 billion in salesFigure 12 by that time (see Figure 14). cognizant reports 8
  9. 9. U.S. Consumer Shopping Online U.S. Mobile Commerce Growth Two research firms project rapid growth in The number of consumers researching or mobile commerce revenue from 2009 to 2015. shopping online is steadily growing and Billions will surpass 200 million by 2015, eMarketer says. But the research firm says most of the $25 $23.8 projected sales growth will come from veteran Web shoppers. $20 $17.5 201.1M 195.4M 184.3M 189.6M $15 178.5M $11.7 172.3M 163.1M $10 $7.4 $10.7 90.1% $4.4 $8.0 89.4% $5 $2.4 88.7% $1.2 $5.8 88.1% $3.9 87.5% $1.2 $2.1 $3.2 87.1% $0 2009 2010 2011 2012 2013 2014 2015 85.0% Coda Research Consultancy ABI Research Source: Coda Research Consultancy & ABI Reasearch. 2009 2010 2011 2012 2013 2014 2015 Figure 14 Percentage of shoppers expected to be veteran Web shoppers Best Buy Store Strategy:Source: eMarketer, March 2011 The Move to Small BoxFigure 13 $910It is, therefore, imperative for CE retailers to not 50 910only embrace but also get full leverage from 40.5 39.7 39 38.6 40 38.7emerging mobile and maturing e-commerce 32.5 32.7 895 31.6 31.3channels. Online and mobile channels will allow 30 $888 27.6retailers that rely primarily on their physical 880 $878presence to remain visible across the spectrum, 20push promotions, provide detailed product infor- 865mation and be visible to consumers when they 10engage in price comparison. Online channels $856 $851also enable retailers to play the price game 0 850with pure-play e-tailers by stocking online-only � Average store size (000 sq ft)product assortments and one-upping them with � New store average size (000 sq ft)“buy online and pick up in-store” options, an — Sales per sq ft (in $)advantage that appeals to impulse buyers whocrave instant gratification. Source: Best Buy Company Report; GS Equity Research 2011The introduction and rapid growth of innovative Figure 15products such as tablets, e-readers and next-gen-eration smart devices needs to be addressed by Buy Mobile stand-alone stores, which is expectedretailers. They can accomplish this by appearing to increase the retail giant’s presence and allowomnipresent across multiple sales channels, it to reduce its large-format store footprintsuch as offering consumers allied content, (see Figure 15).accessories and services in the most convenientmanner possible. Persistent connectedness to Technology and Global Sourcingthe customer is the cornerstone of this strategy The rapid growth of smartphone connections— a CE retailer can conceivably even be agnostic (overall) and the high-percentage of influentialabout store format, as long as the customer is millennials already riding the always-connect-engaged across all fronts. Best Buy, for example, ed wave make it imperative for CE retailers tois attempting to create traction for its smaller prepare for a time when a large proportion ofstore formats, most notably by expanding its Best their customers will be digitally enabled. They will cognizant reports 9
  10. 10. Key Third-Party Servicesfor U.S. Retailers The Future of Shopping In the future, CE retail establishments IT consulting 58.2% will eliminate all boundaries between Web site development, maintanance or hosting 54.5% the retailer and the shopper. All capabili- Custom application development 45.5% ties, (pricing, order management, fulfill- Packaged app implementation or integration 37.3% ment, customer service, returns, etc.) Mobility initiatives 36.4% will be available to consumers regardless Social media initiatives 35.5% of location (aisle three, checkout, in the Telecommunications or networking 30.0% home, jogging in Central Park). Training 29.1% Application maintenance 29.1% Consumer behavior purchase patterns Data center operations 23.6% and offers will be integrated across Business process outsourcing 12.7% channels. Mobile offers will be distributed Entire IS organization 5.5% to shoppers in real-time based on time, Energy reduction and/ or sustainability 4.6% location, customer segment and category Currently not outsourcing 3.6% position. To get there, CE retailers must consider the following: Percent of respondentsSource: RIS Retail Tech Study, April 2011 • Cloud-enabled shopper interaction: Retailers must integrate third-partyFigure 16 offers and services in order to reduce shopper decision models and re-estab-Key Retail Software Architectures lish their authority as a credible source of information. These services can be delivered through the cloud and linked Best-of-breed software 57.7% to a shopper’s mobile device to deliver Integrated solutions suites 52.3% a contextual shopping experience. In-house IT resources to develop software 50.4% • Linking content across channels: Third-party services to help Products and promotions must be develop software 44.1% consistent, leveraging emerging capa- bilities in content and digital asset On-demand or SaaS models 33.3% management. Cloud computing solutions 15.3% • Adoption of mobile devices for store associates to enable a richer Percent of respondents shopper interaction: Equip store-Source: RIS Retail Tech Study, April 2011 based employees with mobile devicesFigure 17 to improve in-aisle customer service and check-out capabilities.need to create services that allow such connectedcustomers to get a view of hitherto unseen storeprocesses, such as inventory status, deeper and technology areas that CE retailers will need toricher product information and, ultimately, even implement to stay viable are:self-checkout. • Next-generation customer analytics thatToday, the top two categories of external sourcing incorporate data gathered from social media.of technology for CE retailers are IT consulting andWeb site development/maintenance/hosting (see • Predictive supply chain management solutions.Figure 16). Mobility services and social media inte-gration, meanwhile, are rapidly gaining ground. • Customer management suites that enableDeployment of these relatively new and quickly consistent customer recognition, tracking andevolving technology domains requires expertise rewards across channels.that is not available in-house. Other best-practice • Multi-channel fulfilment technologies. cognizant reports 10
  11. 11. CE retailers must also find ways to manage costs, The Road Aheada difficult challenge given persistent low margins CE retailers are uniquely positioned to capitalizeacross key categories and the heavy investment on emerging opportunities across the technologyneeded in new technologies to keep pace with and business spectrum to fortify their operatingtheir always-connected consumers. A key to models, as well as profitably engage and staythe cost management conundrum would be the connected with consumers.conversion of Cap-Ex to Op-Ex by using cloudservices for SaaS (software as a service) and Winning players will do the following:BPaaS (business process as a service). Significant 1. Become “retail format agnostic” and usecost reductions could also be gained by transi- multiple channels to stay connected with theirtioning some commoditized business processes customers, profitably.to a BPaaS model (see Figure 17). 2. Focus on and fortify their unique strengthsWe believe CE retailers will find these services (e.g., superior customer service, lowest price).attractive, even indispensible, due to factors such 3. Partner and source talent and services globallyas on-demand delivery, compression of imple- in a virtualized environment and rein in theirmentation time, withdrawal of supporting infra- expenses.structure, negation of application testing, reducedtraining, reduction in ongoing business process 4. Save precious capital and variabalize their costchange management and greater accounting base by actively adopting new cloud-enabledtransparency for such costs. service delivery models such as BPaaS.Another important element of cloud-based In short, CE retailers need to reinvent theirservices is the scalability factor, allowing retailers corporate operating models and dig deeperto quickly extend solutions in new stores or competitive moats to profitably tap into the fastchannels, as well as rapidly withdraw from stores emerging future of the CE retail market.or channels that are not performing at desiredlevels. Another attraction is the utility conceptof pay-as-you-use, which enables adopters to“variabalize” their cost base.Footnotes1 “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=121002 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 significantly 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-presentations5 “2011 Shopper Experience Survey,” Retail Info Systems News/Cognizant Technology Solutions, June 2011. cognizant reports 11
  12. 12. 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 Confirms 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 ChallengingU.S. Economy,” Forrester Research, Inc., November 2010. http://www.internetretailer.com/2010/03/08/e-retail-will-influence-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 forDownsizing,” GS Equity Research, April 2011.“2011 Retail Technology Trends Study,” RIS News, April 2011.http://risnews.edgl.com/retail-research/2011-Retail-Technology-Trends-Study71782AuthorNitin BajajCognizant Research CenterResearch AnalystDurgesh PatelCognizant Research CenterSubject Matter ExpertSteven Skinner, Vice President, Cognizant Business Consulting, Retail and Consumer Goods PracticeAbout CognizantCognizant (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 inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member ofthe NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performingand fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. 1 Kingdom Street #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA Paddington Central Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London W2 6BD Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7297 7600 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7121 0102 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© 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 anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.