Wal-Mart Effect? Thumbs Down to Businessweek

by redshift

Today’s review will cover an “interesting” article from Businessweek on the so-called Wal-Mart Effect. The author’s journalistic skill will be shamelessly torn down and mocked. Enjoy.

Essentially, he says that Wal-Mart’s pricing on a single flat-panel TV in the Christmas season has fundamentally and permanently changed the landscape of the electronics market as a whole. A no-name TV, specifically a 42″ Viore, was priced at $988. A similar Panasonic was priced at $1294. Other retailers couldn’t match these prices – or didn’t want to – as their prices had been nearly double that for some time.

Cleary, this was an evil act. I mean, come on, retailers are going out of business.

The fallout is evident: After closing 70 stores in February, Circuit City Stores on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group, the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores is boarding up dozens of outlets, as well as selling 94 of its 211 stores. […] 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 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.”

The profit bubble was burst for these old-world retailers who could no longer sell their TVs at a huge profit margin. Someone actually came along and offered a better price. A price based on reality and efficient distribution methods. Amazing. From the same article:

“It’s Econ 101: Best Buy and Circuit City had seen fat margins from flat-panel TVs for a while, and as it happens with any product, eventually the margins come down and the music stops,” says David Abella, a portfolio manager at New York-based Rochdale Investment Management, with assets of $2 billion.

Did the executives at Circuit City, Tweeter, CompUSA, Best Buy, and Rex all neglect their studies in economics? Or did they take too large an executive bonus this year? Someone offers a better price, and their only reaction is to close half their stores and lay off thousands of workers. It boggles the mind.

Furthermore, I propose that this had nothing to do with flat-panel TVs anyway. Feast your eyes, again from the same article:

In fact, even though Wal-Mart set in motion the price drops, it has actually been a bit player in the high-definition TV segment.

So, not only did the pricing on one TV bankrupt five companies, but the pricing on one TV from a bit player bankrupted five companies? Come on.

We all know why it really happened. These retailers are living in an older world, a world of brick and mortar and electronics cartels. They can’t compete with Wal-Mart and the internet. The power is finally in the hands of the consumer, who can order a flat-panel TV from anyone on the web and pay half the price, or simply walk into their local Wal-Mart. Efficiency is finally paying off for the businesses.

People are starting to ignore the giant retail outlets who have given them no choice for so long. Why pay hundreds or thousands extra at Circuit City for terrible service?

if consumer-electronics purveyors are hoping to maintain sky-high prices on new products, they’d better not count on it. After all, they have no idea what Wal-Mart has in store.

And Wal-Mart has no idea what the web has in store.