Liberia

'WE ARE SUFFERING’

ALEXANDRE TRUDEAU September 15 2003
Liberia

'WE ARE SUFFERING’

ALEXANDRE TRUDEAU September 15 2003

TWO-HEADED HEAVYWEIGHT

The consumer-electronics market takes a strange turn, JOHN INTINI reports

Business

THERE’S A BATTLE being waged by two of Canada’s biggest consumer-electronics chains at a busy Mississauga, Ont., intersection, and it has the trappings of a prize fight. In the southwest corner, wearing red (on the store’s signage), is Future Shop—a seasoned veteran out of the West with numerous retail

slugfests under its belt. In the northeast corner, in blue-and-yellow, is Best Buy—a feisty American still new to the Canadian game. There’s no ring girl to direct traffic, but there is a guy who in some ways suits the role of frizzy-haired promoter Don King. Like King, who often represents both boxers in

title fights, Kevin Layden, the 43-year-old president of Best Buy Canada Ltd., wins this retail melee no matter what happens.

Strange but true. Richfield, Minn.-based Best Buy Co. Inc. jumped into Canada in 2001 by swallowing up Future Shop Ltd. in a $580-million all-cash takeover. But Best Buy

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opted to pursue an unusual and, some say, risky strategy. At the time, instead of converting the existing 88 Future Shop locations into Best Buys, the company’s executives implemented a dual-banner strategy designed to attract a bigger chunk of the $15 billion that Canadians spend annually on TVs, stereos and so on. The result: two competing and expanding chains, owned by the same company but with separate merchandising and marketing operations. “Future Shop has a very strong brand loyalty with Canadians,” says Layden, whose onetwo punch controls an estimated 20 per cent of the country’s electronics market. “Why play around with that?”

There’s more to it than that, of course. The enormous cost of renovating Future Shops to look like Best Buys was another reason for maintaining separate brands.

There’s also a benefit in not looking to consumers like a one-company behemoth monopolizing the industry. In fact it helps, Layden says, that the two stores are quite different. In contrast to Best Buy,

Future Shop’s employees work on commission, and the chain sells slightly higher-end products than Best Buy. “We’re going after two somewhat different customers,” says Layden, formerly the president of Future Shop Ltd. “Age group and income levels will be very similar but how they like to shop for their products will be different.”

A year after the first Best Buy opened in Canada, the strategy seems to be working. The company’s operating losses are up this year compared to last, but that’s only because of the cost of building new stores. Otherwise, sales are up substantially: during the first six months of2003, they rose 36 per cent over the same period last year, to $1.2 billion. Encouraged by those results, Layden plans to blanket the country with as many as 65 Best Buys and up to 125 Future Shops.

Another unusual part of the business model is how the company decides on store locations. Some Best Buy stores—which currently number 14 in Canada—have popped up mere blocks, or even across the street from, a Future Shop. Consultant David Gray, president of Vancouver-based Sixth Line Solutions, wonders if this ploy will slow

growth for both stores in the long run. “It’s certainly unusual and I think they’re uncertain,” he says. “They publicly say they’re not concerned with cannibalization, but it’s important to minimize it and concentrate on taking market share from other people.” In response, Layden points to the suc-

PUTTING BIG BOXES close together, retail analyst Evans says, can help the company capture double the share it had and kill the competition

cess of the Mississauga location. Before Best Buy moved into the neighbourhood in August 2002, Future Shop sales rung in at $52 million a year. Since, Future Shop has seen a decline to about $48 million, but thanks to sales of $42 million at Best Buy, the increase in revenue on that one intersection is $38 million. “In the long-term, putting boxes close together can help the company capture double the share it had with a single store and kill the competition,” says retail analyst Wendy Evans, head ofToronto-based Evans & Co. Consultants Inc. But despite what the company says, Evans expects the U.S. parent company will

eventually merge the two firms under one brand name. “Market-share dominance,” she says, “is certainly American thinking.” Layden’s team benefits from the fact that Canada has no other major chains. Sure, retailers such as Wal-Mart, the Bay and Sears sell TVs and audio equipment, but the electronics-specific marketplace is fragmented. There have been rumours suggesting U.S. giant Circuit City Stores Inc. might move north, but so far officials with the Richmond, Va.-based company say they have no such plans. Either way, Layden claims he’s unconcerned. “There has always been room for two electronics giants in Canada,” he says. “It would be very hard for a third.”

In an effort to compete, some smaller Canadian firms in that sector have banded together into buying groups to lower costs. And the big boxes haven’t chased away all the independent stores. Vancouver’s Sound Plus and Winnipeg’s Advance Electronics, among others, continue to succeed in a competitive environment because they offer a level of service and selection that the giants can’t. “Their staff is bythe-hour,” says Mark Mandlsohn, managing director ofToronto’s independent Bay Bloor Radio. “We’d rather talk with our customers to find out what they want. We have dedicated professionals, some who’ve been with us 20 years. How can they compete with us?” Still, there’s no shortage of buyers keeping the registers humming at the chains. Even with huge capital expenditures on new stores and comparatively small profit margins on electronics, Best Buy and Future Shop are thriving. As well, the important pre-Christmas sales period is yet to come. But because of the seasonality of the industry—sales aren’t always as brisk as they are in December—and those tight margins, making money is still a challenge, Layden says, so “volume is key.”

Unless something drastic happens, Layden says, the long-term plan is to maintain two distinct chains. If forced to choose, which of the two would he shop in? “I’m not going to do that,” he laughs. “Would a father pick which son he likes more?” No, but he probably wouldn’t let them fight, either. 171