By Ben Smith

WATCH THE BIG BOYS:

The next big thing in TV’s, the largest category in Consumer Electronics, isn’t going to be 3D.  So put the dorky glasses down and think about what recent moves by the big boys signify.

• Walmart buys VuDu (streaming movies) (credit: ZatzNotFunny)
  • Walmart spent over $100M to buy the whole cow
• Best Buy Bankrolls Tivo’s Marketing (credit: Davis Freeberg’s Digital Connection)
  • Tivo’s market cap is $1 billion, so Best Buy is renting the cow for now.  They are spending $20M to promote Tivo this year … Tivo itself only spent $5M last year.

THE NEXT BIG THING:

The next battleground for hearts, minds and wallets of consumers will be connected / internet TV.  Don’t get hung up on the idea that these moves by BBY and WMT are solely focused on the consumer demand for the added features that connected TV’s provide.  Here’s how we see things playing out:

Short term: the need to address consumers growing desire for streaming video is important.  Walmart and Best Buy are gaining access to existing relationships & infrastructures to offer their customers access to their own branded digital video services.

Near term: Walmart and Best Buy are already the leading retailer of TV’s.  Best Buy has an obvious opportunity to integrate Tivo capabilities & connectivity into their own Insignia line of TV’s.  It is not a stretch to think that both Walmart and Best Buy persuade leading TV vendors to integrate these services into TV’s for sale in their respective stores.

Long term: the bigger picture of these moves is about more closely connecting the retailer to the consumer in their home.  In a fragmented media world where it is increasingly difficult to reach consumers via traditional means, Walmart and Best Buy are hard wiring themselves to their consumers.  These new platforms enable a retailer to not only offer the obvious of streaming movies & other digital downloads, but also positions them to take advantage of future advances in connectivity and digital offerings, including ones geared around shopping at home.

For more speculation on retailers connected TV & on demand services, check out these articles:

• “Wal-Mart enters the battle of TV vs. the Internet.” (credit: Fortune)
• “Best Buy Betting Big on Tivo” (credit: NewTeeVee blog)

Now that is about as far as I can go without staying from the mission of Retail Leverage. We know that our readers value that we help keep them informed on big picture news that has retail impact, but we aren’t really focused on the product or technology.  The reason I share this article with you is that you don’t have to be selling TVs or set top boxes to walk away with ideas that you can apply in your own brand/business.

HOW CAN YOU ADVANTAGE A PARTICULAR RETAILER?

The key lesson here in the pursuit of Retail Leverage is to ask (and answer) the question – “How can I advantage a particular retailer versus their competition?”

Look at the lengths that Walmart and Best Buy are going to position themselves against each other in the connected TV space.  Walmart’s strategy involves acquiring a company (VuDu), and Best Buy’s strategy involves entering into an exclusive relationship (Tivo).

The real story is the retailers fight against each other.  Get over the battle you are fighting against other brands – THE RETAILER DOESN’T CARE.

Fortunately though, you don’t have to be in a category that is in the cross-hairs of retailer corporate strategy teams to be able to employ the “advantage” strategy.  Simply put, If you want to get the buyer’s attention, bring something to them that strengthens their hand versus their competition.

As assortments narrow and the tentacles of private label expand, brands are being forced to make bigger bets on specific retailers, product lines, and skus. Too often, people wait to make tough decisions until their hand is forced, and sometimes it is too late.  While the “advantage” strategy might not be right for you at this time, you can learn a great deal from the exercise.  Good luck!

By Ben Smith

It’s hard to have a conversation about consumer electronics without making the discussion relative to Best Buy.  While I assume most people know that Best Buy is the market leader, I don’t know if they understand their magnitude in the marketplace.  With their longtime rival Circuit City closing in 2009 this provided a slight “reset” for the market and it is worth taking a look at how things shook out.  I know that all the customers we met with had their own take / plans on how they were going after Circuit City’s market share.   The general market consensus was that Best Buy would gain the most, but that Walmart and Amazon.com would also benefit.

Well the dust has settled and results from the Q4 holiday season are in.  I realize that some of our readers are in the CE community and have ready access to retailer share.  Note that I’m not quoting anything from NPD that I have access to for my job.  I’m linking to a couple of public sources to point out that you can get a good idea of what is going on with a little digging (or you can get it from us)!  The data I’m sharing is from consumer surveys conducted by 2 different firms,  so take it with a grain of salt – it isn’t cash register data, but provides valuable perspective on where consumers look to purchase their electronics.

1) AD AGE ARTICLE SHOWS BEST BUY GAINING GROUND (WITH 33% SHARE)

Ad Age featured an article appropriately titled “Former Foes Gain Share From Shuttered Circuit City”.

Summary: Best Buy gained share last year and is up to approx. 33% consumer preference share.  Walmart gained also, and is up to approx. 20% consumer preference share.  They have further breakdowns in the article by customer’s income.  Those under $50K/year, Best Buy and Walmart are neck and neck.  But for those $50K & over, Best Buy is the overwhelming leader, over 40% share.

Store       Dec. 2008   Dec. 2009   +/-

• Best Buy    29.8%       33.1%       3.3
• Walmart     17.0%       20.6%       3.7
• Amazon      2.3%        3.6%        1.4
• Target      2.1%        2.8%        0.6
• Sears       1.6%        2.0%        0.4

Their data source: (data from BIG RESEARCH)

Notes: Of course they didn’t include Circuit City’s share in 2008, but I estimate it was between 8-10%.  I estimate that brick & mortar Best Buy and Walmart probably split Circuit City’s share pretty evenly, with Walmart gaining a little more due to a larger number of store locations.  Amazon.com gain’s were likely from Circuitcity.com’s absence, as Circuitcity was a strong dot com player (stronger than their retail presence in comparison).

2) RETREVO PULSE ARTICLE SAYS BEST BUY LOSING GROUND (BUT WITH 40% SHARE)

Retrevo Pulse featured an article titled “Best Buy Competitors Gained Ground This Year”.

Summary: Take it with a grain of salt that Best Buy lost ground in this survey, as they actually have an even larger share of preference in this one, at 40%.  I’m not disputing the source, but as you’ll see in my notes, I think you can explain away some of the differences.

About Retrevo & their data source: The Retrevo Pulse is a data source from a CE shopping website that conducts its own surveys and publishes them. What I like about Retrevo is the simplicity of their reports.

Notes: This article shows Best Buy with a even larger share of preference than the Ad Age article, at 40% – but that it slipped over the last year.  The article also makes it look like Amazon gained at Best Buy’s expense.  Perhaps it boiled the results down too much, and again, we don’t see what Circuit City’s 2008 numbers were to gauge how much there was for competitors to take.  They also show Walmart much smaller than the Ad Age survey.  And conversely, Amazon looks huge here.  Given that the survey was conducted online by Retrevo, a online shopping/comparison site, you can imagine that their population is probably more comfortable with relying on Amazon.com for their CE purchases.

TAKEAWAY: CONSUMER ELECTRONICS STILL REVOLVES AROUND BEST BUY

Best Buy is the dominant player in Consumer Electronics, a king maker that has influence with consumers beyond whatever its share actually is (33% – 40%).  Even as Walmart and Amazon grow share in the CE space, it is ultimately because people get more comfortable NOT making their purchase at Best Buy.  If you are a CE manufacturer, not having your products at Best Buy robs you of credibility with consumers and key influencers.  If you are an agency with clients who sell products at Best Buy, you need to know as much about Best Buy as your clients because it is your best route to success.  If the products you sell can’t succeed at Best Buy, you will have little leverage wherever else you go to peddle your wares.  Conversely, succeeding at Best Buy paves the way for success in other channels.   Best Buy does the heavy lifting for other retailers that sell consumer electronics.  They just have to look at what Best Buy assorts as a baseline and start from there.  So get it right in the first place and base your plans on success at Best Buy.  Retail leverage will flow from there.

BONUS: NAME TO KEEP AN EYE ON IN CONSUMER ELECTRONICS:

If you don’t live in the midwest or south, you probably haven’t heard of HH Gregg.  In the coming decade you will.  They are a regional consumer electronics chain that has national ambition.   Imagine the things that people liked about Circuit City (more experienced sales associates, ability to deal), but without the legacy burden’s that held Circuit City back.   This article in the WSJ lays out HH Gregg’s ambitious expansion plans. While HH Gregg has a small footprint and is only roughly 10% of the size of Best Buy (127 stores), in many ways this is an advantage to them.  They are ramping up expansion in a market where retail real estate has been decimated, including many former Circuit City locations that can easily be re-purposed.

By Ben Smith

HOW TO GET 250,000 NEW CUSTOMERS A MONTH – OVERNIGHT

I guarantee that if you haven’t seen / heard of MagicJack by now – you must have given up cable and are avoiding retail.  How many other consumer electronics products have gained distribution in over 10,000 stores in the last 12 months?  In fact they aren’t far from being on the shelves in 20,000 stores.  While it isn’t a cultural phenomenon like Snuggie, MagicJack has pulled off something that any brand marketer worth their salt has to respect – let alone a challenger brand marketer desperate to break through.

Behind MajicJack is a privately held company largely driven by the efforts of a handful of men with roots in the telecom industry. Remember the 10-10 dialaround numbers? That was one of the founders early successes.  Little is known about the company besides the fact that they’ve built a proprietary network that runs MagicJack – probably how their cost structure is able to work.  It is also hard to get a handle on their finances, but I’ve seen articles projecting over $100 million in revenue in 2009, based on estimates on their install base and quoted sales of over 250,000 new customers a month.

I won’t bore you with the details of “what is” MagicJack beyond saying it is something similar to Vonage, or other voice over IP (VOIP) services out there.  There are some technology and business model differences, but the end result is you are getting phone service via your high speed internet.  It is legitimate, and even Consumer Reports has weighed in on MagicJack, as is one of the most searched terms on their site.

The hook to MagicJack is the pricing – Under $40 the first year, and under $20 each additional year.  Do the math (or they’ll do it for you) – that’s under $2 per month for phone service.  Compare that to what you pay monthly today – if you are lucky $33 via a triple play bundle from your cableco, or $40ish from AT&T.  You can pretty quickly see the value prop.

So the essence of this article is to discuss how MagicJack got to where it is today – and provide inspiration that illustrates potential paths for others to follow.  Challenger brand marketers / agency strategists – take note.  While the path they have taken isn’t necessarily glamorous – it does make sense for the story that they had to tell.  Follow along with us.

FROM HUMBLE BEGINNINGS:

2007: Launched via Drive Response TV (aka infomercials):

Late nights / early mornings.  MagicJack came up on TV the hard way – without Billy Mays or Anthony Sullivan.  Instead all they had to rely on was their value proposition.  You’ve got to start somewhere, and for a consumer electronics / technology related product you don’t just call up 1-800-2BestBuy, sweet talk the receptionist to get thru to the buyer, and bam – your product is on shelves across the country.  They had a story to tell and they used one of the best mediums to tell it.  Direct Response.  Direct Response is even better if you don’t have an ego to get over.

2008: Gained 2^nd Tier Retail Distribution:

Radio Shack has its place in the world and they do certain things right.  This is the kind of product you’d expect to find at RadioShack.  With 5000 locations they can put a product in front of lots of people and add retail credibility.  So it is no surprise that a product like this made its first tangible appearance at retail at The Shack.

GOING BIG TIME – HOW MAGICJACK LANDED THE BIG BOXES

Not sure whose phone rang first, but here’s how we think it went down:

MagicJack Salesman: Your customers are already asking about my product, and  I sold 2 million units alone in 2008.  I ran over $10 million in DRTV ads last year – perhaps you’ve seen it once or a hundred times?  I’ll tag my infomercials telling customers they can now find my product at your store.

Retailer Buyer: I’m thinking about taking a chance and listing this MagicJack thing that everybody’s talking about.  Growth is hard to come by, especially in this environment.  It’s a risk but there is lots of upside …

Note – Risk is the enemy of the retail buyer.  Minimizing that risk in the buyer’s mind if your key job if you are trying to get over the hump.  MagicJack did a great job of minimizing the buyer’s risk.

2009: Gained 1^st Tier Retail Distribution via DRTV tagging.

Best Buy started carrying the product early in 2009.  Almost simultaneously the traditional magicjack infomercials morphed to a version that tagged Best Buy where the normal call to action would appear.  MagicJack was sending its customers to Best Buy stores (or customers could still figure out they could go direct to MagicJack.com).  Note – Without having tangible sell thru data, I have to guess that the product has done okay at Best Buy.  MagicJack has 126 reviews on Bestbuy.com, with 3.6 out of 5 stars.  The fact that it is still on shelf after almost a year is proof enough for me.

In methodical fashion throughout the rest of the year, MagicJack has appeared in retail at Walmart, Staples, OfficeDepot, Walgreens, and CVS.  I’ve seen Walmart, Staples and OfficeDepot tagged in similar fashion as Best Buy.

[youtube=http://www.youtube.com/watch?v=cIRcWKa8CG8&hl=en_US&fs=1&]

MAGICJACK: RETAIL AND DIRECT IN PERFECT HARMONY:

So you might ask yourself wasn’t MagicJack giving up something by tagging retailers, effectively pointing potential customers to stores?

Well they can start dialing back their Direct Response spend, or at least keep it flat.  Plus after 2-3 years of hitting the airwaves hard with the same product, there are diminishing margins of return on the number of people who will buy your product direct.  Chances are they saw the ad – if they were going to buy it direct they would have done so already.

Retail represents an untapped market.  There are people who won’t buy direct, or maybe never even saw it on TV.  And there is a good chance the retail margin they’ll pay is probably close to the cost per order to sell direct (media costs + fulfillment.

LESSONS LEARNED:

1A) Infomercials are a great vehicle for telling a story and building demand at retail.

1B) Marketers with a holier than thou attitude towards Direct Response TV (DRTV) are ignoring a viable tactic.

2) Take risk away from the retail buyer. This makes it easier for them to list / support your product.   MagicJack wouldn’t be at retail if they didn’t have a success story from their direct experience, as well as ongoing aircover in the form of their DRTV spots they continue to run that in effect are ads for their retail placements.

3) There is less risk in balancing a direct and retail strategy than ever before. The battle lines have been blurred by retail consolidation, and the growth of private label.  I don’t think the retail buyer spends much time worrying about where you are selling your product, as long as it is selling well in their stores.   We spend way too much time worrying about who we compete against, versus just selling.