Industry Profiles: Consumer Electronics and Music Stores

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Industry Profiles: Consumer Electronics and Music Stores


U.S. electronics and music retailing in the early 2000s was increasingly conducted by a relatively small number of so-called category-killer chains, such as Best Buy and Circuit City, which featured an extensive line of audio and video products, computers and accessories, and musical recordings. More specialized outlets like the music-only chain Sam Goody (owned by Best Buy) and the computer warehouse CompUSA also held notable shares of their respective markets, although non-store retailing options like mail-order clubs and Internet orders also contributed sizable revenue streams in these segments.

In 2000, the industry posted approximately $57 billion in sales, more than 80 percent of which came from radio, TV, and electronics stores. According to the National Association of Recording Merchandisers (NARM), sales of music products totaled $10.5 billion in 2000, slightly below 1999 levels. In Informationweek, NARM revealed that music industry sales slipped more than five percent in 2001, as this segment faced competition from the growing number of consumers who chose to download free music off of the Internet or make copies of CDs instead of buying musical recordings in stores.

Technological advancements have introduced many new categories of consumer electronics that scarcely existed a couple decades ago, and have made many existing devices considerably more affordable. As recently as the early 1980s, CD audio recordings made their market debut, and personal computers were largely relegated to hobby electronics shops rather than the centers of mass-merchandising outlets common by the mid-1990s. Other major product introductions that emerged relatively recently have included VCRs and camcorders, a spate of computer peripherals and software titles, cellular phones and pagers, and digital versatile discs (DVD). The development of such new categories has combined with continued demand for updated versions of established technologies like large-screen—and now, high-definition digital—televisions and ever more powerful computers.

History of the Industry

Music Stores During the 1980s, the new compact disc (CD) format, with its greatly enhanced fidelity, completely revolutionized both the equipment and recordings segments of the industry. While cassette tapes had existed side-by-side with records for over a decade without overtaking the record format, by the early 1990s, companies halted record album production in favor of CDs. The popularity of compact discs showed no signs of abating. The Recording Industry Association of America (RIAA) noted that by 1993 almost half of all U.S. households had CD players.

Because of the greater durability of CDs and the much higher prices (about 50 percent higher than records during the years both were sold), Wherehouse Entertainment and other major retail chains began to move into the used record business, joining small independent music outlets that commonly bought and sold used CDs and tapes. This area had been the last bastion of the independent retail store. "Furious because they don't make any money off used CDs," commented critic David Browne in Entertainment Weekly, "four major distribution companies—CEMA, Uni, Sony, and WEA—stopped underwriting newspaper advertising for those stores that carry them. That move alone was expected to cost the stores hundreds of thousands of dollars in lost revenue."

Consumer Electronics Stores The commercial sale of personal computers and easy-to-use software developed in the 1980s boosted the retail industry. Retail sales of computers were no longer directed only at large businesses or hobbyists; the target market for computer and software dealers extended to small businesses, schools, and individuals for at-home use.

Overall, however, the sales increases that were once seen in this industry dropped because of market saturation. Approximately 98 percent of American households own at least one color television set, and future sales growth is expected to be seen in replacement and upgrade sets. Similarly, more than 77 percent of all U.S. households that own a television set also own a video cassette recorder; consequently, this product line has been nearing saturation.

While sales have continued to rise slowly, future growth depends upon technological improvements. Long-term growth depended on such promising innovative products as home theater equipment, compact discs, large-screen televisions, and high-quality loudspeakers. Demand for camcorders, televisions, video cassette recorders, and autosound equipment were expected to decline as these technologies reached their saturation points.

There were more than 10,000 radio, television, and consumer electronics stores in the United States in the early 1990s and thousands more music shops. Many of these stores were owned by nationwide chains, such as Tandy Corporation, parent of more than 7,200 Radio Shack stores at that time.

A mini-shakeout of firms took place in the early 1990s as market saturation became more prevalent. Some companies began dropping out of the U.S. electronics market, and some chains were similarly closing their doors. The appliance and electronics chain Highland Superstores Inc., for example, pulled out of the Chicago and Midwestern markets after performing as the area's largest-grossing electronics and appliance retail chain. Competition in many markets continued to pit super-stores against each other and led to increased price wars.

Significant Events Affecting the Industry

While some sales categories continued to enjoy impressive annual growth, electronics and music retailers reached the late 1990s a bit weathered from the rampant expansion campaigns of the major firms and the incessant price wars that beat down profits. As a consequence, a number of the industry's largest mass retailers, including Best Buy, Tandy, and Musicland, scaled back some of their construction plans and even closed down less profitable stores. Simultaneously, the music segment faced continued challenges from popular book and music superstores like Borders and Barnes & Noble, which threatened to lure away customers from conventional music chains like Musicland with their wide selection and comfortable atmosphere. The latest entrant into the mega-selection fray was, Inc., an Internet-based book retailer that attracted hundreds of millions of dollars in book sales in just two years. In addition to books, by 2002 sold music along with a wide variety of other merchandise.

The ability to download free music from the Internet and burn copies of CDs using personal computers and stand-alone CD burners was having a significant impact on music industry sales. As reported in Informationweek, NARM indicated that CD burner ownership rates among music consumers totaled approximately 40 percent by 2002, and that despite efforts of recording companies to copy-protect audio recordings, consumers were still downloading songs at a rate of 3.6 billion per month. While music downloads and copying created challenges for music recording retailers, the same trend had a more positive effect in certain categories of consumer electronics. According to the Consumer Electronics Association (CEA), by the early 2000s portable Internet audio players and CD recorders were increasing in popularity. Additionally, consumers were buying special hard drives for their PCs, called digital music servers, which were used to store music they had downloaded from the Internet (in formats like MP3) or copied from audio CDs.

Key Competitors

Best Buy Co. Inc. is the largest U.S. consumer electronics store, with $19.6 billion in 2002 sales. That year, the Minnesota-based company marketed a broad line of electronics, software, recordings, and home appliances through 480 stores. Although office equipment, including computers, was the company's largest sales segment during the late 1990s, accounting for more than 35 percent of sales, this category was eclipsed by consumer electronics in 2001. Despite a sluggish economy, Best Buy was on solid ground in the early 2000s. Digital products, including DVD players and digital television sets, supported the company's performance. As the leading consumer retailer of computers, Best Buy launched its own store brand of computers, called Matrix, which lessened its dependence on the retail strategies of other leading PC manufacturers. Besides its acquisition of Magnolia Hi-Fi Inc. in December 2000 and Musicland Stores (including Sam Goody, On Cue, Suncoast, and Media Play) in January 2001, the company had plans to open about 60 new Best Buy stores each year into the mid-2000s.

Circuit City Group is Best Buy's largest rival on the national scene. With $9.6 billion in 2002 sales, it trailed Best Buy by a large margin, although it operated many more stores, with 630 that year. Circuit City is less dependent than Best Buy on office equipment for its sales, but that category was increasingly important to the company. In the early 2000s, it stopped selling appliances and increased its focus on electronics and office equipment. Circuit City also owns a chain of car retail super-stores called CarMax, which it was planning on spinning off into a separate company in 2002.

A subsidiary of Best Buy, The Musicland Group Inc. is the United States' largest musical recording retailer. It operates primarily under the Sam Goody name, but also runs the Suncoast video chain and the Media Play and On Cue multimedia chains. In 2002, the company's parent was in the process of consolidating all On Cue stores under the Sam Goody brand name.

Although it faced sluggish sales in the early 2000s, CompUSA Inc. still ranked as the top U.S. computer retailer. In 2002 the company operated 220 stores. In 1998 it absorbed one of its leading competitors, the Computer City chain, formerly owned by Tandy, at a $275-million price tag. Two years later, Mexican retailer Grupo Sanborn purchased CompUSA for $800 million. According to Latin Trade, the acquisition was noteworthy because it marked the first time an American retail chain fell under the ownership of a Mexican firm. In addition to its retail activities CompUSA also sells directly to organizations, including schools, corporate clients, and the government.

With its ubiquitous chain of retail stores, RadioShack Corp. has struggled to break from its roots as a quirky hobby shop to compete with the electronics category killers of the 1990s and early 2000s. Traditionally its stores carried a line of electronics parts and accessories and a comparatively small assortment of assembled electronic goods, many of which formerly were of its own manufacture. The company was slow to infuse national brands and a wider selection of mainstream electronics into its product mix, causing it to lag behind fast-growing rivals like Circuit City. RadioShack eventually gave up manufacturing its own line of computers and sold off some of its other manufacturing operations. By the late 1990s Tandy had adopted Compaq as RadioShack's exclusive computer brand. As early as the 1970s the company had extended itself to more than 7,300 retail locations, most of which were small, crowded spaces in shopping malls. By 2002 it had scaled back its mushrooming store count, which numbered at 7,100. In 2001 RadioShack recorded sales of $4.8 billion.

Industry Projections

Two of the most important growth categories for the industry in the early 2000s were digital high-definition television (HDTV) and digital versatile discs (DVD). Both of these relatively new technologies were expected to witness fast sales growth through the early-to-mid 2000s. According to the CEA, digital TV products alone were expected to generate more than $8 billion in sales in 2002. By the early 2000s, about 10 percent of U.S. TV stations were broadcasting digital signals, and approximately 60 percent of the nation's homes were capable of receiving digital broadcasts. Many of the leading networks, including ABC, CBS, and PBS, were broadcasting varying amounts of programming in HDTV format.

The RIAA noted several key trends for the music component of the industry. Sales of audiocassettes and vinyl records continued to decrease, as compact discs remained the preferred format for music recordings. Along with the rise of music downloads via the Internet, demand for CD singles also continued to decrease.

Global Presence

The U.S. electronics and music retailing industry is surprisingly absent from foreign markets. While a number of top companies have operations in Canada, and some have made plans to expand elsewhere, most have little or no presence in other countries. This is consistent with a broader pattern in retailing, as relatively few retailers in any category are able to expand in the same way, for example, manufacturers might penetrate foreign markets. The electronics retail segment is even less internationalized than some other kinds of retailing. Part of the problem stems from supplier relations and transportation costs. Most retailers buy in bulk from manufacturers and wholesalers, and distribute their inventory from a system of distribution centers. When entering foreign markets, it may be costly or impossible to distribute merchandise from existing distribution centers. Moreover, retailers' domestic supplier relations may not yield products appropriate for foreign markets. For instance, there may not be any labeling on the product in the local language of the intended market; in places like the English-speaking parts of Canada, this is not an issue. There are also usually regulatory issues to consider when entering new markets, and some retail practices in the United States may have different legal ramifications elsewhere. For these reasons, retailers that enter foreign markets often need to forge relations with local suppliers—or simply buy out existing retail operations—but the entire process of entering a dissimilar market may be subject to uncertainties and inefficiencies.

Employment in the Industry

Like most retail occupations, employment in the electronics and music store business tends to pay less than manufacturing and professional jobs. In 2000, the indus-try's average hourly wage was $13.50. That year, there were approximately 487,970 workers in the industry, an increase of more than 16 percent from 1997 levels.

Sources for Further Study

2000 annual survey results. marlton, nj: national association of recording merchandisers, 2001. available at

annual benchmark report for retail trade and food services: january 1992 through march 2002. washington, dc: u.s. department of commerce, economics and statistics administration, u.s. census bureau, may 2002.

digital america 2001, the u.s. consumer electronics industry today. arlington, va: consumer electronics association, 2001. available at

forest, stephanie andersen. "incredible universe lost in space." business week, 4 march 1996.

heun, christopher t. "retailers want a piece of online music subscriptions." informationweek, 11 march 2002.

"industry information." washington, dc: the recording industry association of america, 9 april 2002. available at

myerson, allen r. "compusa: revising computer retailing." new york times, 29 june 1998.

recording industry association of america. "riaa statistics." washington, dc: 1998. available at

"retail trade." u.s. industry and trade outlook. new york: mcgraw-hill and u.s. department of commerce, 1998.

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Industry Profiles: Consumer Electronics and Music Stores

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Industry Profiles: Consumer Electronics and Music Stores