Watch Out, Best Buy and Circuit City (In Walmart's Gunsights!)

Business Week ^ | 11/9/05 | Robert Berner

[voletti]

Wal-Mart is attacking the business model of the two largest U.S. consumer-electronics chains by offering lower-cost extended warranties. This holiday season, Wal-Mart Stores (WMT ) has made no secret that it's gunning for the nation's two largest consumer-electronics chains, Best Buy (BBY ) and Circuit City Stores (CC ). Wal-Mart has spiffed up the interiors of many of its electronics departments and added a slew of high-end products, from Sony (SNE ) liquid-crystal-display televisions and Toshiba (TOSBF ) laptops to Apple (AAPL ) iPods. It's backing the changes with an aggressive holiday marketing campaign and a big day-after-Thanksgiving sale. But here's what really has Best Buy and Circuit City worried: Wal-Mart has entered their most profitable line of business, extended warranties, and it aims to turn that business on its head.

Although they don't disclose it in their financial filings, the real earnings engine at Best Buy and Circuit City is not the sale of gadgets themselves but the sale of warranties. Those are the high-priced, multiyear protection plans on TVs, computers, and other items that are hawked by the retailers' salespeople at the close of each purchase. This fiscal year analysts estimate warranty sales will account for more than a third of Best Buy's operating profit and all of Circuit City's. On Oct. 27, Bentonville (Ark.)-based Wal-Mart attacked that profit source by launching extended warranties on TVs and computers at prices that average 50% below Best Buy's and Circuit City's, says Jane J. Thompson, head of Wal-Mart's financial services.

[D-fendr]

I would think the way to attack Best Buy would be on service - it's lousy. But then that's not WalMart's strength either.

[Terpfen]

Not with the junk Wal-Mart passes off as quality electronics. Best Buy has them beat there.

[HitmanLV]

The best the average Circuit City or Best Buy person can do is read off the list of features on the card next to the price.

The best salespeople in NYC in my experience are at J&R Music World and Willoughbys Camera (is it even there anymore?).

The worst, bar none, are at CompUSA.

[Rca2000]

No matter. After finding what wal-mart is up to now(selling Wicca and other pagan-type stuff, and NOW-- banning the sale of anything that has that EVIL, SICK, IMMORAL WORD in it--"CHRISTMAS", ) I, nor my family will be going there much.

[There You Go Again]

Ooops, WalMart should not do this. Some of the economic imbeciles here on Free Republic (the non free traders) will complain that WalMart is being too competitive. "People at BestBuy are losing their jobs because WalMart is selling flat screen TV's for only $25...that isn't right...we need more government regulation!!!" "I thought you were against government regulation?" "Well normally I am, but I am so stupid when it comes to economics, that I am for it in these cases." AND THUS, THAT IS HOW RINOS ARE BORN....Eg. SEN. SNOWE

[Graybeard58]

I bought what I thought was a new computer from Best Buy but when I tried to collect the rebate I learned that someone had already collected it on that computer. They sold me a used comp. for new. When I raised hell they gave me a new replacement.

Never again.

[Phantom Lord]

I will bet you my entire life savings that I can go to a Wal-Mart right now and find many products with the word "Christmas" in the title on the product itself or on the Wal-Mart sale sign.

Wanna take me up on it?

[TaxRelief]

If it wasn't for Walmart, I don't know how we'd stay on a budget!

[Terpfen]

All retail PCs are junk. I'm sorry to hear you got a refurb passed off as new.

[PJammers]

Where on GOD's green earth did you come up with that one?

Wal-Mart haters are truly amazing!

Geesh.

[upchuck]

From the article:

Not all analysts are convinced Wal-Mart's move will cut into Best Buy's and Circuit's earnings. Colin McGranahan, of Sanford C. Bernstein & Co., notes that it's the sale of the gadgets themselves that drives warranty sales. He believes consumers will put Best Buy's and Circuit's greater choice before the price of a warranty.

But of course, most buyers still don't realize how much more expensive their warranties are than Wal-Mart's. The test comes when they find out. Eric Arnum, editor of the online trade publication Warranty Week, predicts this outcome: "[Wal-Mart] is killing the goose that lays the golden egg."

Wally kills the goose that has been laying the golden egg for Best Buy & Circuit City. Gotta love it.

Besides, I've never heard any expert I trust hype these warranties. In fact, I've heard just the opposite - that they are next to worthless.

Which is why, I'm sure, the salespeople at BB and CC push them so aggressively.

On a slightly different topic, if I was a shareholder of Circuit City I'd be damned nervous to hear 100% of the company's operating profit comes from these warranties.

Yes, I'm an unabashed Wally booster. Feel free to flame the brick wall :)

[TaxRelief]

Walmart has 7,970 items with the word "Christmas" in the description on their website. Did Costco send you an email saying otherwise?

http://www.walmart.com/catalog/search-ng.gsp?search_redirect=false&dept=0&search_query=christmas

[Gabz]

Go WalMart.

[gcruse]

I noticed my local Super Center started putting up big screen projection TV a month or two ago. They have the screens on shelving maybe eight feet off the floor so that if you are standing in front of the screens, you can't see a damn thing. They haven't figured out how critical eye level is to the LCD and plasma stuff yet. Can't imagine they'll sell many until they get their act together.

[Gabz]

Good Grief - you have no idea what you are talking about.

7,900 + items for Christmas and you claim WalMart is banning the word? Please do a bit more research.

[Gabz]

Amen.

[SamAdams76]

Well I'm in the electronics business and I can honestly tell you that the "extended warranties" are a consumer rip-off and nothing but a profit center for retailers. In fact, salespeople at many of these retail stores only get a significant commission if they sell an extended warranty with the product. That's why you always get the hard sell when you go into these places.

For those who think the extended warranties are "peace-of-mind", consider how many electronic devices you have purchased over the years and how many have gone bad for you. I can guarantee that the extended warranties would have costed significantly more in the long run even the cost of replacing what, if any, electronic devices failed for you over the years.

Basically if the product is a lemon, it will fail while it is still under the manufacturer's warranty. If it gets through the first 90 days, it's pretty likely it will give you years of reliable service after that.

[Gabz]

OOPS - I should have read further into the thread.

But these ill/un-informed knee-jerk WalMart bashers, while giving me hours of amusement, still drive me nuts :)

[Porterville]

Invest in agressive WalMart