Thursday, January 04, 2007

Big news: Excessive price cuts hurt profitability

These are a couple relatively old items that have been sitting around because I was feeling lazy over the holidays.

It appears that the huge price cuts Best Buy and Circuit City took for Black Friday had a negative impact on their bottom lines. Imagine that!

Circuit City took the worst hit, because they are the weaker of the pair:
Circuit City Stores ... lost money during the three months ended Nov. 30. Investors already knew that the consumer electronics retailer from Richmond, Va. has been battling cut-throat competition, but they had expected at least a little profit.

Consumer electronics retailers are frantically trying to beat each other to customers by slashing their prices on things like flat panel TVs, effectively crimping the entire industry's ability to make money....
But Best Buy was hurt, too:
The company’s gross profit rate for the third quarter was 23.5 percent of revenue, down from 24.4 percent last year, and operating income for its U.S. operations fell 6 percent to $186 million for the three-month period, which included the first three days of the Thanksgiving holiday.
Best Buy justified their moves with the market share defense:
However, CEO Brad Anderson defended the aggressive price moves, stating they helped Best Buy win market share, brand loyalty and new customers as the chain headed into the final and most earnings-rich quarter of its fiscal year.
Which has some validity, of course. Particularly if Best Buy is playing a game of chicken with Circuit City -- having deeper pockets and being overall stronger, they can afford to play the price-cut game harder and longer. But there are two problems with the game, as I see it. One is that there's another company that can play it better (and we all know who it is), and the other is that consumers' expectations are changed by such events. Now that we've seen that laptops can be sold for $250 and hi-def TVs for $600, we're not likely to flock into stores to pay triple those prices.

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