January 18, 2012
How CE Manufacturers Are Killing Brick And Mortar Stores And Undermining Their Own Future

By Gary Reber

By Gary Reber

    Now that we have embarked on Widescreen Review’s 20th year, I think that it is important, as an advocate for high-performance products, to reflect on the deterioration of presentation, education, demonstration, and personal service sales of performance audio and home theatre products.

    I recommend that this editorial be prefaced with the editorial I have published on www.WidescreenReview.com entitled: “Democratic Capitalism And Binary Economics: Answers For A Troubled Nation And Economy,” which explores in-depth the notion of building viable consumer power by simultaneously broadening the base of ownership of physical productive capital as new capital formation occurs and the economy grows.

    I covered this subject extensively in Issue 138, January/February 2009 in my Editor’s Couch section entitled “The Economy And Widescreen Review” and then in our 150th Issue, October 2010, in an article entitled “The Historical Documents.”

    The environment and opportunities for brick and mortar consumer electronics retailing has steadily gotten worse and continues to do so as consumer finances continue to erode due to the economy’s structural inequalities and decline. This is resulting in an exponential fall-off of consumer spending due to declining labor worker wages, the overleveraging of home mortgages, and the brimming of credit card balances.

    The decline in consumer spending is rooted in the declining status of the middle class and the shift from labor intensive to productive capital intensive production of products and services––which I have covered in the article entitled: “Democratic Capitalism And Binary Economics: Answers For A Troubled Nation And Economy.

    This exponential decline in brick-and-mortar consumer electronics retailing is also rooted in the Internet and the steady shift by manufacturers from presenting and selling their products through a network of independent or small chain brick-and-mortar specialty stores.

    I would like to share some observations with you as to the progression of events that I see, as related to the performance end of the consumer electronics industry.

    The Internet has brought us reading and visual content that is utterly staggering and mind-boggling. There are thousands of blogger sites that claim “magazine” status and many end-user discussion or “mini-blogger” forums. Some even sell the equipment that they discuss or review. And, of course, every manufacturer has a Web site. Some manufacturers sell their products directly via their Web site as well. Information is available as never before, and at times is disseminated through social media Internet programs. Whether it is reliable and truthful and to be trusted is another question.

    While all this “reading” power is now available from thousands of sources, nothing on a printed page, a computer or phone screen, or a video presenting a product, can replace the experience involved in the actual in-person “experiencing” of the product’s performance–– NOTHING!

    There is a growing breakdown of the protected specialty dealer channel. The unfortunate trend that manufacturers have supported is the selling of their products online, through warehouse discount outlets, and to large distributors servicing the so-called “custom installer,” or other individuals and small companies, and Internet “stores” without the requirement or minimum requirement to stock and display, and demonstrate product. While the trend started with generally common “commodity” products, more and more consumers are comfortable with shopping for such common products and pricier products online––especially when price compression and steep brand promotions result in lower consumer pricing.

    But within the last decade, increasingly, performance manufacturers have lessened their sales agreements to include Internet retailing or have not enforced their sales agreements with authorized brick-and-mortar retailers who have broken agreements in order to sell to anyone anywhere. This has significantly contributed to the slow demise of the audio and home theatre specialty retailer, who traditionally maintained a store and stocked, displayed, and demonstrated a variety of non-common performance products while providing education to consumers through face-to-face interaction and A/B product and system comparisons. The specialty retailer cannot compete with “sales” operations that have no comparative costly brick-and-mortar operations, including educated sales personnel, nor can they avoid collecting the sales tax.

    Nor can the specialty retailer compete with “warehouse” retailers who do not provide A/B product and system comparisons and who sell at a small percentage above their lowest cost. Warehouse discount and Internet retailers can operate on far less profit than specialty retailers, who thus cannot compete on price. Without profitability there is no prosperity.

    Another significant development that is negatively impacting specialty retailers is Internet enthusiast forums. Enthusiasts visit forums to seek advice and recommendations from other end users on products. Forum discussions are back-and-forth encounters, often heated, on what specific product performs better than another, or what is the lesser cost relative to performance. Widescreen Review product reviews and articles are often a reference source for such discussion on Internet forums. But again, this is all opinionated “TALK.” Similarly, a manufacturer’s Web site is designed to charge consumer interest in the range of products offered.

    One can argue that consumers have benefited from the opportunity to purchase products online at lower cost, even substantial lower cost. Certainly, in the case of products that require no “in-person” explanation of their performance qualities and demonstration to substantially determine actual performance relative to expenditure, qualify for Internet catalog sales.

    It is human nature to desire to pay the lowest price possible, and we can’t blame the consumer, which we all are, desiring the best possible price and purchasing from the lowest-price producers’ sales channels.

    The problem with the Internet, when manufacturers justify letting their performance product be sold online or through other “discounted” outlets, is that the practice will ultimately undermine their future as a provider of performance products.

    If we look at the scenario that is now supported with technology and apps available to computers and smart phones, the way consumers can use this power is once one has sorted through the pro-and-con discussions and recommendations, sought out a brick-and-mortar store to become further educated and in-person experience the product they ultimately desire, the next step is to search for the product on the Internet for the cheapest price. This scenario completely bypasses the specialty retailer in the final sale. In many cases, the end user never personally experiences the product at a brick-and-mortar store prior to purchase on the Internet.

    The above scenario is the actionable behavior of the consumer seeking the best possible price. Performance manufacturers who allow their products to be sold on the Internet that undercuts their network of brick-and-mortar stores are steadily killing this retail channel and undermining their own future.

    While Internet sales may appear to management to be a quicker avenue to greater sales, Internet sales have drawbacks, in particular with costly, large and heavy performance products. After the sale and added shipping cost, it is often challenging to return a product that is either defective or in which the purchaser ends up not satisfied with. The dissatisfied consumer is first challenged with re-packing the product in the manufacturer’s packaging, and the larger and heavier the product the more challenging the re-packing. There are all sorts of fine print return requirements in addition to re-packing in original condition, including return shipping and insurance pre-paid by the customer, and testing by the Internet seller or manufacturer that the product has not been damaged by the customer. These are requirements for a refund or exchange, often subject to a “restocking” fee. Forget the in-home trial period because if one is not satisfied, then all the above requirements kick in. It is challenging and frustrating no matter what the experience, with plenty of uncertainties and worries about the “status” (new, re-packaged, gray market, non-warranty) of the product purchased and the consequences of being mislead, not satisfied, or just ripped off with one’s money confiscated. Then too, if there is a warranty issue, similar requirements are imposed by the Internet seller or manufacturer who may or may not service the product. Dealing with the specialty retailer eliminates these concerns, with good and trusted brick-and-mortar stores obligated to accept returns and exchanges without the above hassles and expense on the part of the consumer. Furthermore, in-home installation and warranty service is handled by the brick-and-mortar retailer, on behalf of their customers.

    Separate from the Internet sales channel there is the large distributor channel. While the large distributors maintain showrooms with competitively priced products and manufacturer training, this is for the benefit of the custom installer, not the end user. The “selling” is to the custom installer, who is then expected to “sell” to the end user. The scale is one-on-one client relationship without a brick-and-mortar showroom.

    The distributor product showcases are similar to the traditional role manufacturers have had with specialty retailers, except that end users benefited directly by visiting brick-and-mortar stores and conversing with trained salespeople who could explain and demonstrate through A/B product comparisons.

    There are, for the most part, no requirements for the custom installer to stock and display, and demonstrate product. Some custom installer services are divisions of brick-and-mortar stores with “demo/education” facilities, but a large majority of custom installers are small, often individual, operations with no storefronts and no capability to demonstrate product. Distributor showrooms are restricted to resellers with a tax ID. Some custom installers purchase products as needed through licensed and manufacturer-authorized retailers, which is generally not supposed to be permitted by manufacturers in their authorized seller agreements.

    Not all manufacturers are allowing their products to be sold on the Internet at below brick-and-mortar store pricing. Apple, Inc., for example, practices extremely regulatory measures on Internet resellers to insure that its products are not discounted or sold at less cost compared to the products purchased through an Apple brick-and-mortar store. Apple recognizes and supports the power of display, personal products education, and hands-on demonstration throughout their Apple Store network.

    Manufacturers who are allowing their performance products to be sold through non-brick-and-mortar and non-demo/education custom installers and on the Internet are a problem for the specialty retailer, and thus, for consumers who desire to experience in person what performance products are all about. Without a healthy brick-and-mortar education and sales channel, manufacturers of performance products will eventually cease to exist.

    Today, there is a feeling of desperation within the whole high-performance industry. The market for performance products is compressing and the industry is confronted additionally with a shift in potential customer demographics with a growing aging population whose consumer power is declining. The new young generations have not the range of specialty retailers to which they can go to experience the performance audio and home theatre products, annually being improved by technological innovation. Thus, they are unfortunately unaware of the performance picture and sound experiences available.

    Already we have seen and continue to see the disappearance of the giant retail chains––some such as Best Buy, Sears, and Kmart that are identified with the fabric of America and which retail analysts believe will fall victim due to eroding market share. They and others are on a slow deathwatch. Circuit City, Borders, Tower Records, and others with a largely middle-class customer base already have succumbed. But these are mass-market brick-and-mortar chains that do not specialize in performance products. We already have lost The Goods Guys, Sound Advice, and Tweeter, and other regional performance product chains, with hundreds of independent performance product dealers also ceasing to exist. They all are impacted by market pressure to retrench by scaling back expansion plans, delaying the opening of planned new stores, and closing underperforming or redundant stores. Without a growing base of money-powered consumers and unfairly challenged by disadvantaged competition, they face extinction.

    Who is the cause of this defeating direction? Does it not ultimately rest with the manufacturer of the performance products? It is not the consumer, because the consumer is restricted to the sales channels the manufacturer permits and supports. The consumer will always seek out the lowest price that the manufacturer allows to be offered through its sales channels. If performance manufacturers would strengthen and enforce their authorized seller agreements and sales territories, then there would be a greater built-in and supportive incentive for brick-and-mortar specialty retailers to stay in business and for others to start up.

    Such actionable policies can extend to sales channels that sell common “commodity” products far less dependent on significant education and demonstration and that are bought on the basis of comparative pricing.

    As argued in the article “Democratic Capitalism And Binary Economics: Answers For A Troubled Nation And Economy,” in order to succeed, the business corporation has to have customers. The question is how can the corporation increase the customer buying power so that the corporation can grow to its full extent in a global market economy? The answer, in addition to broadening the base of capital worker owners simultaneously with the expansion of the economy’s productive capital formation, is for performance product producers to understand that for their product to be purchased requires that the potential customer not only has the money but understands the performance nuances that differentiate products, which is best achieved through brick-and-mortar in-store education and demonstration, supported by outside independent documentation and critique.

    This is not to say the Internet and other traditional media cannot effectively support the performance manufacturer in the education of potential customers. All “media” coverage can serve to peak consumer interest and educate to effectively entice potential customers to seek out an actual real experience to fully appreciate the differentiated nuances in performance.

    Regional performance audio and home theatre shows, such as T.H.E. Show and the Rocky Mountain Audio Fest, provide a partial reprieve from the sector’s decline, but such shows will never replace the one-on-one “experience” and education for potential new customers that can be provided by a brick-and-mortar sales channel.

    One American performance company that is struggling with the current trend is a loudspeaker manufacturer. Magnepan, who like other performance manufacturers, is steadily losing the opportunity to demonstrate their products to consumers through qualified audio specialists. Are they faced with a destiny to become a factory-direct company? Or sell through wholesale discount stores? Magnepan hasn’t given up and at the 2012 International Consumer Electronics Show (CES) announced the launch of a unique marketing concept to avoid, partly out of desperation, having to turn to Internet/catalog or wholesale discount stores––which only further harms brick-and-mortar audio and home theatre specialists.

    Magnepan recognizes that its small network of brick-and-mortar dealers carry a number of loudspeaker brands and some have dozens of models, but unfortunately there is no room to demonstrate them all. Thus, unless a potential customer makes arrangements to visit Magnepan (which is a stretch), they are finding it very difficult to audition certain Magnepan models.

    Thus, Magnepan is embarking on a dealer and manufacturer program to work together to provide better service than can be obtained from either Internet/catalog or factory-direct companies. Select models will be available through the customer’s nearest dealer for a 30-day home trial––shipped directly to their home. Magnepan will act as their dealer’s Shipping/Receiving/Returns Department. They call this the “Maggie Dealer-Direct Program.” The Mini Maggie System model launches the program. See my interview with Magnepan’s Wendell Diller in issue 164's Editor's Couch.

    Of course, this program is subject to the same drawbacks previously described, in particular with costly, large and heavy performance products. Perhaps the program could be extended to include the more costly, large and heavy performance products, by allowing the manufacturer’s authorized dealer network to sell on the Internet but allocate the sales in accordance with a geographical sales area, agreed to in the authorized seller agreement.

    I think that what is important is that performance manufacturers bolster their authorized seller network and prohibit unauthorized Internet and other discount sales that undercut the specialty brick-and-mortar stores.

    I often question the direction that our society is headed, that is, are we cocooning ourselves and locking ourselves in a head vice to view the outside world on a computer, a smart phone, or a tablet? Does it not seem strange that as a society we are increasingly adopting “catalog” Internet purchases rather than the in-person shopping experience? It used to be for people living in communities without access to brick-and-mortar stores that there was no other option than the catalog route (remember Sears Roebuck and Company). But also it used to be that people celebrated store openings and the prospect of shopping in person––being able to see, touch, and experience products, new and old, that potentially interested them. Likewise, communication was limited to letter writing and the mail. The telephone revolutionized communication, but now, increasingly, we are headed back to “letter” writing via the fast Internet delivery route and text-messaging on phones that otherwise can be used to talk intimately with another person. It all seems backwards: no stores but catalogs, then stores, and now back to catalog shopping via the head-vice Internet and smart phones, and letter writing via mail to personal phone communication, and now back to letter writing and “tweets” via the Internet.

    Today, consumers are enticed with the “lowest” prices on the Internet and are able to ignore the in-person experience, or to opt for the in-person experience and then purchase the product on the Internet––if they can find it being sold. This latter occurrence hurts brick-and-mortar retailers. Specialty retailers are increasingly dealing with enthusiasts, who have gathered opinions from magazines, Web sites, and Internet forums, and come into their stores to confirm for themselves the performance qualities and benefits of products they have read about, but who end up leaving the store to seek the lowest price elsewhere at a discount “warehouse” store or on the Internet. Often, the end user, who has purchased the product elsewhere at the cheapest price, will return to their area’s specialty retailer to request installation service or specific guidance, even though the product was not purchased there.

    So, it comes down to the manufacturers of performance products and their decision to sell their product to non-brick-and-mortar specialty retailers. Thus, those manufacturers opting to do so are contributing to the demise of the specialty retailer and the service that they can provide to enriching the positive perception of consumers toward their products.

    Brand recognition and respect and praise are important. The specialty retailer, as well as the enthusiast press, has always driven such consumer perceptions. But without specialty retailers, brand appreciation will eventually disappear. That will end up creating the perception that except for “features,” there is no “real” difference in performance, so the lowest price will dominate the purchase decision. No longer will there be the respected and trusted specialty dealer who educates and demonstrates, and thus instills the perception and reality of performance attributes and the appreciation for such.

    Because of this movement to the Internet, “warehouse outlets,” and the non-brick-and-mortar “custom installer” operations, manufacturers are digging a hole that will eventually bury the performance products category because consumers will have nowhere to experience in person the benefits and nuances, which can be subtle but distinguishing and appreciative.

    There is also the notion shared by some manufacturers that the “custom installer” makes the purchase decisions for the consumer. The opinion is that the consumer doesn’t care about how his or her money is spent on a system. I can certainly agree that there are some consumers who are rich enough not to be concerned with making such purchasing decisions and who instruct their “custom installer” to purchase what the installer believes is the “best that money can buy,” or the best performance value for the money, or simply the most expensive “status” symbol product. But I seriously doubt that middle-class working consumers are inclined to regulate their purchase decisions to a “custom installer,” without their personal understanding as to what that performance-value equation means. And as consumer earnings further stagnate and decline, those potential consumers will be more engaged in how their earnings should be spent. Yet, certain performance manufacturers have decided to market and promote (advertise) only to the “custom installer” via trade journals that are provided free to anyone claiming to be a “custom installer.” They are largely abandoning marketing and promoting to the end user, as has been the wisdom for centuries, for products meant to be purchased by consumers. They see traditional media as their non-paid PR agency, not as a vested partner that can help to educate. This movement among those manufacturers largely marketing to “custom installers” has impacted all performance-content magazines read by serious enthusiast end users.

    Another discouraging trend evident at this year’s CES is the exponential rate at which American audio and home theatre performance manufacturers are out-sourcing their manufacturing to China, Mexico, India, and other parts of Asia. This is driven by the competitive need to reduce costs and offer performance products at less cost to a middle-class consumer base that is steadily declining in terms of consumer power, and to be able to better compete globally in an effort to find new customers with money to purchase their products. Of course, this further lessens potential American consumer power and destroys labor worker earnings and jobs while further concentrating capital ownership in the present ownership class. This trend also hurts America overall with lost opportunity, displacement of technological innovation, manufacturing, and lost employment. If this continues and is not reversed, this will result in a collapse of the middle class and spell the end of performance products. Those that will survive will be a significantly small cadre of manufacturers reaching out to an ever-dwindling group of enthusiasts who can still afford increasingly expensive products. But such limited enthusiasts are not being replenished because there are fewer and fewer brick-and-mortar specialty stores for new generations to “experience” what performance audio and home theatre is all about. Without the “experience” there can be no true passion instilled to want to purchase performance products, and new generations simply will not know that such products exist.

    Bottom line is that mass human consumption drives mass production and a growth economy. By strengthening the middle class through connecting them with the opportunity to become a capital worker through broadened capital ownership, consumer demand will naturally expand and strengthen the consumer electronics performance product category as well as the general retail health of the country. Thus, the immediate focus should be as long ago posed by binary economist Louis Kelso: “how do we get from a world in which the most productive factor—physical capital—is owned by a handful of people, to a world where the same factor is owned by a majority—and ultimately 100 percent—of the consumers, while respecting all the constitutional rights of present capital owners?”

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