Dueling Fools
Borne in the CompUSA
August 18, 1999
The Bull Rebuttal
By
Paul is absolutely right when he describes the dismal retail experience that is today's CompUSA. You visit Best Buy or Circuit City, then stroll into a CompUSA, and you wonder how the latter stays in business.
But it has so far! This is a glass-is-half-full endeavor. For the first nine months of FY99, this crappy retailer reported a $18.8 million profit. That's not much on $4.86 billion in sales, and the company will report a loss for the full year. Still, it's not bad for a company with obvious problems that management can start tackling with a dramatic shift in the merchandise mix, major store remodeling, extra and better-trained employees, improved inventory management, and cost-cutting moves. Enormous challenges for sure, but really obvious stuff.
Paul argues that CompUSA's customers are Web-savvy. Well, its former customers are probably Web-savvy! Yet, the PC market is nowhere near mature when nearly half the population doesn't yet own a computer and thus probably doesn't have a consistent means of going online. The market opportunity, then, remains huge. And the success of the relatively pricey, high-performance Apple iMac (still the top computer at retail) suggests that a healthy contingent of these newbies will pay up for ease of use one way or another. Rather than Paul's "ToasterUSA," think "iMacUSA."
Retail stores still offer a unique way to appeal to this customer. They can offer folks the chance to see and feel a PC and maybe have it custom-configured. They can also offer hand-holding, which is why the 150 Gateway Country Stores have been such a stunning success.
CompUSA can tackle this same market, and in the same way: low-to-no inventories and direct shipping of boxes configured to customer order by a brand name partner or by the folks that now manufacture CompUSA-branded PCs. Management has already indicated that it plans to be aggressive about expanding the CompUSA PC product line and distribution channels.
I'd agree with Paul that CompUSA's overhead costs are out-of-hand. But no one has yet declared the death of Best Buy. Although e-tailers will increasingly pressure consumer electronics retailers, the problem today is not the brick and mortar retail business per se but CompUSA's mismanaged, PC-inventory-heavy version of it. You can still make a ton of money in retail if you adopt a low-margin, fast-turn philosophy and can sell customers on those high-margin service contracts.
Paul's critique is also a bit conflicted when he bemoans CompUSA's bloated and fast-depreciating inventories while also arguing with the company's decision to outsource fulfillment on direct sales. That's just not consistent. I'd highlight the issue this way: CompUSA's main problem is spending too much corporate energy managing the admittedly low-margin, fast-rotting PC inventory rather than focusing on serving the customer -- potentially with lots of higher-margin, longer-lasting products and services.
In that sense, CompUSA doesn't need to stock a single computer beyond the display models. And it's not clear that there's any competitive advantage in an e-tailer like CompUSA Net.com, which sells PCs and related products (as opposed to Amazon.com, which plans to sell everything) and handles inventory and fulfillment itself. Getting out of the fulfillment business should allow CompUSA Net.com to save in capital costs and risk whatever it loses on margins. That's the Onsale atCost strategy in a nutshell.
Clearly, CompUSA has to manage its operations better. Along those lines, it's already in the middle of implementing a SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> retail software package that should help. A more important concern is whether current CompUSA management has the skills to move toward the consumer electronics model. An influx of new high-level executive talent would help.
What I haven't broached is the possibility that CompUSA becomes takeover fodder for someone, perhaps a Staples <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %>, as mentioned recently by Business Week's notoriously unreliable Gene Marcial. Even more interesting are the oft-repeated rumors that Amazon is looking for a retail partner to manage local returns and customer service. The fact is, while those 207 CompUSA stores in 79 major metropolitan areas are liabilities of a sort, they also occupy some prime retail space that might make them attractive for such a purpose.
Middlemen in general aren't going away, just the ones that don't add value. CompUSA's challenge is to discover how to do that. The good news is that management is now actively working on the answers.
Next: The Bear Responds