O n August 16, 1996, Sandy Bloomberg, founder and CEO of Tweeter etc., reflected on the recent history of his small, upscale New England retailer of consumer electronics. Tweeter had grown from a 13-store chain with $35 million in annual sales in 1991 to a 21-store chain with $82 million in annual sales in 1996. Bloomberg had always attributed part of this growth to Tweeter's ''Automatic Price Protection" policy, which had been implemented in 1993. Under Automatic Price Protection (APP), Tweeter monitored local newspaper ads and automatically mailed a refund check to a consumer if an item purchased at Tweeter during the past 30 days was advertised for a lower price by a competitor. Two recent developments in the marketplace gave Bloomberg reason to reflect on APP, however. First, on May 16, 1996, Tweeter ventured outside its traditional New England base and purchased a controlling interest in Bryn Mawr Stereo, another small, high-end consumer electronics chain based in suburban Philadelphia. One year earlier, Bryn Mawr had adopted Tweeter's "Automatic Price Protection" policy, but up to the time of Tweeter's purchase, had failed to see any significant impact on sales. Second, on June 16,1996, Nobody Beats the Wiz ("The Wiz") opened a 50,000 square foot electronics retail outlet in suburban Boston, the second of ten outlets planned for the New England market and the first in Greater Boston. The Wiz, a nationally recognized New Jersey-based discount retailer, threatened to change the playing field in the already highly competitive New England audio and video consumer electronics market. Three years earlier, Tweeter's introduction of APP had received national press coverage in T h e Wall Street Journal (see Exhibit 1). Now, Bryn Mawr's seeming lack of m~ssion Harvard Business School. of
The Consumer Electronics lndustrq
The United States M a r k e t
In 1995, consumer electronics was a $30 billion industry in the United States, as measured by manufacturer sales (see Exhibit 2). The previous ten years had seen the market grow at a 5.6% compound annual rate, with future growth projected to be strong through 1998. While industry data on retail sales was unavailable, it was widely believed that retail margins averaged about 30% across product categories. At the retail level, consumer electronics were distributed through a variety of channels, including specialty electronics stores (e.g., Tweeter), electronics/appliance superstores (e.g., Circuit City), mass merchants (e.g., Wal-Mart), warehouse clubs (e.g., Sam's Club), department stores (e.g., Macy's) and mail order houses (e.g., Sound City). Exhibit 3 provides an overview of these channels. Exhibit 4 shows the distribution of sales across channels for select categories of consumer electronics.
England M a r k e t
With a population of 13.2 million, New England represented 5% of the U.S. consumer electronics market. In 1996, there were 8 retailers in this region with market shares in excess of 2% (see Exhibit 5). By far the two largest were Lechmere (35% share) and Circuit City (19%). For decades, Lechmere had been the region's most popular retailer of consumer electronics and home appliances, growing to 28 stores (averaging 50,000 square feet) throughout New England and northern New York by 1995. Selling televisions and stereos since the 1960s, Lechmere had become, for many New Englanders, the only place to consider when buying video
and audio equipment. Historically, such attitudes had been reinforced with well-informed salespeople, good customer service and fair pricing on a wide variety of entry and middle-level products. In 1994, Lechmere was purchased for $200 million by Montgomery Ward, a privately-owned, national mass merchant with approximately $6 billion in annual sales. While Lechmere stores continued to operate under the Lechmere name, many consumers believed that the level of customer service and salesperson knowledge had...