Wal-Mart 'killer' machine set to strike again
With strong June electronics sales, Best Buy, Circuit City and Target should be very afraid of this category killer.
NEW YORK (CNNMoney.com) -- Familiar with Wal-Mart's yellow smiley face? Bet it's smirking now, with a grin that can be described as electric.
While June proved to be a tough sales month for many of its rivals, Wal-Mart surprisingly outperformed its own and analysts' expectations for sales at its stores open at least a year, which is a key measure of retail performance also known as same-store sales.
For months, Wal-Mart, the world's largest retailer, has disappointed Wall Street, whining that gas prices and the housing softness were responsible for its lackluster same-store gains which coincidentally didn't seem to hurt its archnemesis Target (Charts, Fortune 500) quite as badly.
On Thursday, Wal-Mart executives basically admitted they expect no big change in that scenario anytime soon. But this time there was a silver lining.
Wal-Mart's aggressive push into name-brand electronics in recent months is beginning to pay off, which is good news for the discounter but worrisome for competitors like Best Buy and Circuit City in the $140 billion consumer electronics market.
Wal-Mart said its June sales surge in consumer electronics was an "exception" to the weak trends it suffered elsewhere, such as in clothing sales and home-related goods.
Kiss of death for Best Buy, Circuit City?
The retailer said flat panel televisions, MP3 players, video game hardware and accessories, laptops and desktop computers had "significant year-over-year gains" while computer sales were fueled by the introduction of Dell computers last month at all Wal-Mart and Sam's Club stores in the United States.
However, Wal-Mart did not break out sales numbers for Dell computers or for the consumer electronics category.
"The fact that Wal-Mart specifically mentioned Dell's launch in its sale release today means it must have shifted an awful lot of these computers in and out of its store in June," said Mark Husson, analyst with HSBC Global Research.
"I think people thought that Wal-Mart must have negotiated a great deal with Dell, and therefore these computers would have a great price and be filled with everything that they needed."
Given its reputation as a "category killer," could Wal-Mart's ambition of becoming a major player in consumer electronics become the kiss of death for industry leaders Best Buy and Circuit City?
Husson said these specialty electronics retailers should worry about Wal-Mart's ability to attract very big and upscale brands.
"Historically Wal-Mart only sold no-name electronics. Clearly that has changed," Husson said. "The concern for everyone is that Wal-Mart can ship a frightening amount of stuff very quickly."
With nearly 4,000 stores in the U.S. that sell a variety of products, Wal-Mart already is a category killer in many areas, including toys, DVDs, groceries and household products - but not yet in consumer electronics.
So far, Best Buy's (Charts, Fortune 500) 1,170 stores that exclusively sell a wide variety of electronic gadgets, movies, music, computers, and appliances make it the No. 1 player in the consumer electronics business, followed by Circuit City (Charts, Fortune 500).
But that ranking could soon change as Wal-Mart puts its enormous retail muscle behind bulking up its electronics offerings.
The tremors are already being felt. This past holiday season, Wal-Mart trumped its competition and ignited an intense price war by being the first out of the gate to chop prices on flat screen TVs, digital cameras, cell phones and other products.
This pressured Best Buy and Circuit City to chop their prices and sacrifice their profits in response to Wal-Mart aggressive move.
In May, Wal-Mart upped the ante once again by announcing it was remodeling its electronics department with better signage and knowledgeable employees, and expanding into more name-brands like Samsung, Philips and Sony for high-definition TVs and home entertainment systems.
In early June, Wal-Mart introduced Dell desktop computers built exclusively for the retailer priced at $498, and planned an exclusive Dell notebook and a desktop computer for sale at its Sam's Club stores over the summer.
"We already knew from our sources that Wal-Mart was making a big and serious effort in consumer electronics," said Richard Hastings, senior retail analysts with Bernard Sands.
"Wal-Mart already competes with them on paper and other office products. Now with its electronics assortment expanding, it's really going to get tough for these chains," he added.
But one group that stands to gain from the heightened competition is the consumer.
Said Husson, "Wal-Mart shoppers benefit from bigger and better brands guaranteed at lower prices than the competition. Who doesn't like that?"
And maybe Wal-Mart's "Everyday Low Price" promise might remove another annoyance associated with electronics purchases - rebates.
"Nobody like rebates. They are an annoyance for consumers and for retailers," said Hastings. "But if Wal-Mart is already offering the lowest price on a model, it can do away with rebates."