Harvard Business School 9-597-028 Tweeter etc. On 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 The Wall Street Journal (see Exhibit 1). Now, Bryn Mawr's seeming lack of success with the policy gave Bloomberg cause to question the impact of APP. Moreover, whatever its past impact, Bloomberg wondered how effective the policy would be in a market increasingly dominated by large discount retailers such as The Wiz. The Consumer Electronics Industry The United States Market 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. Professors John Gourville and George Wu prepared this case with research assistance from James Evans as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Some nonpublic data have been disguised. Copyright 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permi ssion of Harvard Business School. 1 Authorized for use only in the course Managing Customer Value at Rotman School of Management taught by Dilip Soman from Mar 30, 2020 to Aug 28, 2020. Use outside these parameters is a copyright violation. Rev. April 15, 1997 Tweeter etc. 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. The New England Market 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 decreased appreciably under Montgomery Ward's control. In contrast to the regional legacy of Lechmere, Circuit City, the nation's largest consumer electronics retailer, only arrived to the New England market in early 1993. However, their New England presence quickly grew to 15 full-sized stores (approximately 30,000 square feet) and 6 smaller \"Circuit City Express\" stores (approximately 3,000 square feet). With a reputation for knowledgeable salespeople and good service, Circuit City topped $5.5 billion in sales across more than 350 stores nationwide in 1995. Although Circuit City's offerings included personal computers, medium to large home appliances, audio tapes and compact discs, approximately 60% of their total sales were derived from the sale of video and audio equipment. At the other end of the spectrum was Cambridge Soundworks, with less than a 1% share of the New England market. Founded in 1988, Cambridge Soundworks specialized in the design, manufacture and sale of their exclusive line of medium to high-end stereo and home theater speakers. Accounting for 69% of their total revenues in 1995, these speakers regularly received positive reviews in the audio and consumer electronic magazines and were often rated as a good value for their $200 to $600 per set price tags. The bulk of Cambridge Soundworks' remaining sales consisted of popular brand-name audio electronics, such as receivers by Harman Kardon and CD players by Sony, which complemented the sale of their private label speakers. While still only a niche player in the region, Cambridge Soundworks had grown appreciably in recent years, with revenues increasing from $14.3 million in 1993 to $26.9 million in 1995. Having traditionally relied on catalog sales (67% of total sales in 1993), much of this growth was due to the opening of a series of small retail outlets in 1994 and 1995. By the end of 1995, Cambridge Soundworks had 23 retail locations throughout New England (15 stores) and Northern California (8 stores), and revenues were divided between catalog (32%), wholesale (13%) and retail sales (55%). 2 Authorized for use only in the course Managing Customer Value at Rotman School of Management taught by Dilip Soman from Mar 30, 2020 to Aug 28, 2020. Use outside these parameters is a copyright violation. 597-028 Tweeter etc. 597-028 Tweeter etc. Company History The competitive environment was quite different when Tweeter first arrived upon the consumer electronics scene in 1972. In the early-1970s, 21-year old Sandy Bloomberg had been working at Audio Lab, a hi-fi repair shop and components dealer located in Harvard Square in Cambridge, Massachusetts. While at Audio Lab, Bloomberg became entranced by high quality audio components. 1 At that time, the high-end stereo market was only just developing in the United States, with few consumers beyond the hobbyists and avid audiophiles even aware of the increasingly high quality of stereo components available to the general public. In 1972, Bloomberg traveled to Europe where he witnessed and was encouraged by a more mainstream acceptance of high-end stereo components. Shortly afterward, Bloomberg opened his first Tweeter etc. in the storefront of his cousin's industrial music business located near Boston University. Within a few years of Tweeter's founding, the U.S. stereo components market tripled and the Boston market became littered with a number of small independent retailers, of which Tweeter was only one. At the time, there were two major stereo retailers in the BostonTech Hi-fi, started in 1963 by two MIT dropouts, and Lechmere. Tweeter avoided direct confrontation with either retailer by initially focusing on the student market, serving their more sophisticated tastes for higher quality stereo components. Bloomberg's business philosophy was built on a commitment to value, quality, and service. By 1979, Tweeter had expanded to six stores in the Boston area and one in Rhode Island (see Exhibit 6 for a chronology of Tweeter's expansion). These stores averaged 6,000 square feet in space, although some, such as the Harvard Square store at 2,000 square feet, were significantly smaller. At about this time, Tweeter expanded its product line to take on high-end video equipment, principally in the form of color televisions. Much as Bloomberg had anticipated, the general population's knowledge of and demand for high-end stereo and video equipment continued to grow through the mid-1980s. This growth was aided by strong regional and national economies and by the introduction of new technologies (e.g., Video Cassette Recorders [VCRs], Compact Disc [CD] Players). These conditions helped to solidify Tweeter's positioning at the high-end of the audio and video market. By the end of 1986, Tweeter had grown to 13 stores throughout eastern Massachusetts and Rhode Island and by the late-1980s, Tweeter's share of the New England consumer electronics market had grown to almost 2% overall, and close to 5% in the Boston area. During this period, Tweeter continued to be recognized as a retailer of high quality, high-end audio components and video equipment, with knowledgeable salespeople who offered high levels of customer service. Two of their advertising slogans during this period were, \"We don't carry all the brands, only the ones that count\" and \"Some hi-fi salesman can sell you anything, and often do.\" Tweeter customers generally perceived that they were paying a premium price for the products they purchased, but were receiving the best customer service in the region for that premium. 1 Stereo components are separate audio devices that can be combined to form a single a stereo system. For example, a component system might consist of a receiver, a CD player, a cassette deck, and one or two pairs of speakers , all separately purchased to obtain the best of what each manufacturer has to offer. Typically, component systems are more flexible (components can be added or upgraded with ease) and capable of higher quality sound than \"rack systems\" or \"compact systems ,\" which offer prepackaged componentry. 3 Authorized for use only in the course Managing Customer Value at Rotman School of Management taught by Dilip Soman from Mar 30, 2020 to Aug 28, 2020. Use outside these parameters is a copyright violation. The Formative Years: 1972 to the Mid-1980s 597-028 Tweeter etc. The euphoria of the mid-1980s was short lived, however, as three factors contributed to an overall decline in the New England electronics market in the late-1980s and early-1990s. First, the market growth of the mid-1980s led to new competitive entrants, especially at the lower end of the retail market. In 1985, for instance, two Michigan-based chains, Fretter Superstores and Highland Superstores, both warehouse-like electronics chains, opened four stores each in the Boston area. Second, by the late-1980s, household penetration for color televisions, VCRs and many other home electronics had grown appreciably, thereby limiting future growth in those product categories. Third, the once growing U.S. economy came to a screeching halt in 1987 and 1988, with New England among those geographic regions hardest hit. These factors combined to have two major consequences. First, not all retailers survived. The first to falter was Tech Hi-fi, which found itself financially overextended just as competition was heating up. In 1985, it declared bankruptcy and closed its 11 Massachusetts stores. The demise of Tech Hi-fi was followed six years later by Highland Superstores (10 New England stores) and in 1995 by Fretter (15 stores), both of whom also suffered from being financially overextended. The second major result of the increasingly competitive environment of the late-1980s was increased price promotion. Traditionally, the New England electronics market had been characterized by four major \"Sale\" periods during which retailers discounted certain products to draw consumers into their storesa Presidents' Day Sale in mid-February, a Father's Day Sale in June, a \"Back to School\" Sale in early-September, and a \"Wrap it up Early\" or \"Pre-Holiday\" Sale in mid-November. For the remainder of the year, product prices remained relatively steady, with only limited advertised price discounting. Beginning in 1988, however, as the Boston economy bottomed out and consumer electronics sales growth flattened, Lechmere initiated an ongoing series of weekend \"Sale\" campaigns in which they would cut prices on select items on Friday, Saturday and Sunday. In order to retain their market shares, Tweeter and most other major retailers followed suit. As a result, the weekend \"Sale\" became a commonplace event, and consumers began to expect price discounts when purchasing audio and video equipment. In some cases, sales people would even tell customers not to buy on Wednesday, but rather to wait until Saturday when the desired item would be 20% off. During this period, it was not uncommon for 60% to 80% of a retailer's sales to occur on Saturday and Sunday. As consumers increasingly focused on price in their purchasing process, Tweeter's profitability suffered. Noah Herschman, Tweeter's vice president of Marketing, described the problem in the following fashion: The consumers just wanted price, price, price. But, we didn't carry entrylevel products, like a $139 VCR or a $399 camcorder. We carried the middle and high-end stuff. So people would look at our ads and they would look at Lechmere's ads. Lechmere would advertise a $139 VCR, and we would advertise a $199 VCR. They'd have a $399 camcorder, and we'd have a $599 camcorder. Even though their middle and high-end equipment sold for the same price as ours, we seemed to be more expensive to the inexperienced consumer. Our print advertising was actually driving people awaydoing more damage to our business than if we never ran it. In response to the profitability downturn, Tweeter attempted to compete on price as well as product quality and customer service. For instance, Tweeter began to carry Sherwood audio components, an entry-level brand comparable in price to the low-end offerings of Lechmere, Fretter and others. In addition, Tweeter began to stock the lower-end models of brands it had been carrying only at the middle and high-end, such as Sony. Nevertheless, the majority of Tweeter's product line 4 Authorized for use only in the course Managing Customer Value at Rotman School of Management taught by Dilip Soman from Mar 30, 2020 to Aug 28, 2020. Use outside these parameters is a copyright violation. The Shake-Out Years: Mid-1980s to 1993 Tweeter etc. 597-028 To further aid in this price-based competition, Tweeter joined the Progressive Retailers Organization in 1988, a buying consortium founded in 1986 that consisted of small high-end consumer electronics retailers throughout the United States which combined for over $1 billion in annual sales. As a result, Tweeter was able to obtain prices from manufacturers that were comparable with those obtained by its larger competitors. Despite these efforts, the public perception of Tweeter remained unchanged. Customers continued to view Tweeter as more specialized and more expensive than Lechmere and the other New England retailers. While most consumers still recognized the high level of service Tweeter provided, many believed that such service came at the expense of higher prices, something they were increasingly less willing to accept. As a result, Tweeter's sales and profitability began to deteriorate start ing in the early-1990s (see Exhibit 7 ). Tweeter's plight was exacerbated by Circuit City's entrance into the New England market in the spring of 1993. Circuit City's media-blitz advertising and fierce price competition further focused consumers attention on price as the primary determinant of product choice. A Change in Strategy: August 16, 1993 Frustrated by Tweeter's financial performance, Sandy Bloomberg, Jeff Stone (Tweeter's recently hired president and COO), Noah Herschman and the rest of the Tweeter management hashed out possible competitive responses at a management retreat in the spring of 1993. In preparation for this retreat, Tweeter had conducted a number of focus groups in the months leading up to the retreat. Herschman boiled down the results of these focus groups into the two sets of insights. First, individuals shopping for consumer electronics in the New England area displayed the following general characteristics and behavior: On average, consumers actively thought about purchasing a new product one to two months before actually making the purchase. On average, consumers visited two to three retailers prior to purchasing a desired product. The factors most cited by consumers in their selection of stores to visit include newspaper advertisements (cited by 70% of consumers), past experience with the store (50%) and recommendations of friends and family (40%). Eight out of ten consumers checked newspaper advertisements for product availability and price information when in the market for consumer electronic equipment. Virtually all of these consumers delayed purchase until they saw the desired product or class of product advertised in a newspaper circular. Second, individuals who were familiar with or considered purchasing at Tweeter displayed the following specific characteristics and behavior: Four out of five consumers viewed Tweeter as being more expensive than the major competitors in the market (i.e., Lechmere, Fretter). However, most of these consumers reported that if price were not an issue, they would prefer to purchase their desired product from Tweeter. 5 Authorized for use only in the course Managing Customer Value at Rotman School of Management taught by Dilip Soman from Mar 30, 2020 to Aug 28, 2020. Use outside these parameters is a copyright violation. was still in the middle to high-end and included brands such as Denon, Alpine, Kenwood, Klipsch and Boston Acoustics. Tweeter etc. Of all consumers who visited Tweeter in search of a product, 60% also visited Lechmere, 45% also visited Fretter and 20% also visited Sears in the course of their product search. One in three consumers specifically came to Tweeter to figure out what to buy and then went to Lechmere or Fretter, believing they could get a better price there. These focus groups also allowed Tweeter to characterize four types of electronics consumers in the New England market: the \"entry-level customer\