TEMOC Stores Inc. began life as a two-man operation named TEMOC Batteries in 1948 by its founder, Ethan Gilchrist, an engineer, as a business charging up batteries for customers' bulky wireless radios in Melbourne, Australia. With an eye for spotting upcoming trends in electronics, in a very short time, Gilchrist outgrew this start-up position. He shifted the business into radio rentals, then capitalized on early televisions and opened the first store in the 1950s. TEMOC expanded during the 1960s and 1970s and became a publicly listed company in 1972. The company sold consumer electronics and white goods along with related products and services and pioneered the concept of the out-of-town discount warehouse in Australia. In the early 1950s, demand for wireless radios grew fast, and founder Ethan Gilchrist changed the name to TEMOC Radio, opening his first retail store. More stores followed quickly. Following the Consumer Prices Act (1964), TEMOC expanded beyond its Victoria state heartland, becoming a national discount retailer. TEMOC was indeed the unrivaled champion of the out-of-town discount warehouse market. Predominantly a mail-order business, TEMOC advertised stock and prices 45% lower than the manufacturers' recommended retail prices. Few pure- play electrical retailers could compete.

Expansion In 1968, the first TEMOC superstore opened in Sydney, making TEMOC the first company to launch a warehouse style store for selling electricals, such as televisions and radios. Considered a trailblazer, TEMOC beat a path subsequently followed by Do-it-Yourself (DIY) stores and supermarkets. TEMOC has developed from selling sofa-sized radiograms to iPods, digital cameras and laptops under the grammatically dubious slogan "we live electricals". TEMOC went public in July 1972 and expanded its range by purchasing Evoenergy Gas, a discount retailer of gas appliances. By the end of 1976, the group had grown to 50 outlets. During the 1970s and 1980s the company had competition from several growing companies also providing electrical goods. One such company was Bi-Rite which TEMOC bought out in 1989. Under Ethan Gilchrist's leadership and vision, and for much of the '80s and the 90s, TEMOC was booming, with 460 stores and 10,000 employees and mind-blowing profits. Ethan felt confident that this success would continue because of his vision and leadership, and resulting strategy. Gilchrist developed a program where TEMOC gave away its own brand of batteries in exchange for getting people hooked on their brand of batteries yielding TEMOC a nice annuity in the form of 80% of the market for batteries for small electrical personal and household appliances. Inside TEMOC, this was known as the "nickel" strategy named after one of the chemicals in its batteries. It was a fantastic success story. This business strategy was similar to Gillette's or that of printer manufacturers: give away razors or printers to make money on blades and ink cartridges. TEMOC gave away batteries to make money on service and replacement batteries. TEMOC's marketed its batteries under the private brand "Spartan" and due to the lower pricing and relatively good quality, many consumers purchased Spartan batteries for other needs. As a result, TEMOC enjoyed a 39% share of the battery market; slightly behind the battery giants Duracell Inc. and Eveready Company. Wal-Mart Enters the Scene In 1994, Wal-Mart entered the Australian market with the takeover of Appliance Giant. The world's (then) largest retailer effectively wiped close to US$1,500m off the value of Australian chain stores with its announcement that it would discount some goods by around 60%. To survive, retailers had to - at least - match Wal-Mart's like-for-like discounts. The consumer appliance retail business was relatively secure and profitable, and TEMOC's market dominance was so secure throughout the 1980s, the electrical retail chain barely batted an eyelash when Wal-Mart entered the Australian market.

In 2001, the consumer electronics and white goods sales peaked worldwide. But in a weekly senior executive meeting, Noah Harrison, TEMOC's Executive Vice-President of Marketing told the other executives in the meeting that, "although sales are at an all-time high, a peak always conceals a treacherous valley." He went on to say, "Revenue growth is different than strategically positioning ourselves for the future. We need to focus on the long-term game to continue to enjoy the growth we have had for these so many years." Many of the other senior executives viewed Wal-Mart as a formidable competitor and voiced their concerns about how critical they thought it was to focus on the long-term game as well. Harrison was pleased that his other colleagues had brought this up. He knows that Wal-Mart's behaviour elsewhere could help them understand how the company will likely operate in Australia. Harrison pointed out that Walmart has stated publicly that it is committed to its implementation of its cost-cutting model in every market where it operates.

He made the following passionate statement: "Wal-Mart is particularly relevant because compared to other large international retailers; it has the largest footprint in Australia and is therefore poised to expand rapidly. Wal-Mart executives emphasize the need to build scale in existing markets in order to achieve profitable returns, as soon as the company enters a new market, rapid growth is a priority. I believe without adequate safeguards put in place, TEMOC may not survive." As founder and Chairman of TEMOC, and the largest shareholder in the company, Ethan Gilchrist disagreed and downplayed the situation, pointing to historical market trends where sales peak, slow and pick-up again. "It is a cyclical phenomenon, and we need to stay focused on the direction we're headed. It has stood the test of time, and made the company very prosperous, and the leading electrical retailer in Australia." Since TEMOC is a public company and a highly visible one, Ethan Gilchrist comments came under fire by analysts, pundits, and the media. The stakes for TEMOC's fourth-quarter earnings report were high. For the past year, analysts and investors have demanded that the consumer appliance company clarify its vision and strategy and explain what it is doing to combat the entry of Wal-Mart into the Australian market. Calls for a change in leadership intensified. A well-respected industry analyst commented in her recent report about the retail consumer appliance market, "The problem, it seems, is that as the world has changed, TEMOC hasn't". Ethan Gilchrist is an engineer and was known around TEMOC as a "nice guy," a consensus builder, simply not what TEMOC needs right now.

Is the Market Changing? Over the next two years, first, the market began shrinking very slowly, and then picked up speed. During the weekly senior executive meetings chaired by Gilchrist, Gilchrist used this new market data to emphasize his rational to stay focused on the current strategy. He said, "our reputation and long-standing position in the country will bolster us from any storms caused by Wal-Mart." The signs of a changing marketplace were both external and internal.

Externally, life became harder yet for TEMOC when online stores started to see big sales. TEMOC's strategy focused on discount warehouse superstores and the traditional brick and mortar approach to purchasing and selling products. With over 460 superstores now, TEMOC was undergoing a massive refitting of many of its stores, adding mezzanine levels to many of them, which was very costly. Online Shopping Takes Off TEMOC missed the initial signs of shoppers moving to the internet for the best prices. Customer behaviour was changing, and customers are not being influenced and controlled by the brand and firm as much now, when they make a buying decision. People were increasingly starting to use and becoming more comfortable with the online platforms to gather information and purchase products and services. As a result, TEMOC was losing sales to ecommerce giants such as Appliances Online (#1 e-commerce site in Australia), Amazon, B2W Digital and Alibaba.com. In response, although slow to adopt to e-commerce, TEMOC established its own e-commerce business; store.TEMOC.com.au. With its background and competence with brick-and-mortar stores, TEMOC committed a cardinal sin in the development of e-commerce platforms: It applied in-store segmentation to its e-commerce scenario. Although store.TEMOC.com.au. was packed with information that consumers wanted, many customers complained that the e-commerce site was difficult to navigate. One online shopper commented: "They don't have a clue about creating an online experience for customers. I don't have all day to find what I'm looking for. It's very frustrating. They should give Appliances Online a call and get some help!" Antonio Iaconis, Sr. Executive Vice-President, e-commerce management services for Sana, a global leader specializing in e-commerce management noted in a Forbes Magazine article that: "Corporate leadership must fully grasp that in the digital era, retailers must provide compelling reasons to buy in- store and convert that intent into sales." Although purchases on the internet were growing, the "bricks and mortar" retailers (such as TEMOC) could survive. To survive, however, they need to develop an integrated multi-channel approach and view their operations from the position of the consumer (looking from the outside in) and develop an engaging environment that enhances brand loyalty. TEMOC executives appeared to have little understanding of integrated multi-channel retailing, operating instead from disconnected silos - marketing in one, customer services in another, supply chain and logistics in yet another and operations and technology out on its own.

Technology expert Jonah Dundee told Business First Magazine: "TEMOC is failing to understand the importance of multichannel retail and failing to invest in e-commerce." Storm Clouds on the Horizon Customers had become dissatisfied with TEMOC's in-store experience and lack of customer service. One customer was interviewed on a local radio show during a segment about Wal-Mart and its online shopping store. One of the listeners called-in, and the radio show host asked her what she thought of TEMOC. She answered: "Unfortunately, with stores like this and the overheads they have - renting premises and paying staff - they can't compete. A lot of people prefer the internet shopping, especially the younger age group. Everyone's now just conscious of money and it's all about price." Also, from the outside was peer pressure. Several Australian retailers such as Wesfarmers, Coles Group and Ampol Limited were already on a track to develop new strategies including e-commerce to compete with Wal-Mart and its low pricing, cost-cutting model and online shopping store. Another, slightly bizarre, problem emerged. With similar-sounding names and both companies' logos blue on a white background, consumers confused TEMOC with TAMOC (owned by rival Wesfarmers). Despite a US$20m rebranding campaign in 2005, TEMOC continued to lose market share. The internal triggers were clear. There are, in the end, two generic marketing strategies: cost leadership and differentiation. Operating in a fiercely competitive market characterized by very low margins, TEMOC was never going to be able to sustain a cost-leadership position. Yet it continued to focus (almost solely) on price. Global Economic Crash The global economic crash of the 2007 was the final straw. The turbulence emerging from the financial sector passed over into the real economy, and back from the real economy to the financial sector. Economic activity was paralyzed in practically the entire world with unprecedented synchronicity. TEMOC and other electrical retail companies were facing challenging times, with unprecedented decreases in sales and profits, but with strategic cost-cutting, were able to stay relevant. However, those cost-cutting measures included cuts to service that customers expected, and as a result, service levels dropped. When the service levels dropped, consumers stayed away, and worse, became street-savvy and avoided dogged selling of extended and expensive warranties. TEMOC was severely damaged, more so than its competitors because of its brick-and-mortar strategy and the added pressure to reduce costs by re-structuring stores and laying off staff. TEMOC's profit before tax tumbled from US$150m to US$56m. In successive years it posted losses of US$8m, US$3m and finally US$39m in 2011. In 2012, it is reported to have lost a similar amount. Turnover peaked in 2008 at a fraction over US $2bn and declined steadily to a reported US$1.2bn in 2012. Scott Morrison, a full professor and researcher at the Economic Department of the Australian National University said: "Increasing levels of unemployment, wage freezes and stagnation in the property market combined to keep consumer spending on discretionary purchases rock bottom. It was simply impossible for struggling TEMOC to improve its appeal to customers whilst closing stores and axing staff." Best Buy Puts the Pressure On In April 2010, Best Buy launched an online shop in Australia to take the fight to its competitors Amazon Australia, Bunnings and Woolworth Corporation. The online move by Best Buy was intended to shake up the lucrative online consumer electronics market. However, one year later, Best Buy's efforts to win over Australian consumers were an expensive failure, costing some US$200m to set up just 11 big box stores. According to Roger Taylor, CEO, "We were a bit late to launch them and, in that time, clearly consumer confidence has fallen significantly, the product cycle is quite tough to be trying to launch a big box model." Although Best Buy failed, it still placed serious pressure on TEMOC. Smartphones Eating into TEMOC's Sales With every passing day, more and more customers are buying smartphones like never before. This has been fueled by the increasing number of cheap smartphones that are being introduced in the market by all major smartphone makers. Smartphone owners are downloading thousands of applications to watch movies, television shows, listen to radio broadcasts, sports broadcasts, news events and so much more. As a result, television and computer and related consumer product sales dropped dramatically. These consumer goods sales are TEMOC's bread and butter. TEMOC continued to make a loss. Meanwhile, TEMOC's stock has plummeted by roughly 50 percent since its post-IPO peak about a year ago. While TEMOC's first quarter revenue came in at $436 million, an increase of 74% over last year, the amount fell below analyst expectations and the company's guidance. The company lost $162 million during the quarter. Calls for New Leadership Calls for a change in leadership were being demanded. The Board of Directors of the company said the company needs a CEO with "a defining vision" for the company. Finally, Ethan Gilchrist was forced to step down. In April 2013, Nicole Gibson, was announced as the new CEO and President of TEMOC Stores Inc. On her first day, Gibson was sitting at her desk, and looking out the window and said to herself, "where do I start?

QUESTION

Problem statement - short statement summarizing the primary problem(s) of the case

problems

Write short statement summarizing the primary problem(s) of the case