Circuit City Sees $20 Billion Service Opportunity
By George Anderson
Those geeks at Best Buy must know something.
Circuit City said it was going to move further into the service business following the upcoming winter holiday season to begin offering consumers personal computer services along the lines of Best Buy’s Geek Squad. The consumer electronics chain said it was planning to roll out the service initiative nationwide.
The chain is following a growing trend of consumer electronics businesses offering customers specialized services from phone consultations to in-home visits for installation, training and diagnostics.
According to a company press release, Circuit City’s current services business was profitable in 2006 and is expected to grow at a compounded annual rate of 117 percent between its fiscal year 2005 and 2007. The company sees the whole area of home installations, repairs and instruction, and digital subscription services representing a $20 billion opportunity by 2010.
Moderator’s Comment: What do you see as the factors driving the services market for retailers in automotive, consumer electronics, food, home improvement,
office supplies, personal computers, pet products and other areas? Where do you see paid service opportunities (in-store and out) for retailers to generate incremental sales and
profits? – George Anderson – Moderator
The greatest service revenue driver? Software and computer hardware manufacturers who sell complicated unreliable products backed by incompetent help desks. If the stuff was reliable, had simple clear instructions, and the manufacturers answered the phone promptly with skilled staff, who’d need the Geek Squad?
As home electronics become more complex, the components are still commodities. The value is in the setup and installation expertise.
Capturing services can benefit Circuit City in three important ways. First, it can help remove purchase risk. If someone is concerned about how to get a home theatre set up or installed, they are less likely to make the purchase. By removing that risk through a service offering, Circuit City should/will close more sales of complex home electronics solutions.
Second, offering services permits Circuit City to capture more value out of each transaction. If a large percentage of buyers of complex home electronics rely on others to install, setup or troubleshoot, Circuit City can, through services, capture that value.
Third, the margins per foot of cable installed are far better than cable sold in bulk. If you’re creating the demand for the cable and other accessories through product sales, no sense in giving the installation margin to others.
With our increased dependence on technology, a competent, hands-on technician who can fix a variety of problems and make multiple components work together is worth their weight in gold (even at last week’s prices).
Given the trend on the part of consumers to outsource their more mundane tasks, combined with the rate at which technology is changing and becoming more complex/cryptic, there is no doubt that the need for these services will continue to rise. Electronics retailers that can help customers solve technology problems quickly and at a reasonable cost will build invaluable long-term customer relationships.
I would imagine that the biggest challenge for retailers such as Circuit City is finding, training and keeping competent technicians. It takes brains, experience, tenacity, constant learning and probably a bit of built-in passion to solve these problems… not to mention the people skills necessary to deal with the frustration that emerges on the part of the customer when technology shuts down! People of this description have a wide variety of career options and “Geek Squad Member” probably does not often rank high on the list.
Fry’s Electronics gets all of my business precisely because the employees in their service department have never let me down when technology has become a challenge.
CE for the home have always offered an opportunity for tremendous profit from service/installation. This had been the sole domain of small VARs, but once BB got into the business, everyone is suddenly aware of its potential. It is great that CC has recognized this, and is responding to the “Geek” squad of BB. This will add to their bottom line and drive customers into their stores, since they will be able to offer a one-stop shopping experience. Service is a great expansion opportunity since there are so many other areas which it can take CC into besides stereos, computers, appliances, etc. How CC manages their core business, by driving it through their service business will determine their true profitability, as hardware margins continue to decrease.
Even great products and fast service can’t wipe out the desperate need for service, particularly when it comes to learning the user options available in today’s computers. People want to pay someone to “learn” for them.
Apple Computer has already shown this. Their stores are learning centers. They started giving advice away for free. The lines got too long. Now you can buy their “ProCare” for $100/yr. just to get to the front of the line. Otherwise make an appointment for 2007.
Best Buy’s piecemeal approach with the Geek Squad doesn’t make the most of the potential here. Service packages sold in advance have much more potential — they appeal to the contingency fear of the buyer and the provider gets all the breakage (just like Amex gets to keep the money from all those unredeemed traveler’s checks).
Apparently, Circuit City’s $5 million they paid to the Boston Consulting Group has helped them see the obvious. The huge demand for information is an opportunity for profit. Now if they can just eliminate the adversarial atmosphere that exists between their shoppers and associates, they could do a lot more than an extra $20B. I suppose to figure that out would cost another $5 million. Damn, I’d only charge them half that!
Look at how much of Circuit City’s merchandise is “difficult to choose and use.” Not just computers, but digital cameras, video, and even some home theater gear. There’s $20B there easy. Their most dangerous competition is not Best Buy, but Costco, Amazon, and Wal-Mart — all of whom are incapable of providing service. The opportunity for salable, unique, local service packages is huge.