Loss-Leader Laptops Go Back-to-School
By
Tom Ryan
More
so than in recent years, laptops have become the crucial traffic driver
this back-to-school season with selections significantly expanded and
prices drastically slashed.
Wal-Mart
is offering a limited selection of Compaq Presario notebooks – featuring
a 160 GB hard drive, CD and DVD drive, 3 GB memory and Windows Vista
pre-loaded – for $298. Wal-Mart’s stores not surprisingly have struggled
to keep the item in stock.
The
discount giant also has brought out a wide assortment of the Dell Inspiron
1545 laptop at $398 in multiple colors. Prices on the Acer 8-hour battery
laptop were cut by $50 to $548. Overall, Wal-Mart is carrying 40 percent
more laptops this B-T-S season, according to Bloomberg
News.
“We
know all students need solutions that integrate work, entertainment
and portability,” said Gary Severson, senior vice president of entertainment
for Wal-Mart’s U.S. division, in a statement. “Our increased assortment
delivers more targeted offerings from great brands at dramatically
affordable prices.”
Wal-Mart’s
$298-notebook offering edged out Best Buy’s earlier introduction of
a 15-inch Acer laptop with similar specifications for $299 – another item
that has been hard to keep stocked. Best Buy also is testing giving out
laptops for free – or discounting elite models to $399 or lower – if
consumers sign on to internet contracts. The move would be part of
an increased emphasis by the retailer into higher-margin services.
“We
are absolutely looking at that and see that as in play,” chief executive
officer Brian Dunn told Bloomberg News. “There are so many places
people want a brand they can trust that will help them do things they
want to do.”
Staples
also has boosted its portable computer selection by 50 percent as part
of its B-T-S positioning.
A
report on Bloomberg
News theorizes
the discounted price tags on laptops will drive sales of accessories
such as external hard drives and bags that are up to three times more
profitable than computers. Bob O’Donnell, an analyst with research
firm IDC, said consumers last year bought 89 cents worth of accessories
for every $1 spent on PCs.
Best
Buy in the same vein is hoping to make money by bundling laptop purchases
with Geek Squad services
While
hardware margins shrink as prices fall, service margins “will always
be higher,” Robert Stephens, founder and chief inspector of Geek Squad,
told Bloomberg
News. “It’s
like the movie theater: They don’t make money on the tickets; they
make it on concessions.”
Discussion
Questions: Are laptops the right loss-leader choice for this back-to-school
season? Is a mass chain such as Wal-Mart in a stronger or weaker position
to capture added margin points elsewhere than specialty chains (AKA
category killers) like Best Buy and Staples?
Walmart stands to benefit from the traffic that $298 laptops can drive. However, as the article points out, they run the risk of creating “Black Friday”-style bad feelings among their customers. If they can satisfy demand for opening-price laptops they can also drive a lot of other BTS purchases into shoppers’ carts.
On the other hand, I don’t see Walmart having the “sell-up” ability of a Best Buy. A customer drawn into Best Buy by a sharp opening price is more likely to walk out with a higher-priced model and having spent more on peripherals and service plans. This becomes Best Buy’s opportunity to “margin up” on its loss-leader prices, which may be less of a priority for Walmart.
The key to driving traffic with a loss leader is to be able to up-sell the consumer to all those other items they did not realize they needed or wanted. The key for that is to have knowledgeable sales staff that can fill the customers basket. Best Buy seems to be in the best spot to take advantage of the year’s of training and commitment to service.
The problem that may exist for Walmart, that by not having a culture of service and knowledge (either real or perceived) they take the risk of eroding margins with no upside sales benefit.
Computers represent a relatively small percentage of total sales at Walmart so as a loss leader, they make sense.
I can’t foresee them being able to support the category with much on-the-floor expertise though. Getting sales support on a bag of potato chips can be tough in a Walmart, so I wonder about their chances for broad success with computers.
I’m less convinced that they’ll pick up the high-margin accessories because I think these items often require an assisted sale. They’re sometimes things that you don’t even know you need.
The really unfortunate thing is that it’s this kind of mindless commoditization that forces all retailers to lower their service levels and fight on price alone. Don’t expect service levels at Best Buy to be any different.
In the end, as always, it’s the consumer that loses.
First, it is really questionable that these laptops in the article are “loss leaders.” Rarely, in my experience, has WMT sold merchandise below cost. At times, and honestly not all that often, the WMT merchants have redefined the lowest level of merchandise profitability. More often than not, the brunt of the initiative has been carried by the vendor, not WMT. Without specific costing information, it’s hard to be definitive. Still, I caution making assumptions, particularly in WMT’s case, about profitability.
Tactically, laptops are as critical to the older back-to-school market as backpacks are to the younger one. Any parent of high school and older age kids will tell you that laptops are no longer optional, and with built-in two year life expectancy, they represent an almost yearly replacement market. Like clothing or other categories where the “need” expands with age, laptops represent an opportunity to capture a consumer early in the cycle, and remain the provider of choice. Unlike apparel, which is trend and fashion influenced, laptops are more likely to offer retainability, particularly if vendors provide attractive options, as they appear to be doing. Right now, with the exception of the tablet technology, I can configure almost the same technical functions at WMT as I can at Best Buy.
So; even if WMT is shaving the margin thin at the entry point, it has to be seen as precisely that…the entry point. While the aftermarket for accessories may be almost as large as the basis product volume, I don’t believe that this alone is the motivation for WMT’s move. Rather, it is the combination of the the two…it really is the disposable diaper argument all over again.
The key to a having a seasonal “loss-leader” is to tack on sales. For the B-T-S single most critical purchase is a notebook computer. At the college level computers are a requirement in the classroom. Exams are no longer taken via Blue Book, but are now only accepted electronically. High Schools are following those trends.
A retailer with a broad a selection of products like Wal-Mart doesn’t even have to sell the computer to make the promotion successful. They just have to get the shopper to come in and see if the computer meets their needs. While the shopper may be thinking “it can’t be,” it really doesn’t have to be. If the purchaser needs more technology in computing and other electronics, they may ultimately want to go to Best Buy. But, that is all Best Buy has to offer them.
Are laptops the right loss leader? They are not only the right loss leader, there’s nothing in second place.
I have to agree with Don on this topic. WMT isn’t known for using loss-leaders to drive traffic. Due to their size and overall retail power, they don’t have to. What I do see here is an attempt to expand their reach beyond what the “typical” WMT consumer thinks of when they go to their favorite store by expanding their positioning in the tech/consumer electronics market. With the loss of Circuit City and the addition of private label electronics alongside well-known brands (HP, Dell, Toshiba) Walmart is redefining their brand proposition to make the majority of consumers “typical” Walmart shoppers.
It will be interesting to see once BTS is over whether using laptops as loss-leaders really drove significant up-selling or accessory add-on purchases. The customer is so wallet-conscious right now, and UPTs have been such a struggle through this period, I wonder to what degree customers are cherry-picking these loss-leaders. We’ll see.
A WIN for Walmart and Consumer!
Walmart remains solidly focused on the consumer in each product category. Walking into their stores, you have to know that they are focusing increased efforts on Consumer Electronics.
With the consumer stating that they are planning on spending 7.7% less on Back-to-School items this year (National Retail Federation data based on BIGresearch July Consumer Intentions & Actions Survey), items like cost-effective computers, which are the “new essentials” for High School and College students, are certain to keep traffic in-store, and create cross-channel opportunities, as well as convert more frequent “trips.”
It’s a smart move by Walmart.
Keep in mind that Walmart is currently enjoying acceptance by consumers who 18 months ago would have never set foot in the retailer’s floor. As the economy improves–and eventually it will–the same consumers will stop shopping at Walmart.
By catering to these new consumers, by providing laptops and all the accessories, Walmart has expanded its base and ensured that they will remain loyal even as the economy improves.
The low price loss-leader is on target. Undoubtedly, Walmart will selectively add better products to the mix, increase highly desirable add-on items and train or hire more experienced sales people. Walmart is developing leadership in consumer electronics, so this strategy will support growth in that area.