Electricals retailing has become an increasing challenge over the past 20 years. Rebecca Thomson looks at how it has changed.

Electrial figures

Twenty years ago, the electricals category was a wildly different place to do business. There was no iTunes, no price-comparison mobile apps and no online shopping, and Amazon was only a glint in Jeff Bezos’ eye. Customers would never buy a camera from Tesco, and specialist retailers such as Comet and Dixons were the comfortable market leaders.

Since then, things have changed. “What has happened was completely unpredictable,” says Dixons group chief executive Sebastian James. “The most difficult challenge for us and every other specialist bricks-and-mortar retailer is what you’re going to do to ensure you survive forever against internet competition.”

Electricals retailers have in many ways been hit harder by the online tsunami than other retail categories. The convenience of online shopping, coupled with the price transparency it brings customers, conspired to take traditional retailers by surprise. Amazon made big strides early on, and other pure-plays such as Pixmania – now controlled by Dixons – moved quickly to enter the market. While some traditional retailers are now starting to get steadier on their feet, things have looked a little wobbly at times. “We were slow to react,” says James. “But we’re catching up now.”

Comet’s journey over the past few years epitomises the problems the sector has faced. Having failed to respond to the changing environment with an offer that struck a chord with consumers, it went from competing with market leader Dixons to near annihilation in the space of a couple of years. US giant Best Buy also fell foul of the difficult trading environment, retreating from the UK last year.

John Lewis buying director for electricals and home technology Ed Connolly, however, says electricals retailers reacted more quickly than many others to the new environment – they got online fast and have been open to new ideas. The problem is that adapting quickly is harder than it sounds. “Electrical retailers were pretty sharp on the uptake of online retailing in comparison to other sectors. But very few were able to entirely adapt,” he says. “We play in a highly competitive market so all those who are still standing at least were successful to some degree in changing their models to accommodate a new reality.”

But what’s emerging from the online onslaught is a business model very different to what many might have expected when the web first began to make waves. The biggest hurdle created by the internet for electricals retailers may turn out to be price transparency – few can argue against the fact that the ability to research and check prices online has fundamentally changed the way consumers behave. James says Dixons has reduced the price gap between online and offline to 6.5%, and that work is continuing to reduce this further as costs throughout the business are cut.

Service counts

“The rules of the game have changed,” Pixmania executive director Ulric Jerome says. “The customer is a lot more aware and educated than 10 years ago. The consequence of that shift is that there’s no room for unprofessionalism or lack of service.”

But while the online and offline price gap must be addressed, James says stores are anything but redundant and that Dixons’ business model of the future will involve a network of about 400 stores. He says that Currys and PC World customers can spend several sessions researching online and will sometimes make multiple trips to a store, combining online and offline research.

Once customers are in the store, staff can be trained to sell packages of products – the correct cables and accessories for a new TV for instance. And Dixons’ Knowhow service arm is a well-known aspect of its push to improve its service credentials.

“When you add all these factors together, multichannel becomes more profitable than single channel – that’s quite an exciting place to be,” says James. “We’ve never thought that before.”

Which means pure-play retailers might even need to think up a few offline tricks of their own – Pixmania has stores in Europe and even Amazon is rumoured to be opening a trial store in Seattle. “Customers want to see product in person before deciding,” Connolly says. “They want to speak to an expert who also provides a touch-point should anything go wrong after the purchase. It is the perfect category for an omnichannel retailer, so long as your pricing can stand up to scrutiny.”

Although it’s arguable that they have had more structural upheaval to cope with than many other categories, electricals retailers were perhaps well placed to cope with technological change. The whole business model relies on constant technological innovation – whether it’s smart TVs or digital cameras, the category would be nowhere without constant product evolution. As Connolly says: “The industry relies on newness.”

The pace has stepped up a gear over the past 10 years or so, and parts of the market have changed fundamentally. Apple’s iTunes service has revolutionised the hi-fi market by enabling shoppers to store all their music online. Instead of buying CDs or record players, shoppers now simply need a set of speakers to plug their iPod into. This method of storing content is moving into films and books as well – internet-connected TV is causing ripples of excitement in the market, and e-readers are still gaining popularity.

“We have seen the emergence of IT as a category to rival any other,” says Connolly. “This has been prompted by mass production of internet-enabled devices, as well as a significant shift of content purchasing to online.”

Selling inspiration

With the possible exception of white goods, electrical products have morphed from functional necessity to design-led style statements. Nowhere is this more in evidence than at Apple, the poster child for branded retailing in the electricals market, and the technology company’s foray into retail has had a fundamental effect on its contemporaries.

Not only does Apple make products such as the iPad that its competitors want to sell – although they are able to do so with notoriously tiny margins – its approach to retailing has been game changing in some areas. Its gleaming minimalist stores, excellent customer service and experiential approach to product display, enabling customers to try out products, have all made an impact on the industry.

PwC chief retail adviser Christine Cross says: “Apple is different – it’s not about selling electricals, it’s about selling inspiration. But there’s still a lot to learn from it and that’s what John Browett did. He learned from Tesco to put the customer first and learned from Apple to appeal to what customers want rather than what they can necessarily have.”

Having learnt so much from the US technology giant, it was probably fitting that Browett moved from his role as Dixons chief executive to senior vice-president of retail at Apple earlier this year.

This relentless pace of product innovation will carry on. Jerome predicts that further integration will occur – smartphones now act as music players, and cameras, for instance – and manufacturers will continue to plough as much cash as ever into their research and development departments. “To survive, retailers need to be extremely agile,” he says.

In addition, good customer service will continue to be an important differentiator. As one senior industry veteran says: “Apple’s good service is a challenge to the rest of the sector to see if they can match it. The answer is others probably can’t, but they can try.”

And while most of the attention has been on how online shopping has made things difficult, the grocers haven’t helped much either. Ever since Tesco and Sainsbury’s started opening hypermarkets in the 1990s their non-food categories have been growing, and they’ve grabbed part of the market for themselves. Connolly says: “Together with the web this has meant that retailers have had to adapt to much greater competition and face fast price erosion. A new camera, for example, will only hold its price for an average of seven weeks – so you need to respond quickly to ensure competitiveness.”

Changing high street

But while agility is generally a core part of electricals retailing, much of the problem for retailers is the plodding nature of the retail property market. If retailers hadn’t been locked into long-term leases, James says, we might have different high streets today. But the high street is about to start catching up as leases come up for renewal. Dixons is planning to reduce its store estate from 557 to about 400 over the next three to four years, with most of these coming in the guise of large out-of-town Currys and PC World stores.

Between 30 and 40 of these stores will be on the high street, adopting the same format as the smaller store trading in Westfield Stratford City at present. “We think we’ve finally cracked a model that works on the high street,” says James. The ‘urban toy shops’ are aimed at inspiring customers to try products, but James says many shoppers prefer to go to a larger store to see the whole range.

After years of struggling to see through the online storm, electricals retailers are finally starting to build business models that might just take them through the next couple of decades. As Connolly says, it will be the next five years that show who has really managed to grasp the nettle.

All change in electricals retailing

1997 - First Tesco Extra store opens. The grocers’ push into larger stores heralded the growth of non-food categories in grocery retailing and increased competition for specialist electricals retailers. It also started a downward pressure on prices in the category – the fierce competition in the sector has led to years of price deflation.

1998 - Amazon.co.uk is launched. Amazon makes up around half of the total online sales in UK electrical retailing – in total, pure-plays pick up around 12% of sales. It took years for the retail industry to take the online behemoth seriously, but Amazon moved from its core entertainment market into the electricals category quickly and quietly. The biggest online player, it is an emblem of how web retailing has galvanised traditional retailers’ market share.

2011 - Kesa sells Comet to OpCapita. Comet’s troubles encapsulate the problems the sector faced. Structural changes meant the rules of the game shifted and Comet wasn’t able to adapt quickly enough. The economic downturn compounded the issue, making things even harder, and in November 2011 it was sold for £2 to the private equity firm. Since then, it has closed stores and worked hard on a new strategy – its success or failure will depend on its ability to find a business model that suits the new trading environment.

2012 - Dixons plans to shut about 150 stores as leases expire. Multichannel trading needs less space – it’s a truth that many retail categories are having to face. Businesses across the industry are now starting to put a number on the size of the store estate they think they’ll need in the future. With customers in the electricals category often willing to travel to larger stores, and with click-and-collect enabling access to the whole range in smaller stores, a store on every high street is no longer needed.