When Electronics Boutique, the US software and video games retailer,ers in Europe, and with signs that an invasion is imminent, UK retailers may be in for a shock. bought the ailing Future Zone chain in 1995, it expected to spend three years dragging it back into the black. But within the first year, an #8.5 million loss had been converted into a #500,000 profit, and the second year's pre-tax profit for the 1997/98 financial year ended 31 January has now meant its profit is 16 times greater than last year at #8 million.
Turnover was also up 68 per cent to #124.3 million.
Electronics Boutique has grabbed pole position in its market, from homegrown competitors like Game, Virgin and HMV. If this is the benchmark for what trans-atlantic retailers can achieve, the UK and European retail markets are in for a shock if the US decides to invade.
The increasing maturity of the European market is beginning to attract attention. 'We're excited about the fact that PC demand is rising in Europe, and there are potential opportunities for us there,' says Valerie Paxton, VP of corporate communications at Insight Enterprises, a telesales and mail-order firm based in Tempe, Arizona.
Insight has been considering acquisitions in Europe for the past two years and has done research into the European SME market. 'From what we've heard about PC demand among businesses, it's now time to start looking at Europe,' says Paxton.
The UK is the most attractive bridgehead for US retailers wanting to break into the burgeoning European market. 'We always wanted to expand into Europe, and regarded the UK as the ideal starting point,' says John Steinbrecher, UK CEO of Electronics Boutique.
European retailers could be vulnerable to takeover bids. 'The European channel is in some ways up for grabs,' says George O'Connor, research manager at IDC. 'It's under-financed, which is creating opportunities.
If European firms can't fund themselves, they might find a US partner.'
Given that US retailers are used to operating in a more mature market, any decision to attack the UK market could cause serious problems for indigenous UK retailers which have been criticised for high prices and indifferent service. 'We have brought over standard US trading practices and find that they become competitive advantages over here,' says Steinbrecher.
'Because it's such a competitive environment in the US, everybody's prices are very low. Everybody offers all these features, so the only differentiation is customer service.'
Among Electronics Boutique's standard offerings are a 10-day, no-quibble, money-back policy, lowest price guarantees, reservations, loyalty cards and freephone customer hotlines - features that are beginning to be copied by the company's UK competitors.
In a bid to improve customer service and staff loyalty, Electronics Boutique introduced extensive staff training programmes, a bonus scheme and company pension plan, and claims to have increased salaries by about 30 per cent since the Future Zone days.
The retailer works just as hard behind the scenes. 'We're heavily into IT and state-of-the-art distribution, which gives us a competitive advantage over here,' says Steinbrecher.
He has replaced third-party distributors with an in-house operation, introduced IT systems for automatic stock replenishment and cut the firm's inventory by #1 million, despite opening 33 additional stores.
Even redesigning and refurbishing the stores has been far more beneficial than the company expected. In the US, refurbishment might increase a store's takings by between 10 and 15 per cent. In the UK, the figure is between 50 and 200 per cent, which suggests there was plenty of room for improvement.
Electronics Boutique's pricing policy is typically American. 'We aim to go out with the lowest price on the high street,' says Steinbrecher.
Margins and prices are traditionally lower in the US, and would probably be hit hard in the UK if US retailers were to come over in force, with the benefit of economies of scale, central sourcing, and the need to establish their brand.
'US retailers would have to undercut indigenous retailers by five to 10 per cent if they want to establish themselves,' believes Clive Longbottom, strategy consultant at analysts CSL consultancy services. They might even offer Dell or Gateway level pricing in the shops, which could really upset the retail apple cart.
The sign-switch pricing model - where a $1,000 price tag in the States becomes #1,000 in the UK - is already beginning to seem anachronistic, as canny buyers can visit the US Website of a vendor like Dell and make direct price comparisons. This could easily spill into the retail channel, with US-to-UK price differentials reflecting the extra costs of services like shipping, say, between five to 10 per cent rather than the 30 to 40 per cent they have been standing at.
Longbottom predicts a raft of changes to the European retail market if US retailers decide to set up shop in the UK. These could include common pan-European pricing; centralised logistics; minimised warehousing and more reliance on just-in-time supply; longer and cheaper warranties (cutting down on what is a lucrative sideline for retailers); and a greatly increased marketing spend.
'There would be a lot more aggression in the approach to retailing,' says Longbottom. If Rover can offer a refund-or-replace policy on new cars, there is no reason why retailers should not do the same for PCs.
If competition hots up, the kind of marketing ploys we could start seeing in the UK could include special offers, promising a full refund after several years, if customers meet certain conditions.
Added to that, it is likely retailers will begin selling more complete bundles, rather than separate hardware and software components, and will opt to increase value-added services such as help with installation. It is likely that build-to-order systems like those Dell is already selling over the internet will find their way on to the high street.
Analysts expect US retailers would introduce new business models into Europe. Insight Enterprises, for example, has shifted its focus from traditional catalogue-based sales in the consumer market, to cold-calling SMEs to sell them PC equipment and services.
The cold-calling model is quite common in the US, though not yet in the PC market, and Insight claims it is lucrative. 'By decreasing our marketing expenses we have been able to bring up our bottom-line margins,' says Paxton.
Like Electronics Boutique, Insight's standard support and service offerings are a cut above those of many UK suppliers, including freephone links for customers to access manufacturers' own support lines and extranet-type services for regular customers via the Web.
If a US chain wanted to set up shop on this side of the pond, it would be unlikely to start up a European operation from scratch. 'It is hard to believe you would see a big chain come over here and take on PC World,' says one City retail analyst. 'It's more likely it would buy up existing chains, as Electronics Boutique did.'
Paxton agrees: 'Acquiring a company would give us a jump start, as long as it fitted with our business.' During the month, Insight bought Choice Peripherals and Choice's internet service provider, Plusnet Technologies, for #1.7 million cash and #2 million in Insight stock (PC Dealer, 15 April).
Apart from the advantages of taking over an existing brand name, there is the matter of premises. The wide, open spaces of the US may offer almost limitless greenfield potential for hi-tech retailers. But in the overcrowded UK, with its stringent planning regulations, the prime retail sites have been snapped up. 'What we really liked about Future Zone was the properties,' says Steinbrecher.
If our transatlantic cousins did want to take over an established UK retail chain, their choice would currently be rather limited. Specialist Computer Holdings' (SCH) Byte chain, a prime candidate, was snapped up last month by the Dixons Group and so is off the market (PC Dealer, 8 April). Because of this, it seems unlikely the Dixons Group will put PC World up for sale. This leaves smaller companies like Software Warehouse, which has 15 stores accounting for about 25 per cent of its turnover and plans to open more branches this year. But the company does not believe its small, mostly high street premises, would appeal to a US buyer.
Software Warehouse retail director Linda Redmond claims the company is not shaken by the threat of an influx of US retailers. 'We would welcome any competition,' she says.
Of course, the 64,000 dollar question is whether - despite increasing speculation - the US really is poised for an imminent invasion of the UK and European markets. To date, Electronics Boutique is the only US giant to set up shop over here, and many others are remaining tight-lipped about their expansion plans.
CompUSA, US market leader with about 150 stores, admits it is 'always looking for opportunities overseas', but refuses to discuss any specific plans other than that it is planning to open 35 new stores in the US over the next 12 months.
Circuit City, another big US retail chain, denies having any plans for Europe and says it is concentrating instead on expanding in its home market.
Insight Enterprises, which specialises in sales to SMEs, says there are still 150,000 in the US, which its telesales executives have not yet reached.
So, despite its European ambitions, it is focusing at least in the short term on its home market.
More significantly, Egghead, a medium-sized US retailer, which reportedly had international expansion plans, recently surprised the market by closing its stores and switching its sales to the Web. In the long run, the success of direct and electronic channels could make a dent in retail sales on both sides of the Atlantic.
Industry watchers believe US players are keeping tabs on the UK market, but argue that a mass switch to this side of the pond is a way off. 'I wouldn't expect to see much happening this year because US retailers have their hands full dealing with the competition,' says senior analyst at the Meta Group Ashim Pal.
Longbottom believes they are waiting for a more opportune moment: 'I think US retailers are all keeping a watching brief,' he says. 'They will say to themselves "this is a bit of a bubble which might burst". I think they are quite happy to let the Europeans fight it out and then come in and pick up the pieces afterwards.'
This, he thinks, will not be until after the year 2000, and will probably depend on there being well-established retail chains with operations in at least three or four European countries. It will also require reasonable size and maturity in the domestic and small office/home office markets.
The single currency may help, but Europe is still a fragmented market, with different modem standards, two mains power supplies, few pan-continental advertising media, and little logistical infrastructure. Many US firms don't seem to realise this. 'The Americans see Europe as the same as the US - just a year or two behind it,' says Pal. 'But there are many cultural issues which they fail to grasp.'
For example, CompUSA reckons its USP consists of having a series of focused teams - including corporate, government, education, small business and consumer - under one umbrella, which means it combines specialist knowledge with economies of scale.
But the European market is so fragmented that it might need dozens of teams over here making the system unworkable. 'The Americans will face all the same problems that indigenous retailers have already found,' says Longbottom. He also believes that, for the first couple of years, they probably would not affect the European chains, although smaller firms with one or two outlets might suffer.
Longbottom believes the UK/ European retail market is due for a shake-out anyway. 'There will be a slow agglomeration and attrition,' he says.
'In my opinion, the bottom-feeders will fall away, and those just above the bottom will clump together.'
The winners will need to develop pan-European pricing, uniform terms and conditions, integrated communications and a continental distribution infrastructure rather like the strategy Computacenter and Computer 2000 are following.
If they improve their internal IT systems, become more competitively priced and offer a better range of services - such as build-to-order and on-site installation - they may achieve a critical mass in Europe rather than just in the UK.
Whether or not this will enable them to withstand the transatlantic threat, or simply make them a more attractive takeover target, remains to be seen.
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