Will Windows 8 hybrids kill laptops and ultrabooks?

Most PC companies are lining up tablets, hybrids and Touch-screen ultrabooks using the Windows 8 and Windows RT operating systems to be launched in October 2012 (click here for a Technically Personal article on the topic).

I wonder whether the Windows 8 hybrids will kill the Ultrabooks category? and what will happen to good old non-SSD laptops?

While I think that there is ample room for tablets and hybrids, I still think that Ultrabooks, non-SSD laptops, and even desktops will survive for a while. Here's why:

• Price: While few companies have given any indication of pricing, Samsung has announced a $1,199 price for the Series 7 hybrid (11.6" screen, Intel Core i7, 4 GB Ram, 128 GB SSD) and a $649 price for the Series 5 tablet (11.6" screen, Intel Atom, 2 GB Ram, 64 GB SSD). These are significantly higher  price points compared to today's Ultrabooks ($700-1000), non-SSD laptops ($200-700) and desktops (even lower). The tablet is priced lower than the current generation of high-end tablets (64 GB iPad at $699), but with bigger screen, and more memory.

• Screen size: There is a significant segment of corporate workers that do need a screen bigger than 14" for their work. I am sure 14" hybrids will eventually be announced. However I expect the price points to be much higher.

• Emergence of the touch-screen Ultrabook: HP has announced yesterday (click here) that it will be launching the Spectre XT TouchSmart (15.6" touch screen, with NFC for $1,399) and an Envy Ultrabook 4 (14" touch screen Ultrabook). This sub-category seems like a compromise between touch-screen, media-creation using keypad and large screen size. I personally don't see why many folks wanting a fixed keypad would want a high-priced touch screen. Imagine stretching out and touching the screen to consume media while the keypad is still fixed to the computer...too un-ergonomic :-(

For these reasons, I feel non-touch Ultrabooks, non-touch non-SSD laptops and the good old desktops still have ample market potential. Of course, I do expect the price war going on in non-SSD laptops and desktops to soon affect non-touch Ultrabooks... which means even better deals for consumers!

Let me know what you think!

What should Best Buy do to survive?...part deux

I blogged recently about Best Buy's problems and what I think it should do (click here).

Best Buy has come up with a new branding, service and store layout strategy in June (explained here in an Ad Age article).  Their new tagline is "Making technology work for you". They will change store layouts to aid customer decision making using Central Knowledge Desks, and will move the Geek Squad to the front of the store.

I recently read a Fast Company article by David Brier, a brand identity expert, about Best Buy's branding (click here). Here are some excerpts of the article:

Best Buy, your culture is about unloading inventory, not helping the customer. Taking a page from Apple’s retail strategy by adding “Central Knowledge Desks” will not replace doing something real and authentic. My personal experiences unfortunately have not changed what is inbred into your culture.

But let’s get more fundamental: That slogan is not only tired, it is a death sentence that is bland, old, worn, uninspired and not reflective of a single strand of your customer’s aspirations. It reeks of “marketing speak” and “committee-itis.”

The strongest brands stand for something as well being opposed something else...

• Apple is opposed to technology that sets the rules and asks people to adapt; it champions technology that adapts to the needs of the people.
• Nike stands for athletic achievement and is opposed to sitting on your ass.
• Dyson stands for no loss of suction and is opposed to stagnant complacency, first making obsolete the old guards of vacuum cleaners and then doing the same with their own technological solutions.

.. Best Buy, what do you stand for? Also, what are you opposed to? Until you answer those questions, the likelihood of rising from the ashes is grim at best.

Only after answering those questions can you honestly determine what to sound like, what to look like, what your design aesthetic is, and why anyone should care.

And if the best you’ve got is “Making technology work for you,” then the likelihood anyone will care is very slim.

 I tend to agree with David that a brand needs to clearly communicate what it stands for and what it does not. It is one of the essentials of clear differentiation in the customers' minds.

So how should Best Buy differentiate itself (and communicate what it does and does not stand for)?

As I discussed in the previous post, I think services should be a key part of Best Buy's revival (and survival) strategy. I feel, they should be saying "We sell, install, maintain and replace (if broken) technology devices. We do not  just stock the devices and leave it up to you to figure out which product you need, and handle the shipping, unwrapping, installation, maintenance and replacement of the device (unlike our competitors)."

I think "Making technology work for you" does capture parts of this message (and in this sense I disagree with David's assessment). Maybe Best Buy can do better by reinforcing the full extent of the differentiation message in their commercials.

Let me know what you think.

What should Best Buy do to survive?

Best Buy just announced a bad Q2 (click here). Same store sales are down in the US and significantly down internationally. Their operating income has shrunk 87% on falling margins and rising SG&A. Their services, mobile and tablets sales are the only bright spots in a fairly sad story on declining TV, gaming and computer sales. Even the shutting down of stores does not seem to have enabled them to stem the tide.

Here are excerpts from their earnings release:

FISCAL SECOND QUARTER PERFORMANCE SUMMARY
(U.S. dollars and square footage in millions, except per share and per square foot amounts)
	Three Months Ended
	Aug. 4, 2012		July 30, 2011		Change
Revenue	$10,547		$10,856		(3%)
Comparable store sales % change1	(3.2%)		(3.8%)		60bps
Gross profit as % of revenue	24.3%		25.4%		(110bps)
SG&A as % of revenue	23.1%		23.0%		10bps
Restructuring charges	$91		$0		N/A
Operating income	$33		$260		(87%)
Operating income as a % of revenue	0.3%		2.4%		(210bps)
Diluted EPS from continuing operations	$0.04		$0.39		(90%)
Adjusted (non-GAAP) Results2
Operating income	$124		$260		(52%)
Operating income as a % of revenue	1.2%		2.4%		(120bps)
Diluted EPS from continuing operations	$0.20		$0.39		(49%)
Key Metrics3
Total U.S. big box retail square feet	41.0		42.6		(4%)
Revenue per square foot (Domestic segment)	$857		$846		1%
Adjusted operating income per square foot (Domestic segment)	$41		$45		(9%)
Adjusted return on invested capital4	11.1%		10.7%		40bps

Fiscal Second Quarter 2013 Highlights

• Domestic comp store sales decline of 1.6 percent improved compared to fiscal first quarter decline of 3.7 percent 
• Domestic estimated market share maintained year-over-year 
• U.S. big box square footage reduced by 4 percent year-over-year; Domestic revenue per square foot up 1 percent year-over-year 
• Similar to the first quarter of fiscal 2013, International segment year-over-year operating income decline driven primarily by lower revenue in China, Canada and increased competitive conditions in Europe 
• Domestic segment total Services category revenue increased approximately 6 percent 
• Momentum grows in Domestic services with key partnerships announced recently: AARP, Verizon and Target  
• Domestic segment online revenue growth of 14 percent 
• Domestic segment connections growth of 11 percent 
• Domestic segment mobile phones comparable store sales growth of 35 percent 
• Domestic segment comparable store sales growth in tablets, mobile phones, appliances and eReaders more than offset by declines in gaming, digital imaging, televisions and notebooks 
• Adjusted (non-GAAP) Domestic segment year-over-year operating income decline driven primarily by lower gross margins in computing, mobile phones and televisions 

Best Buy today announced GAAP net earnings from continuing operations were $12 million, or $0.04 per diluted share, for the three months ended August 4, 2012 compared to net earnings from continuing operations of $150 million, or $0.39 per diluted share for the prior-year period. 

Revenue

	Three Months ended Aug. 4, 2012						Prior-Year Period
($millions)	Revenue		Change YOY		Comp. Store Sales		Comp. Store Sales
Domestic	$7,803		(2.2%)		(1.6%)		(4.1%)
International	2,744		(4.7%)		(8.2%)		(2.8%)
Total	$10,547		(2.8%)		(3.2%)		(3.8%)

The Domestic segment comparable store sales decline of 1.6 percent was driven by declines in gaming within the Entertainment revenue category, digital imaging and televisions within the Consumer Electronics revenue category and notebooks within the Computing and Mobile Phones revenue category. These declines were partially offset by comparable store sales growth in tablets and mobile phones within the Computing & Mobile Phones revenue category, the Appliances revenue category, and eReaders within the Consumer Electronics revenue category. The Domestic segment online channel revenue grew 14 percent compared to the prior-year period.

The International segment comparable store sales decline of 8.2 percent was driven by the lower growth in consumer spending in China and the continued impact from the expiration of government sponsored programs, which negatively impacted sales in Five Star. Market softness in notebooks, digital imaging and home theater in Canada also contributed to the International comparable store sales decline.

Gross Profit

	Three Months ended Aug. 4, 2012
($millions)	Gross Profit		Change YOY		% of Revenue
Domestic	$1,896		(6%)		24.3%
International	668		(9%)		24.3%
Total	$2,564		(7%)		24.3%

Domestic segment gross profit decreased 6 percent, reflecting a rate decline of 110 basis points compared to the prior-year period. The Domestic segment rate decline was primarily due to three factors. In mobile phones, connection growth and a mix into higher price point smart phones resulted in strong comp sales and gross profit dollar growth, although at a lower overall rate. Second, industry softness in computing resulted in increased promotional activity in the quarter to stimulate consumer demand ahead of the second half of fiscal 2013, which will include the Windows 8 launch. Finally, there was less favorable product mix within the television category.

International segment gross profit declined 9 percent, reflecting a rate decline of 130 basis points compared to the prior-year period. This rate decline was driven by Best Buy Europe and due primarily to increased mix of lower margin wholesale sales and promotional activity within a price competitive environment for mobile phones.

Operating Income

	Three Months ended Aug. 4, 2012
($millions)	Operating Income		Change YOY		% of Revenue
Domestic	$83		(65%)		1.1%
International	(50)		n/a		(1.8%)
Total	$33		(87%)		0.3%

What should they do to survive the onslaught of online retail (and the show-rooming effect) and of discount retailers?

I think the following measures would make sense:

• Continue to aggressively expand the services business by extending tie-ups to a wider range of partners (much like their VZ, TGT and AARP alliances). Become the preferred service partner for as many telecom and cable companies, and computer/ TV manufacturers as possible so that customers look to Geek Squad irrespective of the brand of device or service being consumed.
• Improve online buying experience. Bestbuy.com does not have a good recommendation engine ("People who bought this product also bought Y", "People who viewed this product bought X"), unlike Amazon.  Also BestBuy.com should clearly state its free shipping policy and clearly highlight the value of the store pick-up option.
• Continue to close down unprofitable stores
• Focus more on small kiosks at airports (mp3 players, DVDs, headsets) and on smaller store formats -- these locations have lower SG&A

Let me know what you think!

Pricing issues for Abercrombie & Fitch

I had blogged 3 years ago (click here) about why Abercrombie & Fitch should consider using selective (and end of season discounts) to increase volume so that it does not have an inventory pile-up. Most of the world might have considered me silly for saying that... A&F was hot, had raging sales growth and industry-high margins.

After 3 years, I hear this from a Reuters article in May 2012 of its Q1 report:

Abercrombie & Fitch Co (ANF.N) posted a sharp drop in profit and its first quarterly decline in sales at established stores in more than two years, leading to concern that a growing inventory could mean future discounting.

Its shares fell 13 percent to touch their lowest in more than two years on the New York Stock Exchange.Same-store sales, or sales at stores open at least a year -- an important measure of retail growth -- fell 5 percent in the quarter, and the teen clothing retailer forecast a tepid year ahead.

"While management didn't quantify international comparable sales ... we estimate total international comparables were down double digits," Paul Lejuez, an analyst with Nomura wrote in a note to clients. He noted this was the first negative quarterly comparable sales for the company's Hollister brand in Europe.

Net sales rose 10 percent to $921.2 million, but even that missed estimates.
Abercrombie said it ended the quarter with inventory up 44 percent, against the 10 percent rise in sales. Lejuez said that could signal more markdowns were on the way.
Abercrombie said margins were expected to improve throughout the year, but if it had to resort to discounting while rivals were selling clothing at full price, it could affect margins.

Earlier this month, American Eagle Outfitters Inc (AEO.N) raised its profit expectations for the first quarter sharply as it sold more clothes at full price.
Most clothing retailers, especially those that cater to teens and young adults, were expected to post strong sales for the first quarter as wardrobes were updated for spring breaks and warm weather.

For the first quarter that ended April 28, Abercrombie earned $3.0 million, or 3 cents per share, compared with $25.1 million, or 28 cents per share, a year earlier.


In Q1, ANF was holding 56 days of sales in inventory (the actual number is higher considering that I use cost of inventory and price of sales). Its gross margin has reduced to 62.5% (down from 66% 3 years ago)...but still significantly high compared to industry average.


According to this AP report:
Abercrombie & Fitch announced in June that it was closing 180 U.S. stores over the next few years. The chain had already closed 135 under-performing U.S. stores in two years. The closure will primarily be among its namesake and kids brands but it also plans to close a few Hollister stores as well. 

I will be watching their Q2 results on Wednesday to see how this story develops.

Customized database marketing for Indian e-commerce

Most of the players in the Indian e-commerce market are losing money.

My friend, Sanjay Dattatri has blogged about the challenges facing Indian e-commerce (click here). As he points out, Indian consumers are price-sensitive, dis-loyal and ill-behaved. I tend to agree with him.

As Sanjay points in another blog post, pricing sanity needs to prevail (click here). I agree with him on this one as well.

I do think that e-commerce vendors in India need to adopt a more customized approach to marketing and pricing. After all, aren't online marketers supposed to know all about their customers' buying behavior, browsing, email response (and customer care calls).

Why give the discount to all your customers when the reality is that some customers value your brand and superior delivery performance (and couldn't care less about the few rupees extra for that). The vendor can give a golden treatment to these price-insensitive customers by giving differential free shipping terms, and loyalty points. Some players like indiaplaza and healthkart do have a loyalty program.

On the other hand, one cannot lose out on selling to the price-sensitive customers, who will switch on a better deal available somewhere else.

The only way out is customized database marketing.

In my opinion, e-commerce vendors need to stick to the following rules of customized database marketing:

1) Target your discounts at customers who are likely to shift their purchases from your competition to your website, when given a discount. Examples of these customers include:

• Customers who bought a regular purchase like clothes, or diapers, or books, or groceries or nutritional products many months back and have not purchased since. I was delighted to see that healthkart sent me a  customized coupon code for whey protein 6 months after my first purchase. They avoided giving the discount to everyone as they know they have targeted a potential buyer. The key is to send out a customized coupon code which works only with the specific customer's login.

• Customers who have browsed a particular product or a category for a long time and not bought that product/ category. This can be done only when the customer is browsing with his cookie activated, and the e-commerce vendor is smart about tracking browsing behavior. A classic example would be a books-buyer browsing a mobile phone product page, getting a customized offer. My recommended approach would be to price the product at slightly higher than competition for the masses, and to give a discount coupon to customers who browsed and did not buy. (Quick programming note to vendors: Please don't send discount coupons for lingerie to men who are just browsing. But for that you've got to read the next point.)

2) Get to know more about the customer (even though you may know nothing to begin with). I get shocked when online retailers say that they deliberately have no information about their customer other than their user ID, name and shipping address. As a trusted seller you should try to get more information about the customer. Incentivize customers to update their profile online (such as gender, date of birth, marital status, interests, etc). The Payback program (called imint earlier) did that when they transitioned. When you know that you are dealing with a single guy who has never bought women wear before, you can stop sending him lingerie ads and coupons. Also some interesting things you can do with demographic data:

• Promote Gudi Padva to Maharastrians, and Onam to the Keralites and Eid to Muslims (irrespective of where they live)! -- if you can classify names by mother tongue and religion
• Promote kids items to families with kids

3) Send personalized recommendations/ suggestions, by putting yourself in the customer's shoes. Most e-commerce vendors are using formulaic recommendation engines which give recommendations based on the customer's last purchase. Ideally the recommendation engine should be based on the basket of goods purchased by the customer in the last 6 months.

Also, the recommendation logic needs to be altered for capital goods purchases (mobiles, electronics) vs. regular purchases (books). A mobile phone buyer does not need recommendations on what other similar mobile phones to buy! However a book buyer may appreciate recommendations on which other similar books to buy. For the mobile phone buyer, a list of accessories which go with his/her phone may be useful, but a formulaic recommendation engine may not capture that.

More later...let me know what you think!