Higher end, high-def electrify Wal-Mart

Improving its consumer electronics departments has been a work-in-progress for Wal-Mart since 2005, but it hit somewhat of a milestone in June when it signed a deal with Dell to sell its computers at more than 3,500 stores, a deal that signaled its emergence as an innovative and powerful player in the CE sector.

The deal was a surprise and significant on two levels. One was the fact that Dell, which has shunned traditional retail for years in favor of direct sales, was breaking with tradition and teaming with a mass merchant. And the other was that Dell chose Wal-Mart to make its move instead of a specialist such as Best Buy or Circuit City.

The NPD Group’s vp of industry analysis, Stephen Baker, didn’t think Dell’s move to retail was a good idea, but said that Wal-Mart was a good touching off point. “If you’re going to sell at retail, Wal-Mart is a good place to start,” said Baker. “They don’t ask for a lot of back-end funding and their merchandising is simple.”

It’s that simple and basic approach to the business that’s helped Wal-Mart move into the No. 2 position in consumer electronics sales behind Best Buy, and emerge as a retailer with more upscale ambitions. After being pigeonholed for years as a specialist in sourcing low-priced product from China and Korea, Wal-Mart has remade itself into a stylish destination with slicker merchandising, more expensive products and name brands.

“The merchandise at Wal-Mart used to be comprised mainly of no-name brands,” said Baker. “But now they have a much better mix that includes name brands like Sony, Samsung and Panasonic that you never would have seen in Wal-Mart a [few] years ago.”

And they’ve made it work to the tune of an estimated $22.6 billion in sales at stores in 2006, still well-behind Best Buy at $31 billion but far ahead of Circuit City. And Bear Stearns analyst Christine Augustine estimates consumer electronics sales should jump 10% to 12% this year, nearly double the 7% increase forecast for overall sales in 2007.

As always, Wal-Mart’s ability to offer lower prices than the competition has been key to its success, but so has its presentation. Once a non-descript, cordoned off area in the middle of its stores, Wal-Mart has transformed the CE departments with colorful displays, especially cases housing MP3 players and other pricey gadgets.

“They’ve always done well with smaller products,” said Baker. “They do a great job with digital cameras and that’s why portable media players are turning out to be such a good fit.” Wal-Mart has also expanded its offerings to include GPS satellite systems and other gadgets for travelers.

While Wal-Mart’s move into iPods has been credited with giving its CE departments more color and cachet, its move into LCD and plasma TVs helped transform the business and sent shockwaves through the entire industry. The giant wall of TVs that anchor its CE departments is just as eye-catching as the iPod displays, but has had a far greater impact on the industry as a whole. The display also features TV mounts and cables for high-definition signals and signs with information on how to set up the TVs.

Wal-Mart’s decision to venture into the deep end of TV sales was a key to the rapid price deterioration of LCD and plasma TVs in 2006, when prices declined 32.5% and are expected to fall another 12% this year, according to research firm iSuppli Corp. It also had a ripple effect on other retailers, including Circuit City, which cited low margins on high-definition TVs for its terrible fourth quarter, and Tweeter Home Entertainment, which filed for bankruptcy in July.

But analysts say Wal-Mart’s venture into flat-panel TV sales has its limits. Unlike Best Buy and Circuit City, Wal-Mart doesn’t offer home installation and probably never will, since the job would have to be contracted out while also finding a way to handle massive volume at more than 3,500 locations.

To complement its move into high-definition TVs, Wal-Mart is venturing into high-definition DVD. Most stores now carry a selection of HD-DVD and Blu-ray DVDs and select stores carry HD-DVD players priced around $299. And with Target set to start carrying Blu-ray players in October, Wal-Mart is expected to counter with a larger rollout of HD-DVD players in stores that could trigger a price war.

Wal-Mart hasn’t talked much about its test with Dell but it has been selling two of Dell’s Dimension model desktop computers in stores since June 10. Dell said Wal-Mart is a starting point for what it called its “new retail strategy” that would “expand the number of places and ways people can buy Dell computers.”