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Electronics dealers face tough market online

Thin margins and heavy competition will make life tough for traditional gear-sellers. Yet they have little choice but to forge ahead.

For the bricks-and-mortar consumer electronics giants, big online selling plans present a host of new hurdles, along with unbridled competition from start-ups and a handful of established players.

Yesterday, $9.3 billion Circuit City announced an aggressive new plan to start selling 700 products online by July 1, with an expansion on tap for the Christmas season. Wares for sale will include stereos, televisions, CD players, microwave ovens, and telephones.

Meanwhile, $10 billion Best Buy, which now limits online sales to basic music and entertainment software, has lured Internet grocer Peapod's former chief operating officer John Walden to spearhead its online growth efforts. The Good Guys next month is bringing back Ron Unkefer as chief executive, who has said he will focus on boosting the company's Web sales channel, as well as the company's sagging profits. In 1998, The Good Guys lost $8.9 million.

"Consumer electronics [retailing] is underdeveloped on the Internet," Unkefer said in a recent interview with CNET News.com. "There are industry-unique issues about pricing and distribution that have to get worked through. I have ideas I'm anxious to try." Unkefer declined to elaborate further.

To be sure, many heads have turned toward building a new consumer electronics sales channel online, a business that has already captured the attention of Web-only consumer electronics sales sites, including 800.com, Buy.com, Value America, and Netmarket. And it won't be long before Dell and other big players join the fray. In March, Dell unveiled Gigabuys.com, a new online shopping site that offers thousands of computer products from a variety of vendors. It wouldn't be such a leap for Dell to add consumer electronics as well, analysts said.

"They are all going in this direction. Every store is going to have some sort of an Internet outlet," said Matt Sargent, an analyst at ZD Market Intelligence. To date, most of these companies haven't gone whole hog into Web sales because they lack the infrastructure, he said.

Sargent further added that there isn't much of a "channel" conflict with the store outlets. Most outlets are company-owned, not independently owned franchises. Thus, Web sales will not conflict with the sales expectations of a franchisee.

But bricks-and-mortar firms have more than one tough challenge before they are able to succeed online, said Seema Williams, analyst at Forrester Research.

"For these guys it's a real tough market," she said. "The margins are tough."

Challenges in moving online include keeping their regional store managers happy, working out regional pricing differences, and planning to compensate employees who refer customers to the Web site to buy, she said.

"The biggest bogey is that they've got regional pricing," Williams said, noting that store managers will have difficulty tracking where their customers are shopping when some of their business is cannibalized by the Web site. Williams predicted that Circuit City will likely limp through the Christmas season before getting a handle on online sales by the middle of next year.

Circuit City spokesman Morgan Stewart said the company has already figured out a compensation plan for employees who refer sales to the Web site, but he would not release details. He also said the firm is taking steps to control pricing problems by allowing shoppers to search online for the lowest price available at regional stores in their area.

"In reality, more times than not, our store prices are competitive with our Web prices," he said. Soon, Circuit City customers will be able to check inventories of product at local or nearby outlets, order over the web, and either have the product shipped or pick it up themselves.

Jupiter Communications estimates online consumer electronics sales will grow from $78 million in 1999 to $792 million in 2002, representing just a 2 percent slice of the overall consumer electronics market.

Jupiter analyst Ken Cassar, said he believes consumers will shop online for TVs and stereos and compare prices, but will be reluctant to buy.

"The thing with consumer electronics is that while it is hardware there's a perceived higher differentiation among products," he said. "A PC is boiled down to a collection of components that are easily described and understandable. Stereos and TVs are above that fray to date."

Nonetheless, Mark Mandel, analyst at ABN AMRO, said the consumer electronics giants must move forward quickly with their Internet business "or someone else will sell it to [customers]."

On their side? They have strong brand-name recognition, advertising, and their bricks-and-mortar stores to fall back on, he said. Plus, he added, no one to date has "Amazoned them."

News.com's Michael Kanellos and Jim Davis contributed to this story.