Strategy & Competition
Hhgregg: The Contrarian Electronics Chain
When Circuit City collapsed in January, many retail experts thought Best Buy (BBY) and Wal-Mart Stores (WMT) had the most to gain from the closure of the consumer-electronics chain's 567 stores. But one retailer has seized the opportunity like no other: Hhgregg (HGG) of Indianapolis. The 118-shop chain is invading Circuit City's former home turf in and around Washington and even taking over some of its old locations. Hhgregg's goal: to open more than 50 stores over the next 18 months. "When a window opens, we take advantage," says CEO Dennis May. "Circuit City's demise no doubt is a big part of that opportunity."
Hhgregg's ambitious plan carries significant risk. The history of electronics retailing is littered with chains that grew recklessly, from Crazy Eddie to Good Guys. And the chain is investing at a time when consumers aren't spending as much on TVs and home appliances, which together make up about 85% of hhgregg's $1.4 billion in sales. (The U.S. Census Bureau estimates sales at electronics and appliance stores fell 10.4% in August from the previous year.)
Hhgregg also has an unusual business model. Founded in 1955, it's in some ways a throwback to an earlier era of retail. Its stores are smaller than the typical Best Buy and eschew its cluttered racks of low-margin DVDs and CDs. "Unlike Circuit City, which made the mistake of trying to be more like Best Buy, hhgregg distinguishes itself in the market," says Jefferies & Co. analyst Daniel Binder. Its salespeople are also paid primarily on commission, which May says fosters more loyalty and a stronger team. That was the industry norm until Best Buy abandoned the practice in 1989, believing it fostered pushy sales tactics (Circuit City followed later).
To help avoid that peril, hhgregg gives employees 280 hours of training in their first year to make sure they understand fully the ins and outs of the 100-plus TVs and 400 appliances carried in stores. The result, says May, is "high-caliber people who know the product and know how to sell."
The chain focuses on pricier models with higher profit margins. Bob Perry, an executive vice-president at Panasonic Consumer Electronics (PC), says more people buy its $3,500 60-inch G10 plasma TV at hhgregg than at any other regional chain. That helps explain why the company boasts a gross profit margin of 31%, while Best Buy's is 25%. "Hhgregg makes its dough on the upper end," says Craig Johnson, president of consultant Customer Growth Partners.
While its upscale ethos has hurt it as consumers have traded down to cheaper products, analysts say the company has taken some smart steps to ride out the recession. It started selling video game consoles and netbook computers to keep traffic stable. It has also focused on Circuit City's most lucrative markets. Moreover, by opening several stores in an area at once, hhgregg spreads out the costs associated with expansion. It also sends top managers to the new regions to ensure that its corporate culture takes root.
Despite the risks, investors support May's ambitions. They have pushed shares up 91% so far this year, to nearly 17, compared with 36% for Best Buy. They're betting hhgregg will thrive in markets where others have failed.