In case you missed it, high-end audio retailer Tweeter recently filed for bankruptcy and was acquired by Schultze Asset Management. There is a lesson or two to be learned from this sad story.
First of all, it is important to realize the role that internet retailing made in the demise of Tweeter. Many (not all) internet retailers engage in a practice called “free-riding” in which they take advantage of the massive branding and education efforts of large companies and sell their products at a deeply discounted rate.
In practice, it works like this. If I want a high end stereo system, I might shop at Tweeter, picking the salesperson’s brain for an hour or so and deciding on the exact equipment I want to buy. I would then go home, jump on the internet, and buy the system at a discount from a retailer that provides little add-on value but does have the lowest price.
In my opinion, this is not a moral issue on the part of either the customer or the free-riding retailer. Free-riding is a legitimate business strategy and has done a lot of good. However, it is important to understand that the internet has created a landscape that makes it very difficult for the Tweeters of retail to exist. Iin fact, most analysts believe that free-riding was the main factor leading to Tweeter’s bankruptcy.
The Tweeter story is a perfect example of why I support the recent Supreme Court decision regarding manufacturers controlling minimum pricing. That being said, in the end of the day, the Tweeter business model did not fail because of dubious actions of free-riders. It failed because it did not adapt to the intense price competition that internet retailing has brought to the marketplace.
The main lesson that we all need to learn from Tweeter is that differentiation is critical to success, especially for niche retailers that cannot compete on price. The new strategy for Tweeter going forward will include a focus on installation, which happens to be something that internet retailers will have a hard time competing with.
If you are a free-riding retailer, you need to know two things. First, the recent Supreme Court decision may mean your best days are behind you. Secondly, competing only on price is a cannibalistic strategy. Even free-riders need differentiation.