Posted July 24, 2007 1:02 pm by with 9 comments

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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.

  • Could Tweeter’s demise also come from not offering the same level of knowledge online? I don’t think I’ve ever looked at their web site, but did their online service match their offline? and both come to mind as companies that offer discounted pricing but still over extensive information and tutorials.

  • I think that this post puts too much emphasis on how Internet retailers led to Tweeter demise, but I don’t feel that this is the case.

    I feel that it was Tweeter’s flawed business model that led to their demise. Best Buy and others essentially began to offer the same high-end products along with installation services and drove Tweeter out of the market. If their demise is based around the idea of “free-riding” then why are the others such as Best Buy not facing the same peril?

    I also feel that this ties into Andy’s idea of not having the web presence to back their upscale and knowledgeable service that they have at the stores. You can’t even compare products side by side or find too much information on their products. Take a look at Best Buy’s website and you will see what should be done by Tweeter.

    I think that Tweeter’s bankruptcy was not due to these “free-riders” but instead due to a flawed business model that wasn’t able to adapt and a lack of vision for their own web strategy.

    I also think that the recent ruling on minimum pricing laws wouldn’t help a company like Tweeter anyways. The manufacturers in an industry like electronics don’t have an incentive to adapt a model using minimum pricing. They trying to sell volume and are receiving the price they desire and leaving the rest for the retailers to worry about. Unless they are a prime brand in an industry such as cosmetics or a similar industry where brand recognition and higer-than-average customer service levels are required, I doubt many manufacturers would enact a price minimum.

  • It’s not a secret that on-line resellers operate with lower margins than traditional stores. We have seen our home theatre installers go in 3 different directions.

    One group has embraced the internet as a sales channel and is doing well. Selling mainly popular sizes, which are easily installed.

    Another group either uses their site as a display for their services, but don’t sell products. They focus on complete solutions where integration is key. This allows them to monetize their knowledge of systems integration. From our product range, they sell customised products and higher priced (more exclusive) projection screens.

    As for the third group of retailers, they can’t seem to make up their mind, fail to be really good at either one of the above-mentioned options and are in trouble.

    It shows that adjusting to a changing environment is key for survival…

  • I would like to address a few things posted above. I speak from extensive experience both as a retailer as well as a brand owner (not that that makes me right!)

    Practically every manufacturer wants to protect their product from price cutting. Letting price cutting happen in order to increase volume is suicide because it eventually drives away most of the retailers–certainly the more important ones that make an effort to add value to the sale.

    BTW, I do not know of many manufacturers/brand owners who do not already have a MAP (minimum advertising policy) either in place or in process of being implemented. Electronics is certainly no exception. Enforcement of such documents is the big problem.

    I cannot think of a better way to destroy a brand than allow price cutting to occur. I am not proud to say it, but as an aggressive online retailer several years ago, we by ourselves basically destroyed the US market for a particular product. Except for overseas sales, the company would have gone under. We did this by cutting the price a bit, using our volume to get discounts that no one else could get, and repeating the process. It became a vicious cycle that reduced our cost by 90% and the street price for the product by 60%. We also became the only retailer online that had even a shot of selling the product.

    I do not feel that I am overestimating the impact of online retailers on brick and mortar stores that sell electronics. The price competition is not coming from Wal-mart because they do not carry the high end offerings–only niche electronic online retailers do. People going to Tweeter to listen to different systems do not end up buying the system at Wal-mart–they go to the Internet.

    Tweeter could have picked up some sales online by beefing up their education on their website. However, I am not sure that it would have helped them in the physical stores. To be online, pricing has to be competitive, and Tweeter would have ended up having to offer a different price online than they were comfortable selling at in the store.

    I do not consider the comparison to Best Buy to be completely valid. Best Buy does not focus on high end electronics. They can (and do) sell their products in the store with minimal education. In such a commodity marketplace, a brick/mortar company can certainly survive especially by implementing multi-channel strategies.

    On the other hand, I do agree that Tweeter is to blame for its own problems–they should have adjusted to the new era of price competition and changed their model. As already mentioned, I also acknowledge that free-riding is not a moral issue and has done much good for our economy.

  • Don Harrison

    Free riding did not send Tweeter into bankruptcy. It was a lack of identity. During December the company sacrificed margin by cutting prices to below cost in an effort to compete. The fallout was a degradation of the brand and of course lack of profit.

    I would challenge the author’s statement that many analyst cite free riding as Tweeter’s main problem. Everything I have read referenced Wal-Mart and Best Buy forcing Tweeter to decide between gross margin or comp sales. The company failed along both fronts.

    Free riding is not as common as what the author states…IF you provide value first service. I own a small company in Atlanta and compete heavily with some of local places, but experience very little if any free riding. If someone brings up the Internet I simply lay out the facts between buying locally for a few dollars more or ordering off the internet, not even an issue at that point.

  • @Don,
    I respect your opinion. However, do you realize that in your first paragraph, you contradict yourself? Why would Tweeter have to cut price in an effort to compete if not because of free-riders?

    You may be in a situation where you do not encounter free-rider competition. However, I assure you that you are the exception. A personal example does not prove your point, and my consulting and analysis of numerous industries tells me that free-riding is extremely prevalent.

  • Don Harrison

    I don’t contradict myself, I offer up the factual data that Wal-Mart and Best Buy cut into Tweeter’s market share and instead of pursuing the service provider model at the expense of topline growth, TWTR chose to compete on price, which resulted in a loss of profit. The evidence behind this is a raise in the market share of both BBY and WMT and the eventual bankruptcy of TWTR.

    The statement that MOST analysts believe TWTR failed because of internet pressure simply is not backed up by factual data. If that was the case BBY and WMT would also have seen a decrease in their market share.

    The most common areas cited by analyst for the failure of TWTR revolves around their inability to form an identity based on their rapid expansion during the late 90’s and early 2000’s on buying regional stores. And the problem faced of WMT making an aggressive move into consumer electronics, pushing BBY into higher end electronic sales (witnessed by the acceleration of the Magnolia model). TWTR simply was not positioned properly in the market place, the internet has not been cited in any of the analyst reports I have read…and sharing customers with TWTR and taking over some accounts I have dug in pretty deep to be able to fend questions.

    My personal example is again a factual representation of how I along with members of organizations I belong to deal with “free riders”. We do not worry about the internet, we worry about BBY, CC, and the other CEDIA dealer down the street. Those are the competitors we hear on a daily basis…as I mentioned if the internet is brought up the argument is quickly killed.

    I think you are making a general statement based on your industry and trying to tie it into the consumer electronics industry, which I don’t think you unerstand as well as your own business.

    If you would care to share some of your findings on consumer electronics and free riding I would be very interested in reading the reports, I simply cannot find anything.

  • Robin Glover

    I just got laid off from Tweeter as a low level employee. I think the main, more simplistic I guess, reason is that they tried to over expand and compete with Best Buy. The focus should be on customer service and exclusivity of product. Brands like Martin Logan and Crestron and Krell. Walk into Best Buy and you get a zit faced minimum wage teenager who doesn’t know anything. Tweeter’s salesman are all knowledgeable professionals. They shouldn’t even try to be in Best Buy’s category and only focus on high-end, high cost equipment.

  • I worked for tweeter in Phoenix and i can tell you why they have had a hard time and it will be the down fall of the USA Cheep bastards like you. Only shopping for the cheapest price quality service does not mean a thing. Most of you probably bought your home theater in one box or some cheap ass package deal and you show it off to all your friends and say listen to how great it sound. My friends they sound like crap step up and buy quality products. When all you cheap people have left is Walmart and they start jacking your price up you will all cry to the government about price gouging because of the lack of competition.