Cognizant Reports

Understanding U.S. Consumer Electronics Retailing

Executive Summary
The U.S. consumer electronics (CE) retail industry has endured severely fluctuating fortunes in the last decade. A swiftly changing CE market landscape, continually reshaped by the forces of continuous product innovation and change, is forcing the entire CE retail industry to confront challenges across multiple fronts. These issues include the following: consumer regardless of shopper location to deliver the complete shopping experience.

Optimize retail floor space through increased store inside of a store concepts and reduction of future store size footprints. Use in-store space for increased demonstration of connected shopper solutions, showing how all elements of a complete basket can work together prior to a shopper exiting the premises. Save precious capital and reduce operational costs by embracing emerging service delivery models to transition select commoditized business processes to cloud computing-enabled business process as a service (BPaaS).
U.S. GDP Growth Rate (%)

The advent of the frugal and sophisticated U.S. consumer, thanks to the Great Recession. Debilitating price wars fought by three distinct retail trade formats discount vs. pure-play vs. online retail. Significant competitive advantage enjoyed by online retailers due in part to lower overhead and tax laws that have not caught up with the new rules of the retail game. Ever-changing and demanding millennial consumer preferences.

U.S. CE Industry Growth vs. GDP Growth

Millions
$200,000 6% 4% 2% 0% -2% -4% -6% $100,000
2006 2007 2008 2009
(estimated) (projected)

These forces have left CE retailers scrambling for cover under their onslaught. In the recent past, we have witnessed the bankruptcy of a large player, Circuit City, as well as the less-than-stellar growth of other key players. It is clear that CE retailers or CE retail divisions of organizations such as Best Buy, Target, Walmart, RadioShack, etc. will need to re-evaluate and re-align their strategies to face the new realities of the marketplace. In our view, winning CE retailers must:

$175,000 $150,000 $125,000

2010

2011

-8%

U.S. CE Industry Growth Rate U.S. GDP Growth Rate (%)

Create integrated channels a store without boundaries that offer all capabilities to the

Source: CEA 2011; U.S. Bureau of Economic Analysis; Goldman Sachs Estimates 2011 Figure 1

cognizant reports | december 2011

The Current State of U.S. Electronics Retailing

Key Categories Key Product Categories
Video Products (Television, navigation products, digital cameras and accessories, digital camcorders and accessories, e-Readers, DVD and Blu-ray players, etc.)

Key Retailers
Best Buy Walmart Costco Sears hhgregg Amazon

Characteristics TV market growth has diminished on category maturation,

lack of catalyst from 3D/connected TVs. 55% of total sales in FY 2012.

TVs greater than 46 average size are expected to garner TV barely re-emerges when penetration hits ~30%, as sales tend to flatten. An estimated addressable market of 17M annual transactions/connections. Largest percentage of all photos will be taken through digital still cameras,
at 51% in 2010, followed by mobile phone, at 42%.

Consumer Electronics
Audio Products (MP3 players and accessories, home theater audio systems and components, musical instruments and mobile electronics, etc.) PC/Notebook/Netbook (Related subscription service commissions, hard drives, networking equipment and related accessories such as printers.) Best Buy Walmart Costco Sears hhgregg Amazon Best Buy Apple Dell Walmart Staples Officemax OfficeDepot Amazon Apple Best Buy Amazon RadioShack Communications service providers Best Buy Amazon RadioShack Sears Lowes The Home Depot Best Buy hhgregg Game Stop Walmart Best Buy Amazon

Stand-alone MP3 players have seen a significant dent in sales due to the
adoption of phones as a personal music device. The dominant market leader Apple has seen iPod sales decline 6% year-over-year and account for less than 8% of Apples revenue.

Continuing margin erosion due to commoditization of category

(except Apple products) because of product proliferation and product cycle time compression.

Home Office

Tablets

Tablet market opportunity: FY12E $12B U.S. market (+50%). Apple remains the leader in the tablet PC market with a 54% share. RadioShack is expected to be the net winner due to its sharp over-index in
tablets vs. other more PC-centric competitors.

Mobile Phones and Connections

FY12E $34B U.S. market (+6%) Estimated channel mix: 65% of total points of purchase
(77,000 in 2010) are direct channels.

Among indirect channels, retailers constitute 56% of the share. For the first time, a majority (54%) of all new mobile phone handsets
purchased by U.S. consumers are smartphones.

Appliances

Appliances and Small Electronics

$14B appliances industry.

Entertainment

Gaming Hardware and Software (DVDs, Blu-rays, CDs, digital downloads and computer software.)

FY12E $23.5B U.S. market (-2%). $15B gaming software value chain. 15M trade-in units across industry. $2B console-based market opportunity

(console subscription points card + downloadable content).

Source: Cognizant Research Center analysis Figure 2

The Market Landscape

The U.S. retail electronics market tallied revenues of $180 billion in 2010 across five key categories: consumer electronics (video and audio products); home office (PCs, notebooks, netbooks, tablets, mobile phones, etc.); appliances; entertainment hardware and software (see Figures 1 and 2); and services. Total sales of the Top 10 electronics retailers are expected to grow by 6% in 2011 to reach $110 billion (see Figure 3). Absent Apples stellar performance, the previous two business cycles (2008-2010) have been characterized by anemic revenue growth, the demise of Circuit City and flatlining in the key category of TVs. After experi-

encing market share gains following Circuit Citys demise, the major players have essentially seen flat growth a year after the fact, indicating that revenue increases in 2009 for some major players were purely a result of the redistribution of Circuit City sales rather than incremental business gains (see Figure 4, next page). Reality struck in 2010 and continued in 2011, with revenues of major players growing only by 4.5%; marginal revenue growth was driven primarily by new product introductions, such as tablets and netbooks, and not from existing product lines, as well as from an increase in store fronts and retail floor space. It is clear that shifting consumption patterns and product distribution models,

cognizant reports

Top 10 Players: Store-Based CE Retailing by Domestic Revenues

$40 $30 Billions $20 $10 $0
Best Buy Walmart Apple Staples Game Stop Target Costco Sam's Club RadioShack OfficeMax

2008

2009

2010

Source: Dealerscopes Top 101 CE Retailers, March 2011 Figure 3

especially from physical to online sales, have had a major, across-the-board impact on the electronics retailing space.

Market Forces
We see four distinct forces that will cause further upheaval in the industry landscape over the next few years. The ability of current players to respond nimbly to these challenges and seize opportunities arising from rapid change will be the key to long-term competitive advantage. These forces include: Consumer sophistication and frugality, increased regulatory scrutiny, cut-throat competition and millennial consumer behavior (see Figure 5). Consumer Sophistication and Frugality The shift of retailer-oriented product categories from highly considered to near commodity status (the result of increasing shopper sophistication) reduces the advantage of sales staff

in providing differentiated customer advice. Furthermore, consumer reliance on third-party intermediaries for offers and pricing information threatens to convert retail stores into little more than physical showrooms for online merchants. Additionally, U.S. consumers continue to reel from a depressed job market and rising prices, especially in key consumption items such as fuel. Conspicuous consumption is on the decline; premium brand substitution with cheaper variants and even postponement of consumption are the order of the day. According to the Consumer Electronics Association, spending on CE products by the average U.S. consumer household fell 14.5% between 2009 and 2010, or $1,380 per household in 2009 vs. $1,179 in 2010.1 Falling consumer demand is also indicated by the recent uptick in the U.S. savings rate, which has traditionally trended downward during the last few years (see Figure 6, page 5). Key operational challenges for CE retailers include:

Market Share Gains: The Circuit City Impact

Retailer Dollar Share Increases by Category (March December 2009) Best Buy Flat-Panel TVs Notebook PCs Desktop PCs Digital Cameras 5.2% 5.5% 4.7% 5.5% Walmart 3.2% 2.3% 0.3% 2.7%

Source: NPD Estimates Figure 4

Margins: Prices of key product categories like TVs and PCs (notebook, netbook and desktop) have consistently declined or remained at bargain basement levels over the last few years, creating pressure on margins for retailers.2 Sales of these products are essentially replacement or extension sales, as these are mature and near-ubiquitous categories. These product categories typically have the highest rate of high-margin warranty and services attachments, which are also declining due to flat sales, creating additional challenges for retailers.

cognizant reports

Forces Shaping the U.S. CE Retail Industry

Forces Drivers Consumer frugality: Consumers trading down (moving away from premium brands), opting for lower priced alternatives, deferring discretionary spend. Deleveraging: Declining consumer debt levels, higher savings rates, lower consumption. Availability of shopping technologies for instant price discrimination, product information and comparison.

Changes Anemic growth in the sector

with negative comp sales. Fall in operating margins across some key categories. SG&A cost escalation due to higher store expenses, promotional offer lead by price competition. Multi-channel strategy: Reduce selling cost, compete on price and maintain margins.

Impact Change in revenue mix from lower margin notebook PCs, TVs,
etc. to higher margin products like smartphones, tablets.

Selling these from small-format stores, which cuts down selling

Consumer sophistication and frugality

costs and paves the way for greater attachment of services to the sale, leading to higher margins. Importance of the online channel for store-based retailers with an expanded assortment, giving them pricing power. Customers using offline retail establishments as storefronts for online sellers.

E-Fairness momentum. State budget deficit and Regulations

uncollected sales tax.

Five states have enacted laws

in recent years (NY, RI, NC, OK, CO); four states passed laws in 2011 in the first two quarters (IL, SD, CA, AR); and 20 states have legislation or similar discussions underway.

Level playing field for brick-and-mortar and online retailers. Online-only assortment by store-based retailers. Online-only assortment also disaffects offline shoppers because
of the presence of different pricing strategies.

Price differentiation across

Competition (Online vs. store-based retailers, making margin a bigger risk than market share.)

categories between online and store-based retail models. Walmart has a strong advantage based on its size, giving it massive economies of scale in procurement and, hence, the ability to pass on price benefits to the consumer.

Pricing pressure. Margin reduction. Focus on supply chain and

right assortment.

Online retailers have been able to take advantage of the con Large discounters like Walmart have taken full advantage of
ecosystem.

sumer frugality phenomenon in a big way by competing on price. failure of Circuit City by garnering market share in key categories.

Relationship with Apple for iPad and iPhone sales will drive the Reducing product cycle lead times to increase pressure on
accurate demand forecasting to get in and out of products before margins are completely eradicated. The proliferation of new products necessitates buyers to increase their market awareness and research in order to identify where to place their bets. Working capital must be released sooner for non-working capital by exploring non-traditional methods to move product through third-party providers or intermediaries. Pricing pressure makes it increasingly difficult to wring savings out of the value chain at the same speed at which retailers are experiencing pricing pressure, thereby enhancing margin erosion trends.

Emergence of Gen X and Shifting client preference and changing product cycle

millennials as core franchise. Multi-channel strategy for consistent customer exerience acoss channels. E-commerce: Reduce selling cost, compete on price and maintain margins.

Compared with baby boomers, Gen X and Gen Y are: More tech/finance savvy. More autonomous in their purchasing decisions. Demand greater transparency. Demand tailored service offerings; desire a seamless/social purchasing experience.

Retailers need to: Invest in client-friendly IT platforms. Offer a solid online transactional platform. Build a mobile strategy. Create a social purchasing experience.

Source: Cognizant Research Center Analysis Figure 5

Large CE retailers are, therefore, moving their revenue mix from lower-margin items such as notebook PCs and TVs, to higher-margin products like smartphones and tablets. They are also selling these devices from small-format stores, which reduces selling costs and paves the way for greater attachment of services to the sale, leading to higher margins.

and store-within-a-store), increased promotional spend and the need to hire knowledgeable workers who can engage customers in a sales and advisory relationship rather than a strict sales interaction. Additionally, customers are increasingly using a mix of offline and digital channels for transactions, which requires retailers to offer more options, increasing the importance of an effective online channel for brick-and-mortarbased retailers.

Distribution: Consumer electronics retailers face rising expenses primarily due to expansion into different retail formats (stand-alone store

cognizant reports

U.S. Personal Savings Rate

%
15 12.5 10 7.5 5 2.5 0 1950

Competing for Hearts and Pocketbooks CE retailing has always been fraught with difficult issues, but the challenges are even greater today. For example, CE retailers face increasing competition from discounters (e.g., Walmart) that can leverage massive economies of scale, both on the purchase side (by striking deals on bulk purchases) and on the consumer side, by realigning floor space dedicated to electronics according to demand (typically during the holiday shopping season). A new and interesting dynamic is also at play: The increasing inability to distinguish competitor from supplier. Apple is a case in point; it designs and manufactures some of the most in-demand consumer electronics products in the U.S. and sells them through its chain of speciality stores and online. Apples policy of limited distribution, especially in the new and highly lucrative tablet market, effectively penalizes other retailers outside the Apple ecosystem. Since their introduction in 2010, tablets have proved to be a disruptive force in the computing segment; market researchers predict that tablet shipments will outstrip PC shipments by 2011 and result in the reduction of notebook PC sales by 30% to 35% in 2011 and 2012, successively (see Figure 7). Retailers with significant PC revenue streams will be negatively impacted by this momentum switch (see Figure 8).3

1960

1970

1980

1990 Year

2000

2010

2020

U.S. Recessions

Source: U.S. Department of Commerce, Bureau of Economic Analysis Figure 6

Essentially, the quest for consistently improving financial performance compels single-channel retailers to move to a multi-channel strategy. In spite of real-world concerns such as negative spill-over and cannibalization, the advantage of low-cost access to new consumer segments and potential increases in customer retention and loyalty a multichannel strategy makes sense from the vantage point of a retail CFO.

Global Unit Shipments of Desktop PCs and Notebooks vs. Smartphone and Tablets
800,000 Global Unit Shipments (B) 600,000 400,000 200,000 0
Q4 2010 Inflection Point Smartphones + Tablets > Total PCs 2013

2005

2006

2007

2008

2009

2010

2011E

2012E

2013E

Desktop PCs

Notebook PCs

Smartphones

Tablets

Note: Notebook PCs include Netbooks Source: Katy Huberty, Ehud Gelblum, Morgan Stanley Research Data and Estimates as of 2/11 Figure 7

cognizant reports

Impact of Tablet Sales on CE Retailers

4.3%

Apples Stranglehold
Apple has created a storm in the CE market and bounced back from a 5.3% decline in revenue growth from CE sales in 2009 to a 51.5% spike in 2010. How did Apple pull it off? The answer: The Apple ecosystem. For instance: Apples deep and intricate supply chain relationship. In the case of the iPad, this results in a $50 to $60 advantage in input costs for the memory and display components of the iPad 2 over competing tablet products. A limited distribution policy of products to retailers, especially at launch, when the hype cycle for the product is typically at its highest. This creates a shortfall of in-demand stock at other retail establishments. The carefully-crafted Apple Store purchase experience, with its focus on maximizing customer convenience, from feature education, to purchase, to product activation. These factors make it exceedingly challenging for other retailers to grab a slice of Apples share of the pie, especially in the tablet market.
0% 0.1% 0.1%

% 5 4 3 2
0.3% 0.1% 0.1% 0% 0.3% 0.1% 0.1% 0.1% - 0.2%

1 0 -1

Best Buy Office Depot OfficeMax 2010 2011E 2012E

- 0.1%

Radio Shack

0.4%

Staples

Source: Company data, IDC, Goldman Sachs Equity Research, 2011 Figure 8

Online retailers have been in play for some time now. However, it is only in the last few years that they have emerged as viable challengers to brickand-mortar behemoths. Online retailers have been able to take advantage of the consumer frugality phenomenon in a significant manner by competing primarily on price (see Figure 9, page 7). Sales of CE products online grew by 17% in 2010, to $13.6 billion (see Figure 10). This represents only 14% of the total market for CE products, suggesting significant room for growth. Impending Regulatory Changes Online sellers enjoy the twin advantages of lower overhead and tax laws that have not caught up with the new rules of the retail game. Most states in the U.S. do not have a sales tax regime in place to extract revenue from online sales. This has created an unequal playing field between offline and online players. As Best Buy CEO Brian J. Dunn said in a recent investor presentation, Taxing all online sites equally would be a major, but not complete, closure in the pricing difference. It will also significantly hurt small, online retailers that compete completely on price.4 Moves are afoot to address this gap, with five states passing E-Fairness laws in recent years, four states doing the same in 2011 and another 20 states holding discussions on similar legislation (see Figure 11, page 8). Millennial Consumer Behavior The always-on, always-connected lifestyle of millennial consumers is driving frenetic change in cognizant reports

product lifecycles, with time-to-market for product releases compressed to levels unforeseen just a few years ago. This has also created demand for a slew of allied services, ranging from connectivity solutions and service plans, to accessories. The millennial pattern of media consumption on multiple connected devices has also required pure-play retailers to get into the content delivery business. Millennials are now armed with instant access to pricing information across channels and also rely on online reviews much more than traditional consumers for their purchase decisions. This leads to a lower reliance on store employees as a preferred source of product information. The social purchasing experience, with the ability to engage in instant feedback and rapid price-comparison, will be a significant factor in the market dynamic for CE products, especially among millennials.

Average Price Differential vs. Amazon

Average price dierence above Amazon*
28% 19% 30%

Walmart

Target

Specialty Retailers

An Amazon fulfillment center

* Assumes no sales tax on Amazon purchases and free shipping; Source: Wells Fargo. Photo: Getty Images.

Sources: Faber Novel, The Hidden Empire 2011 Figure 9

Winning Strategies
To succeed, CE retailers must consider the following plans of attack:

Engage profitably with millennial consumers: The defining characteristic of millennials is that as digital natives, they adapt to computer and Internet technologies very swiftly. They are demanding and technologically savvy, craving instant access to product information and reviews from third-party sources, especially from their social networks. They

extensively use shopping technology, whether PCs for detailed research or smartphones for rapid, on-the-go comparison (see Figure 12). Price, convenience and selection are the most important factors for millennials to arrive at an optimal purchase decision. This demographic does not distinguish between channels but expects an interactive, consistent and seamless experience across channels. CE retailers will need to embrace unified strategies across processes such as supply

Online Commerce Gaining Share vs. Offline

% 7 e-Commerce as % of Total Retail Sales 6 5 4 3 2 1 0 Q3:00 Q3:01 Q3:02 Q3:03 Q3:04 Q3:05 Q3:06 Q3:07 Q3:08 Q3:09 Q3:10 Q3:11 Q3:12 Mobile e-Commerce penetration e-Commerce penetration 4% in Q2, 2010

e-Commerce penetration

Linear trendline (y=0.094x + 0.9895, R 2=0.9599)

Note: Adjusted for eBay by adding back eBay U.S. gross merchandise volume. Source: U.S. Department of Commerce (Q2-2010), Morgan Stanley Research Figure 10

cognizant reports

E-Fairness Momentum: 2011 State Activity

$260B in online revenue and $26B in annual uncollected sales tax, or 13% of states budget gap.

Five states have enacted laws in recent years (NY, RI, NC, OK, CO) Four states passed laws in 2011 (IL, SD, AR, CA) Twenty have legislation or similar discussions underway

Laws already enacted Legislation or other activity underway Law enacted 2011 No state sales tax Amazon collects sales tax

Source: Best Buy Investor Presentation 2011; Wells Fargo Report on The State and Local Budget Squeeze, Feb 2011 Figure 11

Mobile Shopping Preferences

If a retailer offered the following services for a mobile device, indicate how likely you would be to use them on a scale of 1 to 10.
Coupons Product and price lookup Ability to instantly use loyalty program awards/offers Product comparisons Store locator Ability to place an order View your status/ points in the store loyalty program Ability to receive location, personalization or time-based product offers
Very unlikely to use 3.7 4.6 5.3

6.3

7.3

chain, merchandising, pricing, inventory management and customer service to ensure a boundary-less store experience across channels. The mobile store is one way of interacting with consumers to keep them engaged. It will play a significant part in the future of CE retail, by ensuring uniformity of product information across all channels, be it in-store, online or mobile. CE retailers will need to invest significantly in equipping their sales forces with the latest and greatest sales tools and technologies, as traditional hard sales pitches do not cut it with millennials, who in many cases have access to as much information as sales staff do. Enabling sales staff with technology will deliver an even more meaningful in-store interaction, as evidenced by recent research:5

4.7

5.9

4.3 4.9 5.7 6.4 3.9 4.7 5.7 6.7 3.9 4.6 5.8 6.7 4.2 4.7 5.5 6.1 3.8 4.4 5.5 6.2 3.6 4.2 5.1 6.0

7.0

> > >

57% of shoppers want improved interactions with store associates. 58% of shoppers want engagement with store associates in the aisle, with mobile check-out capabilities. 64% of shoppers want store associates with mobile technology to provide improved instore customer service.

Very likely to use

Emerging Elders

Baby Boomers

Gen X

Gen Y

Source: Retail Info Systems/Cognizant Technology Solutions 2011 Shopper Experience Study Figure 12

Adapt to emerging distribution formats: Research indicates that U.S. online retail sales will directly account for 8% of total retail sales and, more importantly, will influence 53% of all retail sales by 2014 (see Figure 13). Mobile commerce is likely to deliver $17 billion in sales by that time (see Figure 14).

cognizant reports

U.S. Consumer Shopping Online

The number of consumers researching or shopping online is steadily growing and will surpass 200 million by 2015, eMarketer says. But the research firm says most of the projected sales growth will come from veteran Web shoppers.
178.5M 184.3M 189.6M 195.4M 201.1M

U.S. Mobile Commerce Growth

Two research firms project rapid growth in mobile commerce revenue from 2009 to 2015.
Billions

$25 $20 $15 $10

89.4% 90.1%

$23.8 $17.5 $11.7 $7.4 $1.2 $1.2 2009 $2.4 $2.1 2010 $4.4 $3.2 2011 $3.9 2012 $5.8 2013 2014 2015 $8.0 $10.7

172.3M 163.1M

87.1% 85.0%

87.5%

88.1%

88.7%

$5 $0

Coda Research Consultancy

ABI Research

2009

2010

2011

2012

2013

2014

2015

Source: Coda Research Consultancy & ABI Reasearch. Figure 14

Percentage of shoppers expected to be veteran Web shoppers

Source: eMarketer, March 2011 Figure 13

Best Buy Store Strategy: The Move to Small Box

50 40 30 20 10 0 Sales per sq ft (in $)
Source: Best Buy Company Report; GS Equity Research 2011 Figure 15
$856 Average store size ('000 sq ft) New store average size ('000 sq ft) $851 40.5 32.5 $910 39.7 32.7 $888 39 31.6 27.6 $878 38.7 38.6 31.3

It is, therefore, imperative for CE retailers to not only embrace but also get full leverage from emerging mobile and maturing e-commerce channels. Online and mobile channels will allow retailers that rely primarily on their physical presence to remain visible across the spectrum, push promotions, provide detailed product information and be visible to consumers when they engage in price comparison. Online channels also enable retailers to play the price game with pure-play e-tailers by stocking online-only product assortments and one-upping them with buy online and pick up in-store options, an advantage that appeals to impulse buyers who crave instant gratification. The introduction and rapid growth of innovative products such as tablets, e-readers and next-generation smart devices needs to be addressed by retailers. They can accomplish this by appearing omnipresent across multiple sales channels, such as offering consumers allied content, accessories and services in the most convenient manner possible. Persistent connectedness to the customer is the cornerstone of this strategy a CE retailer can conceivably even be agnostic about store format, as long as the customer is engaged across all fronts. Best Buy, for example, is attempting to create traction for its smaller store formats, most notably by expanding its Best

910 895 880 865 850

Buy Mobile stand-alone stores, which is expected to increase the retail giants presence and allow it to reduce its large-format store footprint (see Figure 15).

Technology and Global Sourcing

The rapid growth of smartphone connections (overall) and the high-percentage of influential millennials already riding the always-connected wave make it imperative for CE retailers to prepare for a time when a large proportion of their customers will be digitally enabled. They will

cognizant reports

Key Third-Party Services for U.S. Retailers

IT consulting Web site development, maintanance or hosting Custom application development Packaged app implementation or integration Mobility initiatives Social media initiatives Telecommunications or networking Training Application maintenance Data center operations Business process outsourcing Entire IS organization Energy reduction and/ or sustainability Currently not outsourcing 58.2% 54.5% 45.5% 37.3% 36.4% 35.5% 30.0% 29.1% 29.1% 23.6% 12.7% 5.5% 4.6% 3.6%

The Future of Shopping

In the future, CE retail establishments will eliminate all boundaries between the retailer and the shopper. All capabilities, (pricing, order management, fulfillment, customer service, returns, etc.) will be available to consumers regardless of location (aisle three, checkout, in the home, jogging in Central Park). Consumer behavior purchase patterns and offers will be integrated across channels. Mobile offers will be distributed to shoppers in real-time based on time, location, customer segment and category position. To get there, CE retailers must consider the following:

Percent of respondents

Source: RIS Retail Tech Study, April 2011 Figure 16

Key Retail Software Architectures

Best-of-breed software Integrated solutions suites In-house IT resources to develop software Third-party services to help develop software On-demand or SaaS models Cloud computing solutions 57.7% 52.3% 50.4% 44.1% 33.3% 15.3%

Cloud-enabled shopper interaction: Retailers must integrate third-party offers and services in order to reduce shopper decision models and re-establish their authority as a credible source of information. These services can be delivered through the cloud and linked to a shoppers mobile device to deliver a contextual shopping experience. Linking content across channels: Products and promotions must be consistent, leveraging emerging capabilities in content and digital asset management. Adoption of mobile devices for store associates to enable a richer shopper interaction: Equip storebased employees with mobile devices to improve in-aisle customer service and check-out capabilities.

Percent of respondents

Source: RIS Retail Tech Study, April 2011 Figure 17

need to create services that allow such connected customers to get a view of hitherto unseen store processes, such as inventory status, deeper and richer product information and, ultimately, even self-checkout. Today, the top two categories of external sourcing of technology for CE retailers are IT consulting and Web site development/maintenance/hosting (see Figure 16). Mobility services and social media integration, meanwhile, are rapidly gaining ground. Deployment of these relatively new and quickly evolving technology domains requires expertise that is not available in-house. Other best-practice

technology areas that CE retailers will need to implement to stay viable are:

10

Next-generation customer analytics that incorporate data gathered from social media. Predictive supply chain management solutions. Customer management suites that enable consistent customer recognition, tracking and rewards across channels. Multi-channel fulfilment technologies.

cognizant reports

CE retailers must also find ways to manage costs, a difficult challenge given persistent low margins across key categories and the heavy investment needed in new technologies to keep pace with their always-connected consumers. A key to the cost management conundrum would be the conversion of Cap-Ex to Op-Ex by using cloud services for SaaS (software as a service) and BPaaS (business process as a service). Significant cost reductions could also be gained by transitioning some commoditized business processes to a BPaaS model (see Figure 17). We believe CE retailers will find these services attractive, even indispensible, due to factors such as on-demand delivery, compression of implementation time, withdrawal of supporting infrastructure, negation of application testing, reduced training, reduction in ongoing business process change management and greater accounting transparency for such costs. Another important element of cloud-based services is the scalability factor, allowing retailers to quickly extend solutions in new stores or channels, as well as rapidly withdraw from stores or channels that are not performing at desired levels. Another attraction is the utility concept of pay-as-you-use, which enables adopters to variabalize their cost base.

The Road Ahead

CE retailers are uniquely positioned to capitalize on emerging opportunities across the technology and business spectrum to fortify their operating models, as well as profitably engage and stay connected with consumers. Winning players will do the following: 1. Become retail format agnostic and use multiple channels to stay connected with their customers, profitably. 2. Focus on and fortify their unique strengths (e.g., superior customer service, lowest price). 3. Partner and source talent and services globally in a virtualized environment and rein in their expenses. 4. Save precious capital and variabalize their cost base by actively adopting new cloud-enabled service delivery models such as BPaaS. In short, CE retailers need to reinvent their corporate operating models and dig deeper competitive moats to profitably tap into the fast emerging future of the CE retail market.

Footnotes
1

American Households Spend More Than $1,100 Annually on Consumer Electronics, CEA Study Finds, Consumer Electronics Association, May 23, 2011. http://www.ce.org/Press/CurrentNews/press_release_detail.asp?id=12100 In fact, gross margins for TVs have dropped from 27% in 2007 to 22% in 2009, while PC margins have remained stagnant at around the 13% mark, according to Goldman Sachs Equity Research, April 2011. According to Goldman Sachs research, RadioShack is expected to be the net winner among other sellers from the proliferation of tablet technology, as the company derives significantly lower sales from PCs and notebooks, which are being cannibalized by tablet sales. Analysts feel there will be a net neutral effect for Best Buy in 2011, as its core PC business continues to suffer from tablet cannibalization, but its competency in wireless and close relationship with Apple could help it absorb this disruption. Best Buy Investor Relations: Presentations, Best Buy Analyst Day 2011. http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=IROL-presentations 2011 Shopper Experience Survey, Retail Info Systems News/Cognizant Technology Solutions, June 2011.

cognizant reports

11

Resources
Consumer Tech Revenues Will Reach Record High in 2011, Consumer Electronics Association, January 2011. http://www.ce.org/Press/CurrentNews/press_release_detail.asp?id=12047 Best Buy and Walmart Capture Two-Thirds of Circuit Citys Total Dollar Share, NPD, April 2010. http://www.npd.com/press/releases/press_100412.html Forever Frugal? 2010 U.S. Consumer Survey Confirms Persistent Frugality, Booz & Co., 2010. http://www.booz.com/media/uploads/Forever_Frugal.pdf Inside the Apple Store, Dealerscope, June 2011. http://www.dealerscope.com/article/ inside-applestore/1#utm_source=dealerscope.com&utm_medium=search_results_page&utm_ campaign=search_result U.S. Online Retail Forecast, 2009 To 2014: Online Retail Hangs Tough For 11% Growth in A Challenging U.S. Economy, Forrester Research, Inc., November 2010. http://www.internetretailer.com/2010/03/08/ e-retail-will-influence-53-of-purchases-by-2014-forrester-says The State and Local Budget Squeeze, Wells Fargo Securities Research, February 2011. https://www.wellsfargoresearch.com/disclosures/Documents/TRACS%20vol%205%20-%20RETAIL.pdf Best Buy: Framing the Issues: Newer Stores Smaller than the Average Box, Suggesting Need for Downsizing, GS Equity Research, April 2011. 2011 Retail Technology Trends Study, RIS News, April 2011. http://risnews.edgl.com/retail-research/2011-Retail-Technology-Trends-Study71782

Author
Nitin Bajaj Cognizant Research Center

Research Analyst
Durgesh Patel Cognizant Research Center

Subject Matter Expert

Steven Skinner, Vice President, Cognizant Business Consulting, Retail and Consumer Goods Practice

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 130,000 employees as of September 30, 2011, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

World Headquarters
500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: inquiry@cognizant.com

European Headquarters
1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 20 7297 7600 Fax: +44 (0) 20 7121 0102 Email: infouk@cognizant.com

India Operations Headquarters

#5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: inquiryindia@cognizant.com

Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.