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CE Manufacturers Using Retail Bypass Model

Distribution channel bypass, already a key strategy of digital media producers, has now picked up momentum with digital device makers. The major manufacturers of consumer electronics (CE) equipment are embarking on a strategy that will disrupt traditional CE retail networks, and may expose them to new risks, according to ABI Research.

Companies such as Sony, Dell, Bang & Olufsen, Philips, and Pioneer are establishing chains of own-brand retail stores and kiosks. Apple went down this road years ago: today it has about 125 Apple stores worldwide, which account for about 20 percent of the company's revenue. Dell has over 160 kiosks in malls. Sony is partnering with Zoom Systems to deploy vendor kiosks, targeting virtually all the leading malls in the U.S.

"OEM storefronts and kiosks represent a major change that will disrupt the current retail ecosystem," says research director Vamsi Sistla. "Bypassing their existing distributors and retailers could prove successful for some, but might present challenges for others."

Their motives are clear. Most of these vendors already have significant online sales, and want fresh fields for expansion. They can provide a richer and more customized experience for shoppers than the major retail chains can. They can control and protect their brands: if consumer demand falls, an OEM can take more effective countermeasures via its own outlets, while maintaining better control of margins. And if appropriate, they can partner with other vendors to offer complementary products and accessories.

But there are risks as well. For example, retailers' stock prices are partly determined by their bricks-and-mortar performance. Wall Street sets share prices using parameters such as the number of stores added or shut down, and how much revenue per consumer the stores generate. By opening their own stores, OEMs � which were previously rated on their ability to design and make innovative CE products � subject themselves to new kinds of judgment from financial markets.

OEM-owned outlets represent permanent cost centers, and must perform well year-in and year-out. "Stores mean ongoing operational costs as well as infrastructure," Sistla notes. "Anybody can make money when times are good, but when economies contract, retailers are the first to be tested. Some will remain profitable, others may not. With this strategy, OEMs may be trying to boil the ocean."

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