Are Category Killers About to Get Killed?

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Are Category Killers About to Get Killed?

Anyone who played "King of the Hill" as a child knows that no one stays at the top forever. Eventually, something always leads to the "king" being knocked off.

In the retail world, for the past couple of decades, the "kings of the hill" have been so-called "category killers." These retailers — including Best Buy, Barnes & Noble, and Staples — are highly focused and specialize in particular categories of merchandise. They have enjoyed a huge competitive advantage driven by a wide assortment of products, aggressive pricing, large stores, extensive networks, and deep expertise in the categories they serve.

But now, the top position of these kings is being seriously threatened by emerging technology and the maturing of the Internet, which includes a growing comfort level with using it for all kinds of shopping. For the many "category killers" that seem to have ignored this coming change, it may be too late.

In their defense, the evolution of e-commerce in many of these categories may have been hard to predict. In the early 2000s, retail store asset productivity was growing at an impressive rate as retail sales grew from $2.87 trillion in 1999 to almost $4 trillion by 2007. During this time, Internet sales were also increasing dramatically, but with the whole pie expanding, no one felt very threatened by the growth of someone else's piece. Early on, when large retailers lost sales to the Internet, the losses were usually minimal when compared to their overall business; and it was usually limited to a small number of items. This marginal intrusion simply lulled them into complacency.

But then, the recession hit.

Sales in stores dropped off sharply, but Internet sales kept climbing. Growing from a base of $28 billion in 2000, Internet sales reached $165 billion by 2010. At this growth rate, such sales are expected to exceed $250 billion by 2015.

Because of this growth, sales per square foot for retailers have improved little in the past four years. For category killers specifically, return on invested capital has actually declined. For Best Buy, this measurement has dropped from 23.68 percent to 15.01 percent since 2007, while sales per square foot have declined from $909 to $853.

So far, the categories that have been most affected include music, video, and book retailers. Today, these categories hardly exist outside the Internet channel.

Meanwhile, 20 percent or more of sales for categories like electronics, toys, and baby products have moved online — and over 10 percent of sales for apparel, greeting cards, party supplies, and office products are now transacted via e-commerce...

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