The Final Word: Ethics

Ethics is a subject always more easily discussed than practiced. There's been a lot of discussion recently about the ethics of retailing—or, more accurately, the ethics of buying retail.

It's always been a problem, but the Internet has raised the stakes by an order of magnitude. Customers go to the high-service shop when they're trying to figure out what to buy, then shop on the Internet for the lowest price.

You could call it a classic free-market situation—only those retailers who don't offer sufficiently higher value to compel a sale will lose out—but it's impossible to ignore the factor of customer attitude. Customers have to recognize what's truly in their best interests. [See Mr. Rossmann's and Mr. Anderson's letters in this issue's "Letters" column.—Ed.]

The costs experienced by specialty retailers are inherently higher—either through lack of buying advantage, the additional costs of providing better service, or, more likely, both. They can't keep offering better service if an insufficient percentage of sales contacts turn into actual sales.

Readers should have an idea of the scale involved. Although the supposed gross profit margin on consumer electronics can occasionally range as high as 60%, the presence of near-universal discounting, plus a product mix that includes lower-margin items, yields actual gross profit margins in a range of 28% to 36%. Costs of operating specialty retail stores run between 31% and 34% of sales, though some of the bigger ones probably are able to cut that down a bit. Simple math shows that consumer-electronics specialty retailing yields profit margins of between -3% and +5%. It's better than wholesale distribution or grocery stores, where nets of 1-2% are common, but it's still a fine line between staying in business and going under.

The other side of the market equation strongly affects consumers: When specialty retail stores go out of business, the higher level of service they offer is no longer available for customers to take advantage of. Without specialty retailers to introduce their expensive, specialized products, high-end audio manufacturers go out of business. Customers who audition all that's available at their local retailers, then shop the country for the best price—by mail-order or Internet—cut their throats on future product investigations.

But price is an arbiter with almost everything purchased in this country. Wealthy people pump their own gas. Wine freaks check all available sources to save $5 on an $80 California cabernet. Diamond purchasers wait until they're in New York to take advantage of the better deals available there. In no product category is the rule of thumb "That's our price, take it or leave it."

I recently bought a new car for the first time, and it was most instructive. Of course—and I recommend this to anyone purchasing hi-fi equipment—I spent most of my time figuring out which car would best fit my needs. I read magazines, pored over brochures, took test drives, read articles on the Internet, and took more test drives. I talked with owners of the cars I was considering, and consulted my past experience as a mechanic.