Circuit City 1998 Annual Report Download - page 9

The Company's research and development teams design and develop products for Global's private label programs. The individuals responsible
for research and development have backgrounds in engineering and industrial design.
This in-
house capability provides important support to the private label programs. Many of the Company's private label products were designed
or developed by an in-house research and development team. Examples of products designed in-house include PC's, furniture, ergonomic
monitor support arms, printer and monitor stands, wrist rests and other durable computer related products, storage racks and shelving systems,
various stock and storage carts, work benches, plastic bins and shop furniture. The Company owns the tooling for many of these products,
including plastic bins, computer accessories, furniture, and metal alloy monitor arms. See "Research and Development Costs" in Footnote 1 to
the Consolidated Financial Statements.
COMPETITION
PCS AND NOTEBOOK COMPUTERS
The North American and European computer industries are highly competitive with many U.S., Asian and European companies vying for
market share. There are few barriers of entry to the PC market with PCs being sold through the direct market channel, directly from
manufacturers, computer superstores, mass merchants and over the Internet. Timely introduction of new products or product features are
critical elements to remaining competitive. Other competitive factors include product performance, quality and reliability, technical service and
customer support, marketing and distribution and price. There can be no assurance that the Company will be able to maintain or improve its
current competitive position with respect to any of these or other competitive factors. Some of the Company's competitors have stronger brand-
recognition, broader product lines and greater financial, marketing, manufacturing and technological resources than the Company.
Additionally, the Company's results could also be adversely affected should it be unable to implement effectively its technological and
marketing arrangements with other companies, such as Microsoft(R) and Intel(R).
COMPUTER RELATED PRODUCTS
The North American computer related products market is highly fragmented and characterized by multiple channels of distribution, including
direct response (mail order) distributors, local and national retail computer stores that carry computer supplies, computer resellers, mass
merchants, computer "superstores" and the Internet. The tremendous growth in the computer related products market during the past 10 years
has been accompanied by substantial changes in the nature of product distribution and sales. The decentralization of computers throughout
factory, business, engineering and office environments has made it increasingly difficult and expensive for many suppliers to use traditional
direct sales methods to locate users, initiate sales contacts and effectively provide service to customers. Average order values also tend to be
smaller than in the past, reflecting individual requirements rather than the greater needs traditionally associated with centralized data processing
departments. These changes in the structure of the computer related products market have placed traditional distributors with direct sales forces
at a competitive disadvantage due to their cost structures and established selling methods. As a result, direct marketers have been able to
increase sales to the larger businesses that have traditionally been served by contract stationers and VARs. They have also been able to capture
sales volume and market share from the numerous small retail computer stores.
In Europe, the Company's major competitors are regional or country-specific retail and direct-mail distribution companies. The Company's
presence in eight European countries provides Global with the flexibility to purchase large volumes centrally. In addition, the commonality of
certain core pages of the European catalogs provides for economies in catalog production. The Company believes that these factors allow it to
take advantage of cost savings not available to many of its competitors in Europe.
There can be no assurance that the Company will be able to maintain or improve its current competitive position with respect to any of these or
other competitive factors.
INDUSTRIAL PRODUCTS
The market for the sale of industrial products in the United States is highly fragmented and is characterized by multiple distribution channels
such as retail outlets, small dealerships, direct mail distribution and large warehouse stores. Global also faces competition from manufacturers'
own sales representatives who sell industrial equipment directly to customers, and from regional or local distributors. Many high volume
purchasers, however, utilize catalog distributors as their first source of product specifications. In the industrial products market, customer
purchasing decisions are primarily based on price, product selection, product availability, level of service and convenience. As is the case with
the office products industry, the Company believes that direct mail is one of the most effective and convenient distribution methods to reach
mid-sized facilities which place many small orders and require a wide selection of products. In addition, because the industrial product market
is highly fragmented and generally less brand oriented, it is well suited to private label products. The majority of the Company's industrial
products are high gross profit margin, private label products.
Competition with respect to industrial products in the United Kingdom is similar to competition in the U.S., with the exception that most direct
mail companies in the United Kingdom drop ship the majority of their products from the manufacturer, resulting in long delivery lead times. As
Global stocks the majority of its products featured in its dedicated industrial catalogs, management believes it has a significant advantage over
most of its direct mail competitors in the United Kingdom.
Elsewhere in Europe, no dedicated industrial catalogs are mailed by the Company, although industrial products are featured in computer