CASE STUDY

TEMOC Stores Inc. began life as a two-man operation named TEMOC Batteries in 1948 by its founder, Ethan Gilchrist, an engineer, as a business charging up batteries forcustomers' bulky wireless radios in Melbourne, Australia.With an eye for spotting upcoming trends in electronics, in a very short time, Gilchrist outgrew this start-up position. He shifted the business into radio rentals, then capitalized on early televisions and opened the firststore in the1950s. TEMOC expandedduring the 1960sand 1970s and became apublicly listed company in 1972.The company sold consumer electronics and white goods along with related products and services and pioneered the concept of the out-of-town discount warehouse in Australia.In the early1950s, demand for wireless radiosgrew fast, and founder EthanGilchrist changed thename to TEMOC Radio, opening his first retail store. More stores followed quickly.Following the Consumer Prices Act (1964), TEMOC expanded beyond its Victoria state heartland, becoming a national discount retailer. TEMOC was indeed the unrivaled champion of the out-of-town discount warehouse market. Predominantly a mail-order business,TEMOCadvertised stock and prices 45% lower than the manufacturers' recommended retail prices. Fewpure- play electrical retailers could compete.

Expansion

In 1968, the first TEMOC superstore opened in Sydney, making TEMOC the first company to launcha warehouse style storefor selling electricals,such as televisionsand radios.Considered atrailblazer, TEMOC beata path subsequentlyfollowed by Do-it-Yourself (DIY) stores and supermarkets. TEMOC has developed from selling sofa-sized radiograms to iPods, digitalcameras and laptops underthe grammatically dubiousslogan "we live electricals".TEMOC wentpublic in July1972 and expandedits range bypurchasingEvoenergy Gas, a discount retailer of gas appliances. By the end of 1976, the group had grown to 50 outlets.

During the 1970s and 1980s the company had competition from several growingcompanies also providing electrical goods. Onesuch company wasBi-Rite whichTEMOCbought out in 1989.Under Ethan Gilchrist's leadershipand vision, andfor much ofthe '80s andthe 90s, TEMOCwasbooming, with 460stores and 10,000employees and mind-blowingprofits. Ethan felt confident that this success would continue because of his vision and leadership, and resultingstrategy.Gilchrist developeda program whereTEMOC gave awayits own brandof batteries inexchange for gettingpeople hooked ontheir brand ofbatteries yielding TEMOC anice annuity inthe form of80% of themarket for batteriesfor small electrical personal andhousehold appliances.Inside TEMOC, this was known as the "nickel" strategy named after one of the chemicals in its batteries. It wasa fantastic successstory. This business strategy wassimilar to Gillette's or that of printer manufacturers: give away razors or printers to make money on blades and inkcartridges.TEMOC gave away batteries to make money on service and replacementbatteries.TEMOC's marketedits batteries underthe private brand "Spartan"and dueto the lowerpricingand relatively good quality,many consumers purchasedSpartan batteries forother needs. Asa result, TEMOCenjoyed a 39%share of thebattery market; slightlybehind thebattery giants Duracell Inc. and Eveready Company.

Wal-Mart Enters the Scene

In 1994, Wal-Mart entered the Australian market with the takeover of Appliance Giant.The world's (then) largest retailereffectively wiped close to US$1,500m off the value of Australian chainstores with itsannouncement that it would discount some goods byaround 60%.To survive, retailershad to -at least - match Wal-Mart'slike-for-likediscounts.Theconsumer appliance retailbusiness was relativelysecure and profitable,and TEMOC's marketdominance was sosecure throughout the1980s, the electricalretail chain barely batted an eyelash when Wal-Mart entered the Australian market. In 2001, the consumer electronics and white goods sales peaked worldwide. But in a weekly senior executive meeting, Noah Harrison,TEMOC'sExecutive Vice-President of Marketing toldthe otherexecutives in themeeting that, "althoughsales are atan all-time high,a peak always conceals a treacherous valley." He went on to say, "Revenue growth is different than strategically positioning ourselves for the future. We need to focus on the long-term game to continue to enjoy the growth we have had for these so many years."Many of theother senior executivesviewed Wal-Mart asa formidable competitorand voiced theirconcerns about how criticalthey thought it wasto focus onthe long-term game as well.Harrison was pleasedthat his othercolleagues had broughtthis up. He knows that Wal-Mart's behaviourelsewhere could help themunderstand how thecompany will likelyoperate in Australia.Harrison pointed outthat Walmart hasstated publicly that itiscommitted to itsimplementation of its cost-cuttingmodel in everymarket where itoperates.He made the following passionate statement:"Wal-Mart is particularly relevantbecause compared toother large internationalretailers; it hasthe largest footprint in Australia and is thereforepoised to expandrapidly. Wal-Mart executives emphasize the need to build scale in existing markets in order to achieve profitablereturns, as soonas the companyenters a newmarket, rapid growth is apriority. I believewithout adequate safeguards put in place, TEMOC may not survive."Asfounder and Chairmanof TEMOC, andthe largest shareholderin the company,Ethan Gilchrist disagreedand downplayed thesituation, pointing tohistorical market trendswhere sales peak,slow and pick-upagain. "It isa cyclical phenomenon, andwe need tostay focused onthe direction we'reheaded. It hasstood the testof time, andmade thecompany very prosperous, and the leading electrical retailer in Australia."SinceTEMOC isa public companyand a highly visibleone, Ethan Gilchrist commentscameunder fire by analysts, pundits, and the media.The stakes forTEMOC's fourth-quarter earningsreport were high.For the past year, analysts andinvestors have demanded thatthe consumer appliancecompany clarify itsvisionand strategy andexplain what it isdoing to combatthe entry ofWal-Martinto the Australian market. Callsfor a changein leadership intensified. A well-respected industry analyst commented in her recent report about the retail consumer appliance market,"The problem, itseems, is thatas the worldhas changed, TEMOChasn't". Ethan Gilchrist isan engineer andwas known aroundTEMOC as a"nice guy," aconsensusbuilder, simply not what TEMOC needs right now.

Is the Market Changing?

Over the nexttwo years, first,the market beganshrinking very slowly,and then pickedup speed. Duringthe weekly seniorexecutive meetings chairedby Gilchrist, Gilchrist usedthisnew market data to emphasize his rational to stay focused on the current strategy. He said, "ourreputation and long-standingposition in thecountry will bolsterus from any stormscaused by Wal-Mart."The signs of a changing marketplace were both external and internal.

Externally, life became harder yet forTEMOC when online stores started to see big sales.TEMOC's strategy focused ondiscount warehouse superstoresand the traditional brick andmortar approach to purchasing and selling products. With over 460 superstores now, TEMOCwas undergoing a massive refitting of many of its stores, adding mezzanine levels to many of them, which was very costly.

Online Shopping Takes Off

TEMOC missedthe initial signsof shoppers movingto the internetfor the bestprices.Customer behaviour was changing, and customers are not being influenced and controlled by thebrand and firmas much now,when they makea buying decision.People were increasinglystarting to useand becoming morecomfortable with theonline platforms togather information andpurchase products andservices. As a result, TEMOC was losing salesto ecommerce giantssuch as AppliancesOnline (#1 e-commercesite in Australia), Amazon,B2W Digital and Alibaba.com.

In response,although slow toadopt to e-commerce, TEMOC establishedits own e-commerce business; store.TEMOC.com.au. With itsbackground and competencewith brick-and-mortarstores,TEMOC committed a cardinal sin in the development of e-commerce platforms: It appliedin-store segmentation to its e-commerce scenario. Althoughstore.TEMOC.com.au.was packedwith information that consumers wanted, many customers complained that the e-commercesite was difficult to navigate.

One online shopper commented:

"They don't have a clue about creating an online experience for customers. I don'thave allday to find whatI'm looking for. It'svery frustrating. Theyshould giveAppliances Online a call and get some help!"Antonio Iaconis, Sr. Executive Vice-President, e-commerce management servicesfor Sana, aglobal leader specializing ine-commerce management noted in a Forbes Magazine article that:"Corporate leadership must fullygrasp that in thedigital era, retailersmust providecompelling reasons to buy in- store and convert that intent into sales."Although purchaseson the internetwere growing, the"bricks and mortar"retailers (such asTEMOC) could survive. To survive, however, they need to develop an integrated multi-channelapproachand view theiroperations from theposition of the consumer(looking from theoutside in) and develop an engaging environment that enhances brand loyalty.TEMOC executives appeared to have little understanding of integrated multi-channel retailing,operating instead from disconnected silos - marketing in one, customer services in another,supply chain and logistics in yet another and operations and technology out on its own.

8Technology expert Jonah Dundee toldBusiness First Magazine: "TEMOC is failing to understand theimportance of multichannel retail and failing to invest in e-commerce."Storm Clouds on the HorizonCustomers hadbecome dissatisfied with TEMOC's in-store experience andlack of customer service. One customer was interviewed on a local radio show during a segmentabout Wal-Martand its onlineshopping store. Oneof the listenerscalled-in, and theradio show host asked her what she thought of TEMOC. She answered:"Unfortunately, with stores like this and the overheads they have - renting premises andpaying staff - they can't compete. A lot of people prefer the internet shopping, especially the younger age group. Everyone's now just conscious of money and it's all about price."Also, fromthe outside waspeer pressure. SeveralAustralian retailers suchas Wesfarmers, Coles Group and Ampol Limited were already on a track to develop new strategies includinge-commerce to competewith Wal-Mart and itslow pricing, cost-cuttingmodel and onlineshopping store.Another, slightly bizarre, problem emerged. With similar-sounding names and both companies'logos blue on a whitebackground, consumers confusedTEMOCwith TAMOC(owned by rival Wesfarmers). Despite a US$20m rebrandingcampaign in 2005,TEMOCcontinued to lose market share.The internal triggers were clear.Thereare, in theend, two genericmarketing strategies: costleadership and differentiation. Operatingin a fiercelycompetitive market characterizedby very lowmargins,TEMOC wasnever going to be able to sustain a cost-leadership position. Yet it continued to focus (almostsolely) on price.Global Economic CrashThe global economic crash of the 2007 was the final straw. The turbulence emerging from thefinancial sector passedover into the realeconomy, and backfrom the realeconomy to thefinancial sector. Economic activity was paralyzed in practically the entire world with unprecedented synchronicity.TEMOC and other electrical retail companies were facing challenging times, with unprecedented decreasesin sales andprofits, but withstrategic cost-cutting, wereable to stay relevant. However, those cost-cutting measures included cuts to service that customers expected, and as a result, service levels dropped. When the service levels dropped, consumersstayed away, andworse, became street-savvyand avoided doggedselling of extended and expensive warranties.TEMOC was severely damaged, more so than its competitors because of its brick-and-mortar strategy andthe added pressure toreduce costs byre-structuring stores andlaying off staff.

TEMOC's profitbefore tax tumbledfrom US$150m toUS$56m. In successiveyears it postedlosses of US$8m,US$3m and finally US$39min 2011. In2012, it isreported to havelost a similar amount. Turnover peaked in 2008 at a fraction over US $2bn and declined steadily to a reported US$1.2bn in 2012. Scott Morrison,a full professor andresearcher at theEconomic Department ofthe Australian National University said:"Increasing levelsof unemployment, wagefreezes and stagnation in thepropertymarket combined to keepconsumer spending on discretionarypurchases rockbottom. Itwas simply impossiblefor struggling TEMOC toimprove its appeal to customers whilst closing stores and axing staff."

Best Buy Puts the Pressure On

In April2010, Best Buylaunched an onlineshop in Australia totake the fight toitscompetitors Amazon Australia, Bunnings and WoolworthCorporation. The onlinemove byBest Buy was intended to shake up the lucrative online consumer electronics market.However, oneyear later, BestBuy's efforts towin over Australianconsumers were anexpensive failure, costing some US$200m to set up just 11 big box stores. According to RogerTaylor, CEO, "We were a bit late to launch themand, in that time, clearly consumer confidence has fallensignificantly, the productcycle is quitetough to betrying to launcha big boxmodel." Although Best Buy failed, it still placed serious pressure on TEMOC.

Smartphones Eating into TEMOC's Sales

With everypassing day, more andmore customers arebuying smartphones likeneverbefore. This has been fueled by the increasing number of cheap smartphones that are being introduced in the market by all major smartphone makers. Smartphone owners are downloadingthousands of applicationsto watch movies,television shows, listento radiobroadcasts, sportsbroadcasts, news eventsand so muchmore. As aresult, television andcomputer and related consumer product sales dropped dramatically. These consumer goods sales are TEMOC's bread and butter.TEMOC continued to make a loss.Meanwhile,TEMOC's stock has plummeted byroughly 50 percentsince its post-IPO peakabout a year ago. WhileTEMOC's first quarter revenue came in at $436 million, an increase of 74% over last year, the amount fell below analyst expectations and the company'sguidance. Thecompany lost $162 millionduring the quarter.

Calls forNew Leadership

Calls fora change inleadership were beingdemanded. The Boardof Directors of the company said thecompany needs a CEOwith"a defining vision"for the company.Finally, Ethan Gilchrist was forced to step down.In April 2013, Nicole Gibson, was announced as the new CEO and President of TEMOC Stores Inc. On her first day, Gibson was sitting at her desk, and looking out the window and said to herself, "where do I start?".

1)Executive summary- brief summary of the case

2)Issues - Identify five issues/symptoms

3)Problem statement - short statement summarizing the primary problem(s) of the case; to be a series of well-constructed sentences

4)Decision criteria- Clearly define the criteria that provides the basis for evaluation

5)Analysis of Alternatives - three alternatives; strengths and weaknesses

6)Recommendation - describe the preferred option and provide a justification for the solution you choose

7)Implementation/action plan- briefly discuss what short, medium and long-term action steps you would take

Reference: Lussier, R., Achua, C. (2015). Leadership: Theory, Application, & Skill Development (6th Edition)