The Ultimate Boondoggle?What Happened to Ultimate Electronics?
"Over the last handful of years, the supply chain has really broken down, and we've had very similar technologies, or competing technologies, available to consumers through non-specialty distribution channels. A lot of private-label manufacturing in the Far East produced competing technologies. The brands themselves didn't mean much, but they commoditized the high-end product Ultimate was selling, because the private-label products were now becoming available in category-killers or even mass merchants. Ultimate was increasingly competing with Best Buy, and even to some degree Target, Wal-Mart, Sears, Costco, and direct retailers like online distributors. Broadened distribution… eroded gross margins. Ultimate cannot compete from an operating efficiency or product pricing standpoint with much larger companies.
"So that was the industry backdrop. But what really was the company's downfall was while that was happening in the supply chain, it committed to very strong store growth. The quality of the business was eroding because of the industry issues just as the company was doubling down on real estate and lease investments—long-term capital commitments. They were growing rapidly, they got into some bad locations, and 10-year operating lease commitments in an eroding macro environment did them in.
"The other problem was that the stores were way too large. If you think about Ultimate's position in the market as a specialty, focused, niche retailer… they were operating 30,000-square-foot stores. There simply isn't 30,000 square feet of limited-distribution, high-end electronics product out there. Maybe 10,000 retail square feet, but certainly not 30,000. So not only [was Ultimate] paying a lease on too big of a piece of property, but it didn't have product to merchandise it. Often [it] was putting more mainstream products on its floors, competing on price with Best Buy and mass merchants. The real estate and lease issues took a tough industry backdrop and magnified it. They were ultimately what drove the company into a bankruptcy situation."