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DENVER -- The consumer electronics industry is predicted to hit $100 billion in sales this year. That may be just one-fourth of what the grocery industry sold lost year, but consumers don't need CE products to survive--at least not technically.

But consumers increasingly consider electronic items critical to life in the modern world. As a result, the traditional CE specialty retailers that comprise this category are under attack by chains the likes of Wal-Mart. Best Buy recently presented a new long-term strategy meant to help it compete in this expanded marketplace, and Circuit City continues searching for a way to match specialty competitors and mass merchants.

With this in mind and the holiday season approaching (CE being a favorite among gift categories), DSN Retailing Today partnered with McMillan/Doolittle consulting and headed out to do a pricing survey on some typical CE items, including hot products and staple items. Aurora, Colo., proved to be fertile ground as it hosted both national leaders and a Wal-Mart, while also being the home market to Ultimate Electronics, which operates stores under the SoundTrack name in the Denver area.

The results only served to illustrate one of the largest challenges facing the industry: Price no longer offers a means of differentiation. Chains came within pennies of each other on key items such as game consoles, handheld devices and DVD players.

So how to succeed in a category when price is removed as a competitive and even top brands are available at Wal-Mart?

Price matching across retailers only works on products with relatively short life cycles. A PlayStation2 and Palm Zire are popular releases under specific model numbers, but try duplicating a 27-inch TV across stores and pricing is much more difficult to compare (see Cost Comparison chart), leading to greater differentials and opportunities for retailers.

Hot new technology offers a point of differentiation and here is where stores like Ultimate Electronics can excel. The retailer carries a smaller selection of commodity items but goes deeper into home theater than many specialty retailers. But while plasma and other flat-panel technology are hot at the moment, relying on such complex purchases requires a constant stream of new product, points out McMillan/Doolittle's Neil Stern. "A format like Ultimate's is very dependent on the product cycle," he said. "And at the rate of commoditization, the pricing structure doesn't hold up long enough provide that kind of service."

Entertainment products, including media, are often used as traffic builders by specialty and discount stores alike. Pricing is incredibly competitive on popular releases, but since Ultimate doesn't carry prerecorded media or video game consoles beyond Sony's PlayStation2, it has clearly chosen to bring customers in with the promise of good service and cutting-edge product.

Best Buy, on the other hand, delivers on its promise to supply consumers with all their entertainment needs.

Stuck in the middle is Circuit City. "They're not really differentiating on the high end and not participating in the traffic categories like a Best Buy," said Stern. "[The Aurora store] was a very good store experience, but the chain doesn't own anything in the consumer's mind."

In the CE category--where price is now uniform--perception is very important. Wal-Mart is hardly category dominant, nor does it want to be as margin is lower in CE than other categories. It does, however, want to create the perception that it has all the products a customer needs. In reality, selection is limited in hard goods due to space and limited in entertainment items due to company policies monitoring content. The retailer does use the Internet to offer a wider selection of CE items, but in stores the category is largely one of convenience.

Best Buy has built a reputation on good prices in a fun environment. And although Circuit City matched prices item for item, it still struggles with the perception of higher prices without the entertainment edge. This pricing survey found that reputation to be undeserved.

"This pricing survey says that on the products we could compare, the differences were meaningless," said Stern. "But the customer would play back a different story on the perception of pricing and the perception of service."

Top brands may be easily found in multiple channels, but vendor support can play a role in differentiation as well. Only Best Buy and Circuit City carried popular PC models from HP and Compaq. Both offered manufacturer rebates, but on a Compaq Presario Notebook computer, Best Buy featured a $250 rebate, Circuit City just $100.