Consumer Electronics' Tough Transition
Shoppers are acting like it's 1999 again. That's the verdict of retailing experts as they watch holiday sales take shape: Bank of Tokyo-Mitsubishi is predicting a 4% increase in overall retail sales this holiday season from November through the end of the year, a rise that's being fueled by an economic rebound and low, low prices.
Alas, consumer-electronics makers won't uniformly share in this good cheer. According to the Consumer Electronics Assn. (CEA), wholesale sales of electronics gear from September through November are running 2% below a year ago. This may foretell flat sales at best through stores over the holidays -- even though the CEA expects unit shipments to rise 3%.
"We're expecting to sell more product than we have in the past but at a much lower price," says Sean Wargo, director of industry analysis at the CEA, a trade group of 1,000 retailers and electronics companies. "That will lead to fairly flat spending" during the holidays and perhaps an increase of only 1% in consumer-electronics sales for all of 2003, to $95 billion at wholesale.
Not every product and merchant will share the same fate, of course: High-ticket items as flat-panel TVs, digital cameras, and camera phones are posting strong sales increases this year. But down in the world of mid-range and low-price electronics, where the highest unit sales tend to cluster, fierce competition sparked by discounters such as Target (TGT ), Wal-Mart (WMT ), and Costco (COST ) is causing price deflation and making for scarce profits.
While the hot digital items are making headway, the old reliables of consumer electronics are in freefall. According to the CEA, shipments of analog TV sets for the year should fall to 16 million units, from 18 million in 2002. VCR shipments will drop over 50%, from 11 million to 5 million. Shipments of TV-VCR combo will slide from 4 million to 2.3 million. These declines represent much higher unit volumes than the ascendant digital categories, hence the relatively flat total sales numbers.
That's putting a higher premium than ever on being in the right market with the right product at the right time. And as holiday shopping fires up, sales are strong for some familiar names: Sony (SNE ) is reporting double-digit revenue growth in the U.S. and Asian markets during the all-important fourth quarter, when it normally records most of its profits. Chipmaker Intel (INTC ) has said strong demand in PCs and consumer electronics will boost its full-year earnings.
Sales at electronics retailer Best Buy (BBY ) rose 18% in the third quarter, and dirt-cheap DVD players and TVs sparked customer stampedes the day after Thanksgiving at Wal-Mart, the country's No. 1 retailer, which recorded a single-day sales record of $1.5 billion across all of its products. Online electronics retailers showed a 63% traffic increase for the last week of November vs. a year ago, according to Web tracker Nielsen Net Ratings. That bested by 34 points the increase in the next-best performing category, jewelry.
By contrast, retailers that try to go chest-to-chest with the discount powers without lowering prices will pay dearly. For instance, Circuit City's third-quarter sales fell 1%.
More than ever, the spoils are going to the fleet of foot -- those that can change products and strategies quickly. One such transition is from analog to digital: "Digital camcorders and cameras, DVD players, and digital TVs are selling very well," says Amrit Tewary, a consumer-electronics equity analyst with Standard & Poors. In 2003, rentals of DVD movies outpaced VHS rentals for the first time. Through the first nine months of 2003, sales of stand-alone DVD players totaled 15 million, up 25% vs. same period last year.
Photography is another area where the digital transition has reached critical mass, with sales of digital cameras expected to grow 50% or so this year. According to the CEA, digital cameras should outpace sales of film-based cameras for the first time. "The growth has been dramatic," says Elliot Peck, director and general manager for camera sales at Canon USA. "For the next couple of years, you're going to see total growth in digital cameras of 120% to 130%."
Music-related sales are going gangbusters, too. Through the end of October, wholesale shipments of digital music players, including players using both solid-state memory and hard-disk drives, had soared 68% this year, to 2.1 million, says the CEA. The market for hard-drive players alone -- once the sole province of Apple's vaunted iPod -- is expected to double in 2003, to 1.8 million units, according to International Data Corp., as Samsung and Dell (DELL ), among others, join the fray.
Paid Web downloads remain a minuscule percentage of total music sales, but that could change in the next year as Wal-Mart, Dell, Hewlett-Packard (HPQ ), and technology Web site CNET (CNET ) have all jumped in to chase market leader Apple (AAPL ) in the download business.
The downside for makers of older or more-common electronic products is that digital no longer necessarily means high-price. Wal-Mart has offered $29 off-brand DVD players, and most big retailers are selling bottom-of-the line models for less than $50. Prices for even flat-panel computer monitors are plunging, with a 15-inch LCD display often going for less than $300, vs. $1,000 and up three years ago.
"There are a lot of cheaper products coming into the country at the same time the economy is picking up," says S&P's Tewary. "That's a stimulus for the sector."
Cheap, highly capable products are a mixed blessing for electronics retailers, too. They're torn between giving limited shelf space to products that are phasing out but are still in demand, and promoting those that are on the ascent but are still a tad shy of mainstream. "We're seeing duplicate categories," says Steven Baker, director of technology research for NPD Group. "You have a 20-inch LCD television, a 42-inch plasma TV, and a tube TV, whereas before you only had a tube TV."
MORE BIG PLAYERS.
Ultimately, though, stores have to push their Cadillac models. While DVD players might be tops in unit sales with 15 million total, plasma and LCD TVs are the leaders in profits, with gross retail margins in the 30% range. "I've been surprised," says Jim Barr, general manager for commerce services at MSN, the second-largest Internet service provider and a Microsoft (MSFT ) subsidiary. "People are buying plasma TVs online, which blows me away. We didn't see that last year."
It's not a shock, consequently, that new competitors such as Gateway, Dell, Wal-Mart, and, soon HP, are jumping into a business long dominated by Sony, Samsung, and Sharp. That pattern will be repeated as the consumer-electronics market broadens so much as to overlap with the computer and photography industries.
"A digital camera is a computer with a lens attached, and we know computers," says Chris Morgan, a vice-president who oversees worldwide sales and marketing of consumer devices. Morgan believes HP will enjoy an advantage as consumers seek information and entertainment that will be delivered via a variety of devices -- computers, TVs, and CDs, DVDs, and MP3 players. At the least, U.S. PC makers should present a challenge for Asian electronics makers, which tend to concentrate on freestanding devices, although they have experience in computers.
MAYBE NEXT YEAR.
Ultimately, 2003 may turn out to be not just the year that digital took over but also that U.S. companies began to regain ground in consumer electronics from the Japanese. The product trends that may prompt this are in their infancy. For the most part, TV sets still don't talk to computers, and moving music around a house via wireless systems remains a pastime for geeks. But if the rapid adoption of this year's hottest technologies is any indicator, then 2004 could be more prosperous for consumer-electronics makers and retailers.
In the meantime, they'll have to be content with -- on average -- a lukewarm holiday season.
By Alex Salkever, Technology editor for BusinessWeek Online