Aug 26, 2007

Flat Screen TVs Highlight Dismal State of Consumer Electronics Retailing

Consumers walking into an electronics store looking for big-screen high-definition TVs will find things look and feel different than it has recently. According to a recent article by Eric Taub, here's how the flat screen TV marketplace will look this year:

  • More name-brand models along the wall and a lot fewer of the second-tier brands that carry lower price tags

  • Sales employees pushing expensive services like $399 professional installation packages and $79 picture calibration services

  • Much less liberal return policies that are getting tougher

  • Sales people focusing on models with superior picture quality and large sizes
Prices will continue to fall, industry analysts say, because retailers are powerless to prevent the declines:
  • Taiwanese contract manufacturers, continue to build new plants and expand production and the average retail price of 42-inch HDTVs — one of the most popular sizes— has declined 18 percent since last year

  • Price promotions by minor makers propelled Vizio from the No. 4 L.C.D. television maker in the American market in the first quarter of 2007 to the best-selling maker in the second quarter of 2007

  • As low-price, high-volume mass merchants like Wal-Mart and Costco become major vendors of big-screen HDTVs, all retailers are forced to keep their prices — and their profit margins — as low as possible

The impact of low, sometimes negative, profit margins has been devastating to retailers

  • Regional electronics chain Tweeter Home Entertainment Group sought protection from creditors in bankruptcy court. It was sold in July to Schultze Asset Management, an equity buyout firm

  • Circuit City cut costs by laying off some of its higher-paid veterans in sales

  • Best Buy’s gross profit rate declined 6 percent, to 23.9 percent of revenue compared with 25.4 percent a year-earlier

  • Costco, which operates on a 9 percent profit markup on television or about half what big-box retailers manage said its effective profit margin on TVs was more than halved

  • Sales of surround-sound systems have also been disappointing because TV makers have been promoting their own high-quality sound built into the TV sets. And many consumers do not understand that to get true surround sound requires the addition of external rear speakers

  • Extended warranties, another high-profit service, are selling less well. As TV prices drop, consumers are less inclined to buy the insurance

Retailers are trying new strategies:

  • Circuit City has increased its Web presence, hoping to appeal to Internet shoppers by offering additional information about what equipment is necessary to view high-definition programming (more information may also reduce HDTV return rates). The retailer is also promoting its professional installation services, called Firedog.

  • Best Buy, which has its Geek Squad installation and repair service, is also looking to sell higher-profit premium models through its Magnolia subsidiary, which operates both as separate locations and as stores-within-stores

  • Retailers are demanding more high-profit accessories for the new flat-panel TV buyer. “The high-definition DVD format war must end by 2008 if retailers are going to sell movie discs and players” Forrester Research says

We're not optimistic the retailers will be able to repair the fundamental flaws in this consumer channel system. It will take concerted, pro-consumer strategic moves by a forward-thinking branded manufacturer to sort out the mess and bring improvements that matter. Will any rise to the challenge?

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