Accessories Execs Anticipate A Stronger Second Half

By Jeff Malester On Jul 11 2005 - 6:00am

The flip-flopping stock market — pressured by a worsening trade picture, slowly rising interest rates, a clouded jobs environment, oil-pump price pressures and the specter of inflation — tends to paint a picture of a softening economy, which makes consumers increasingly conservative with their large-dollar consumer electronics purchases.

Even with big-ticket CE price points currently on a southerly course — due, among other things, to increasing price competition — convincing consumers to make an expensive audio or video purchase often is not easy. And when retails heat up and price points come down, margins tend to further narrow.

To the rescue comes a wide range of accessories products, which often can be smartly bundled with larger A/V ticket sales. Cables, batteries, mounting solutions, even CE furniture encourage add-on purchases that create incremental retail dollars at higher-than-usual margins. The keys to doing this business are inventorying the proper accessories mix and conveying to consumers just how these products perform.

And what do accessories-maker execs expect from business direction in the year's second half?

Taking an umbrella view, full-line accessories maker Jasco Products finds the economy thus far in 2005 has been fairly flat. “Many of the traditional discounters have struggled to make their plans and cite high oil prices as the key contributor,” said Kent Shiplet, marketing and sales executive VP, at the Oklahoma City-headquartered Jasco. “Other retailers that attract more affluent shoppers are doing well,” he said.

Accessory sales were relatively flat for most retailers during the first four months, with the exception of computer accessories, which is experiencing double-digit increases, noted Shiplet. Accessory sales appear to have trended up in May, he said.

“We are optimistic that improved sales will gain further momentum through the balance of '05,” continued Shiplet. “The equipment drivers for improving accessory sales are sales gains for high-definition TV, laptop computers, MP3/iPod, satellite radios and DVRs. Home theater accessory sales are clearly benefiting by the growth in larger-screen digital TVs.”

Jasco said its GE-brand SmartHome DIY home automation and security line is experiencing strong growth. As with other companies in this category, video surveillance products are broadening their appeal and now represent 20 percent of the DIY security market. A blank-media storage provider, which finds the CE business victimized by a slower economy, predicts there is light beyond the tunnel.

“The economy lost some of its forward motion during the second quarter, but there are signs of modest improvement over the next few months and a healthy fourth quarter,” said Ronan Ryan, director of product marketing at Charlotte, N.C.-based Verbatim.

“Many firms in the CE/PC peripherals industry — specifically storage devices — overestimated consumer upgrade demands and have made adjustments in both pricing and volume. At the same time, retailers are reassessing their expectations for Blu-ray storage technology and increasing their orders for present technology storage devices that are more aggressively priced.”

Verbatim's Ryan finds that new, full-featured DVD burners and recorders have made the CD/DVD technology more attractive for even the casual user. This has produced expanded user demand for high-performance DVD media “with year-to-year demand increasing more than 200 percent.”

“The leading media manufacturers — CD and DVD — have been ramping up their production, so there appears to be a reasonable balance between supply and demand,” noted Ryan. High-capacity, high-performance media continues to require unique experience in the areas of production processes, procedures and quality control. While lower-speed media tends to be extremely price sensitive, retailers are seeing a growing understanding among consumers in the areas of product quality, consistency and value, he said.

Although CD demand seems to have peaked, the demand for both single-layer 4.7GB and double-layer 8.5GB DVDs is growing rapidly as the customer base expands and people gain experience with computer-based burners and set-top video recorders, said Ryan.

Technology advances, such as Verbatim's VideoGard, which provides 40x greater scratch- and scuff-resistance than conventional discs, have become very popular with both professional and casual users, said Ryan. “Dual/double-layer (DL) 8.5GB DVDR media has moved beyond the requirements of video content developers. Our media not only delivers true 2.4x write speeds, but also 4x, 5x and even 6x on mainstream drives. As yields improve and prices move down, we see significant increases in the demand and sale of higher-capacity DVD media, not only in the second half but well into 2006 and 2007.”

At the same time, Ryan said Verbatim is broadening its storage offerings in other high-growth areas. These include USB flash drives and small- to medium-capacity hard drives. While there are a growing number of commodity products in these categories, Verbatim, for example, sees a strong demand for what some might call specialty storage products. In other words, higher-capacity, higher-speed units that provide optimum data security and reliability.

The increasing concern over identity theft, data hacking and virus-based content destruction has made content and data protection — especially with portable storage devices — a solution channel partners can sell profitably. These types of products should be in high demand in the fourth quarter, and beyond, concluded Ryan.

One accessories manufacturer has an alternative to the correlative purchase.

“Even in a softening economy, accessories present opportunities,” said Brett Allsop, sales and marketing VP at Bellingham, Wash.-based Allsop. “But the type of accessory can determine whether a person is going to pull out their wallet.”

For “back-stage” accessories, like batteries and cables, purchases are directly linked to major electronics purchases, said Allsop. “So, when someone buys a home theater system, they want to use it today, so they're going to buy the cables they need to hook it up. Or when they buy a new or a used MiniDV recorder, they're going to buy an extra battery so they won't be caught without power as they drive from soccer practice to a piano recital. So, when major electronics purchases slow, so, too, do back-stage accessories for those major electronics.”

But, then there are more discretionary “feel good” accessories, which consumers don't really need, but want — to make their stuff look better, work better or fit into their lifestyle, continued Allsop.

“When you don't have the cash to buy a new system, a few accessories can breathe new life into a room and serve as a minor upgrade to an existing system. These are things like CD and DVD storage, mouse pads, cellphone covers and electronics cleaners. You might not buy a new computer every six months, but you can buy a new mousepad twice a year. If you run out of space for your DVD collection, you can pick up some new storage for about the cost of another DVD. Even when major electronics purchases are slow, consumers are still looking for ways to spruce up their living room. In fact, we've found sales of our higher-end accessories strengthen over the last six months.”

And aside from the high margins and incremental sales opportunities that all accessories represent to retailers, Allsop noted there is another beneficial element to discretionary décor-oriented accessories. “In general, they're going to be attractive. They are, after all, designed to look good in the home. And a product designed to look good in the home can make for an attractive display at the retail level. Even if consumers don't make that purchase today, there'll be a positive visual impact and association.”

Maxell, which has made its plans for the back half of 2005, expects continued strong growth in most of its product categories, with especially robust results in DVD media and mini player and iPod accessories, according to Don Patrican, executive VP at the Fair Lawn, N.J.-headquartered company.

“DVD media sales growth in the second half of the year will be fueled primarily by increasing household penetration of hardware and new aggressively priced models coming on stream this fall in the $149 to $199 price points that are less confusing and easier to use,” he said.

Also, Patrican noted that format confusion is easing, further boosting consumption. “We also believe new print-to-center DVD media, which has been selling very well in the first half of 2005, will continue to be extremely hot in the second half.”

Media consumption will continue to be driven by the killer app: the conversion of VHS tape libraries to DVD media, and by the increasing popularity of photographic applications and time shift copying, said Patrican. “We expect, however, these overall consumption increases will pressure global supply into a potential shortage. Supply pressure is also coming from commercial market requirements for DVD and demand in the broadcast and post-production markets.”

Maxell also is planning for dramatic growth in sales of DVD camcorder media and double-digit sales gains of Mini DV to offset double-digit consumption declines in 8mm and VHS-C camcorder tape, and flat sales trends in the Hi-8 camcorder tape format.

In CD-R, the company expects potential supply shortages as many Taiwanese manufacturers convert CD-R lines to DVD production to satisfy demand, and because it is a more profitable product for them. But, Maxell also expects greater CD-R sales declines as consumers are increasingly using iPod and other digital mini players for portable music.

“The mini player and iPod accessories business will mirror that trend with extremely strong sales in the back half of 2005 as consumers look to accessories to expand the flexibility of their players,” said Patrican. “The incredible popularity of iPod, MP3 and other mini players has inspired people to want to enjoy them in a wide range of environments and in all facets of their lives.

“Our engineers designed our mini player accessory products to make these players more flexible and easier to use at home, in the office or on the go. Initial orders from our retail partners indicate confidence that this will be a hot product category.”

Looking at consumer electronics as a whole, Scott Gill, president/CEO of Savage, Minn.-based mount maker Chief Manufacturing, finds CE is “undoubtedly a very competitive marketplace today.”

The home theater projector market, for example, offers 14 major brands fighting for market share. “But with the increase in competition and subsequent price declines of both plasma and LCD display technologies, coupled with new mounting and furniture solutions from brands like Chief and Sanus Systems, there is now a great opportunity for retailers to transform the consumer video and audio experience for a broader base of consumers,” said Gill.

CE accessories in the second half of 2005 and 2006 will help continue this transformation of the American family TV room, Gill noted. “From sophisticated swing-arm wall mounts to furniture with aesthetics matched to the latest flat panels, new legions of consumers will be looking for the types of accessory products.”

Continued developments in wireless technology will likely be the next driver of new, innovative CE installations in homes and businesses, said Gill. “True commercialized wireless front-projector systems and wireless distributed TV signals will help facilitate easy installation of the next generation of display technologies,” said Gill.

Jim Wohlford, president of Chief's sister company, Sanus Systems, based in St. Paul, Minn., said, as flat-panel TV improves in quality and comes down in price, it will become the driving force in 50-inch and smaller mounting and furniture solutions.

“Microdisplay rear projection and front projection will be the primary drivers in 50-inch and larger,” said Wohlford. “Smaller flat panels are rapidly adopting VESA standards, which is good news for everybody.” Sanus has 16 different VESA mounting solutions for small- and medium-size flat panel, he noted.

Most home theaters are moving to microdisplay rear projection or front projection, continued Wohlford. “For both of these, the low-boy consoles are an ideal choice. They can support a big TV or sit under a drop screen. The fastest growing area over the coming year is likely to be front projection.” Sanus is introducing a new range of front-projection mounts and accessories,” he said.

“The strength in the demand for HDTV products and associated audio equipment, in my opinion, continues to drive the CE industry,” said Joe Perfito, president of Orlando, Fla.-headquartered cable maker Tributaries.

“For the remainder of 2005, I believe the concepts of consumer confidence in the specialty A/V retailer/custom installer, and the continued need for better margins, will drive sales of value-added, add-on products and accessories to a 25 percent growth,” said Perfito.

As new HDTV technologies and audio equipment become more complex, the need for savvy consumers to get qualified assistance in choosing the best products for their situation becomes more critical, said Perfito. “The-big box stores are not particularly effective with this type of consumer. Historically, the specialty audio/video retailer/custom installer has been the 'expert of choice' for this savvy consumer, satisfying his A/V needs.”

Today, in addition to home theater, consumer's home automation, networking and distributed audio and video requirements are fueling an unprecedented growth in this market segment, said Perfito. Tributaries has focused its resources directly on the specialty A/V segment, namely the CEDIA/PARA retailer/custom installer.

“The result for Tributaries cable and power products the first half of 2005 has been excellent. Our growth in domestic business is in the double digits, far exceeding our original 2005 forecasting. This growth is being attained both from current dealers as well as new additions,” said Perfito.

As margins for video products continue to erode for retailers and custom installers, the sale of high-margin high-end cables, power conditioners and other value-added products becomes an extremely important part of each sale, he noted.

“We expect to see continued strength in CE accessories in the second half, as demand for CE, in general, remains positive,” said Paul Perryman, national sales manager at San Diego-based GE/Sanyo.

Contributing to this growth trend at the battery/charger maker are two factors, said Perryman. Consumers are looking for accessories to enhance or protect their electronics investment, and retailers rely on high margins of accessories to offset lower margins from electronics.

“Heading into the holiday season, digital cameras, MP3 players and cellphones will be popular gift items again this year, and accessories for these devices will benefit accordingly,” said Perryman, whose company offers a complete line of cellular accessories to complement the latest phones on the market.

A majority of digital cameras and MP3 players use AA or AAA batteries, creating a lucrative market for nickel-metal hydride (NiMH) batteries and chargers, he noted. To help retailers capitalize on these opportunities, GE/Sanyo will introduce new AA and AAA NiMH batteries with industry-leading capacities.

“Although the cellular phone market will not be as robust as last year, cellphone penetration will continue as carriers introduce new 3G services, MVNO's fill prepaid niches and consumers adopt family plans with multiple phones per household,” said Perryman.

Flat-screen displays should have a major effect on accessories sales during the second half, said Geoff Miller, executive VP at OmniMount Systems.

“The accessory business tends to follow in the footsteps of the components that they complement,” said the head of the Phoenix-based mount maker, “and their demand runs the gamut from slow to middling [to] gangbusters for flat-screen displays. One imagines a similar scenario for the second half year.

“Inflationary pressures are more of an issue than for some time,” continued Miller, “and juggling costs, brand share and profitability are likely to tax us all. But thank heavens for a hot category [mounts] to drum up floor traffic.”

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