Midyear Report: Is Car Audio At A Crossroads?

By Amy Gilroy -- TWICE, 7/3/2006

New York — With early 2006 sales in car audio showing continued losses in core categories, TWICE asked suppliers if the car stereo market might be shrinking to the point of becoming a smaller, niche market.

Car stereo sales to consumers through April this year were slow, charting about 20 percent declines in amplifiers, speakers and CD players, compared with the same period last year, according to the The NPD Group, Port Washington, N.Y.

Sales to dealers were also disappointing, according to the Consumer Electronics Association (CEA). Early reports for the year through May showed in-dash CD players down by 29.2 percent in units and 28.3 percent in dollars.

The results follow several years of flat or down sales in key 12-volt categories.

The sluggish start for this year is attributed mainly to sticker shock at the gas pumps (see TWICE, June 19, p. 42). Although gas prices may remain high, consumers are expected to adjust to the new costs and resume earlier buying habits by Christmas, said some industry members.

The bigger picture for 12 volt is less clear. The great majority of suppliers claim the market is in the midst of a transition that will last from two to five years. Some say the market could return to growth within that time and others say the jury is still out.

Sony's new mobile electronics general manager Brennan Mullin noted, “Any categories that offer connectivity to other sources will show growth … Whether or not it will put the whole category back into growth remains to be seen.”

Pioneer national accounts VP for mobile electronics Larry Rougas acknowledged a tough first quarter for the industry and continued “struggles” for the aftermarket in the near future.

Rougas said sales of low-end CD players were sluggish in the first quarter, leading the company to reduce prices to spur sales

Harman takes an optimistic stance. Brand marketing director Chris Dragon noted, “No, I do not think the car audio aftermarket is going to shrink, but the traditional categories that we keep hanging our hat on are going to shrink, and an emerging category will change our business model.”

For this year, most suppliers said amplifiers and speakers will see flat sales. CD players should decline by 4 percent to 10.1 million units in sales to dealers, according to the CEA.

Alpine said overall the industry could end up slightly ahead of last year in terms of dollars because of portable navigation and the growth in higher ticket in-dash DVD players. Overall unit sales, however, will likely be down for 2006.

Bright spots in the market include in-dash double-DIN DVD players, OEM integration devices, iPod integration devices, navigation (see p. 32), Bluetooth and satellite radio.

The transition to some of these categories and features has already started. Here is what we can expect in the growth niches for 2006:

OEM integration devices (name-brand units, such as the JL Audio CleanSweep and Rockford 3Sixty): They could exceed sales of 50,000 units this year, according to supplier estimates.
In-dash double-DIN DVD players: They are seeing wholesale unit growth of 15 percent to 30 percent, said suppliers.
iPod adapters: Sales of iPod car accessories could exceed $300 million this year (including off-brand FM modulators), according to earlier reports from NPD for retail store sales alone (not including the Internet).
Navigation: In-dash navigation sales forecasts this year range from flat at 110,000 units to a hefty increase of 30 percent to 35 percent.

Sales of portable GPS units are expected to skyrocket, tripling this year to 2.5 million units in the United States (see p. 32).

Satellite radio: It will generate 3.33 million subscriber sales from retailers this year (as opposed to OEM sales) said N.Y.-based-Lehman Brothers' in a recent forecast. Lehman estimates that XM will generate 1.48 million new retail subscribers and Sirius will generate 1.85 million for the year.

Earlier this year, CEA had predicted a 10 percent increase in unit sales of car-related satellite radio products and a 9 percent increase in dollars. Revised CEA forecasts are due for release later this month.

Many suppliers said the rate of adoption of these new technologies depends on a much-needed shift in the retailer mindset. Although more retailers are beginning to promote iPod connectivity, still about half of 12-volt specialists are not pushing the segment, said vendors, even while it is commonly agreed that 60 percent of iPod users want to listen to their iPods in the car.

“The hurdle is modifying the selling behaviors of the salesmen. Given that, it will take three to five years before [integration] becomes a massive category,” said Dragon.

Ray Windsor, general manager of Audiobahn, said the changes will occur sooner. “I think the end of 2008 will see an up tick for most suppliers … The more cool devices come out that consumers want to add to cars, the more our business will respond to it … There will be a desire to add gaming, Internet and cellphones and other things to the car in a hands-free fashion.”

Blitzsafe president Ira Marlowe is more cautious. “Honestly, I see 12 volt shrinking. The OEMs are offering everything the aftermarket was doing exclusively.” He agrees that the market “will change or morph into something else,” but notes that in the interim many specialty retailers are turning to home audio to supplement their business and some are leaving the business entirely.

Although Rob Wempe, national sales manager for Rockford Fosgate, is positive about the future, he notes that retailers are not promoting as they did in the past. “We don't have demo cars in the parking like we used to, or contests on Saturday. There's nothing better than a demo car with an iPod hookup. Or even better, if a salesman shows his car and says, 'I did this for $1,000.' I bet if you called dealers you wouldn't get 25 percent who could do that.”

Wempe claims the new Rockford 3Sixty OEM integration device is back-ordered at present due to better-than-expected demand (with better supplies due by the end of June).

Panasonic mobile entertainment director Rob Lopez also agreed that the market is in transition.

As for the first half of the year, Michael West, marketing director of Eclipse, said that the sticker shock at the gas pumps will be absorbed and consumers will adjust. “I think that it will smooth out by the holiday season. It's like anything else — consumers will get used to it and adjust, and there will be the need for the audio unit in the car and getting your iPod connected up.”

Two suppliers who cater to the meat and potato car audio segment, MTX and Memphis Car Audio, said their sales are currently up by double digits.

Note: Lehman Brothers and/or its affiliates own 1 percent or more of any class of common equity securities of Sirius Satellite Radio and XM Satellite Radio as of the end of the last month.