ACs, Cash Flow and You

As you know by your own sales and reports in TWICE recently, the cool summer resulted in a disappointing sales season for room air conditioners. And that's being diplomatic.

The traditional importance of AC sales on the industry reminded me of a comment by an executive with a PC maker, at the height of that market's boom around 2000, who asked me at the end of an interview, “Steve, we love TWICE, but why do you have to have all those stories about air conditioners on page one?” I politely told him that electronics/appliance retailers probably make triple the margin on a typical AC than they do on a PC.

Ah, those were the days. ACs were used as incremental sales and savvy CE vendors knew that if retailers had good room air sales during the summer that they would have cash available for late season electronics buys in the fall.

The almost-suicidal pricing of ACs, and major appliances in general, has been pushed in the last three or four years to attain that “junk food” of financial stats, market share. All of that is empty calories if your company and your customers lose money on every sale.

The situation with ACs is a symptom of a serious industry ailment, namely that more bread-and-butter categories are becoming commodities. In last week's issue, industry veteran Jay Liebowitz, president of Intercounty, told senior editor Amy Gilroy at the NECO Alliance meeting that an average sell-through in ACs is usually around 70 percent, but that this year it was 40 percent to 50 percent, which hurt cash flow.

Liebowitz said that in his area, “five-thousand Btu units were stacked up at A&P, in lumberyards and even Pep Boys.” NECO, and other buying groups and independents, made up for the lost sales from ACs in other areas this year. But BrandSource's executive director Bob Lawrence expressed concern over the long term, saying, “How many categories can independents give up to the big box [retailers] before it hurts us?”

And, I may add, how long before this trend hurts consumer electronics and major appliance manufacturers? It already has. Take a close look at the financials of some of the top CE and majaps brands.

During the annual TWICE Retail Roundtable held at CES in January, when asked about the effects of Wal-Mart and other mass merchants of all types on specialty CE retailers, Larry Mondry, CEO of CompUSA, made a comment that could also apply to the appliance business. “As technology becomes more ubiquitous, and frankly commoditized, [Wal-Mart] is in a position to sell anything they want. The solution is more technology. I'm just very hopeful that all those smart technology minds will have lots of great new stuff for us to sell by then.”

That's all well and good, but the problem is that to come up with new products, you need the ability to plow some of today's profits into tomorrow's technology.

Today's electronics and appliance market is polarized between low-end and high-end products, with the middle all but gone. Without some market discipline, on the part of vendors and dealers, this industry may soon enter another Dark Age of evolutionary, but not revolutionary, “me-too” products. I'm sure no one wants to go back to the late 1980s and early 1990s when everyone was wringing their hands, waiting for “the next VCR” to bail out the industry.