By Lisa Johnston
New products on display at the American International Toy Fair, held in N
TWICE: How did the custom market do in 2006 in dollar volume, and what are the prospects for 2007?
Bob Gartland, AVAD: Most custom dealers were still experiencing growth in 2006, but I believe their percentage growth rate has slowed to single digits. It is difficult to get hard data. So much of this is speculation backed by experience. Higher interest rates over the past two years have curbed refinancing and remodels, something our core dealer base has benefited from. Slowing in the new home market has had some effect, although I believe we will see that more fully in 2007. Growth in higher-priced MDUs has helped in many markets to offset these factors.
Dealers focused on production home builders may see a further decline in their growth in 2007 that may even fall below 2006 levels. However, builders are committed to projects already and will have homes coming out of the ground. Our products help differentiate their inventory, so they may be more open to offering home entertainment as standard features or options.
Scott Norder, AMX: Last year was a big year for the custom market. While housing starts were down, housing completions were at an all-time high, ensuring a strong year for companies like AMX.
Yesterday's custom luxury items, like granite countertops and cherry cabinetry, are commonplace today, and builders are desperately searching for new ways to differentiate themselves in the crowded housing market. AMX's residential builders program addresses this need and more. Packages that include lighting, distributed audio, HVAC and security can be provided for the cost of a Sub-Zero refrigerator – including the AMX control system and integration. .
Randy Klein, Crestron: There will always be more existing homes than new homes under construction, and this year we developed several solutions that specifically address retrofit and renovation applications. We've expanded our line of products that operate on our wireless mesh networks, including thermostats, lighting and shade control. We also introduced two new WiFi touchpanels
These are exciting times with tremendous potential for custom installers. The only installers that are affected by a softening in new home construction are those that do not have a broad selection of solutions to offer clients or installers that have not partnered with vendors that truly add value.
Jeff Kussard, Russound: Looking to 2007, experience would have us expect a downturn at the entry level. So we anticipate a slowdown among production builders during Q1 and Q2 of '07 while they work to adjust inventory levels. Assuming this can be accomplished by midyear, we then expect revitalization in this sector as the production builder seeks competitive advantage in the adoption of technology.
Experience tells us that the home buyer at the upper end of the market continues to buy, though perhaps somewhat more cautiously, even during times of slow markets. This coupled with the baby-boom generation reaching its earning power peak, and seeing a growing empty nest demographic, has us expecting the upper end to help "soften the landing" a bit. So we expect the true custom market and the expanding high end MDU sector to continue strong. We do expect sales growth to moderate a bit in '07 from the spectacular rates of recent years. But we don't expect to lose much momentum.
Paul Starkey, Elan: We have begun to see a slowdown in factory sales in Q3 and continuing into Q4. We will show double-digit growth in 2006 but see 2007 being softer. While housing starts per se do not translate to down sales, slowdowns affect the production builder market first. Because our business is largely custom-builder based, we may have not seen the impact that other manufacturers may be seeing.
TWICE: If custom-install dollar growth has slowed or flattened, are the rapid declines in display technology the main culprit?
Gartland: The price compression on video, both flat panel and front projection, has been impossible to recover from. Even though lower pricing may compel a consumer to order more than one flat panel for a home, the average project just doesn't have enough opportunities to make up the lost revenue. Therefore, a dealer can never fully recapture the loss.
Klein: We have not seen a slowing in the growth rate. If suppliers are reporting a slowdown, it's because they rely on individual products, whereas we offer complete, integrated solutions. As for display technology, it's an important component in an integrated system, and certainly one that people like to talk about, but it's just one small part of a much larger custom solution. We see rapid growth in the demand for lighting control, whole house audio, home theater and even HVAC control.
Kussard: In conversation with our dealers and from our various research efforts among our distributors, dealers and the market at large dealers are definitely feeling the impact of the race to the bottom by display manufacturers.
The good news is that the real business professionals among them see this as an opportunity rather than a threat, allowing them to shift sales dollars to higher margin product categories like audio electronics and speakers. We'll gladly take some of the money left on the table by the display sector as they duke it out to see who can survive on single-digit margins.
Starkey: The impact of the stock market and disposable income figures have as much to do with luxury-goods purchases. Most professionally installed products are started with the video purchase, but many other products are then added. Lower TV prices also bring more buyers into the market.
TWICE: Are any factors offsetting the new-home-construction downturn?
Gartland: The consumer purchasing a home in an average housing project is typically not our customer today. They will spend the first two years adjusting to their new mortgage, finishing their decorating, completing their yard, etc. Our category is not yet on their consumption radar. Unfortunately, there are too many basics ahead of us.
More expensive, step-up housing starts don't fluctuate as dramatically, so the opportunity in most parts of the country is not impacted as much as one might think.
Norder: With an overall decrease in new home construction, builders must be smarter and more strategic with their marketing and sales efforts. When they partner with an installer to offer technology packages, they're taking advantage of a new, lucrative way to differentiate themselves from their competition.
Klein: The most obvious and important factor is the retrofit market. Retrofits are up 200 percent this year. And, yes, there is definitely an increased awareness among all the trades that AV and control systems are an integral part of any new home.
Builders, architects and designers understand that in the competitive housing market, they need to find new ways to increase margins and differentiate themselves. Builders and other trades are partnering more and more with AV installers to offer home technology. It's a positive trend that will continue to grow our industry.
Kussard: The biggest contributors to whatever buoyancy we may enjoy over the next 12 months will be the industry trade associations. We all look to the coming maturity of the residential installed-systems sector to allow new influencers like the big AV retailers, home improvement retailers, and production builders to take the business to a new level, but we are just beginning to see these players enter the market. It will take time for them to develop the momentum necessary to make our products essential to life in the home. So as these influences work their way into the market, it will be the long-standing efforts of organizations like CEDIA and the related divisions of the CEA to create relevancy and demonstrate value to the consumer and the building professions and trades that will continue to carry us.
TWICE: Why the buzz now about MDUs by installers and suppliers?
Gartland: MDUs have popped up in a lot of metro areas over the past five years. Purchasers of these condos tend to be empty nesters who have expendable income and want to enjoy their new homes. Progressive dealers have seen this segment as a great opportunity, and they're right!
Klein: There has been revitalization in several larger cities, including New York, Miami and Chicago. Along the Sun Belt, developers are building MDUs, anticipating increased demand for luxury condos as the baby boomers plan for retirement. In an increasingly competitive environment, architects and developers need technology to differentiate their properties and increase profitability. For several years, we've offered the solutions they now seek. The excitement is certainly understandable, but nothing has really changed for our dealers.
Kussard: High-end MDUs are a very attractive housing opportunity for many new empty nesters as primary residences and second or third homes. By the very nature of the business model, these offerings are central or close to city centers. Installers and suppliers are simply following this "migration." .
Starkey: Demographics are driving aging wealthy adults back into the city, closer to work, into low or no maintenance living, downsizing from the large home to multiple homes to vacation, travel and use. This new lifestyle is friendly to entertainment and CE products. Also these individuals have high discretionary dollars to spend.
This TWICE webinar, hosted by senior editor Alan Wolf, will take a look at what may be the hottest CE products at retail that will be sold during the all-important fourth quarter. Top technologies, market strategies and industry trends will be discussed with industry analysts and executives.