San Diego — Rampant price and margin compression in the flat-panel TV industry resulted from a variety of factors, including reaction to heavy price promotion from warehouse clubs, manufacturers going off MAP programs for key periods and a dramatic oversupply in the second half of 2006.
That was the assessment of Ross Young, DisplaySearch president, during his market research company’s Flat Panel Display Conference, held here March 6.
“We started tracking monthly channel margins, and you could see what a tremendous decline there was in the fourth quarter,” said Young. “We’ve had some improvement in January, but we had a tremendous drop in margins, and that’s why we saw Tweeter and Circuit City report losses in a very strong holiday season for TV.”
One reason, he said, was the emergence of Vizio as a major flat-panel brand.
“We don’t underestimate this,” Young said. “They have attacked all of the warehouse clubs. They have no channel conflicts because they haven’t been selling at major national retailers and because the warehouse clubs take 20 percent to 25 percent lower retail margin, they can get 20 percent to 25 percent lower prices. That has brought more traffic to the clubs and it has brought a lot of pricing pressure on the whole supply chain. They’ve actually had 700 percent growth and were the No. 5 brand in the fourth quarter of 2006. We had them ahead of Toshiba and ahead of LG in 32W-inch and larger flat panel.”
As warehouse clubs have benefited, other chains began to react, Young observed.
“We’ve seen 10 percent discounts below MAPs become common in the fourth quarter. They were also offering extended financing terms which cost them quite a bit of margin, and free stands and price matching,” said Young. “They were also incentivized by the brands at lower prices to sell through any trailing credits. So what starts out at a 35 percent to 40 percent all-in gross margin is falling very quickly. And certainly the clubs are also contributing to that pricing pressure.”
Young said there are too many flat-panel TV brands to sustain a healthy market.
“We counted close to 70 brands with market share in the U.S.” said Young. “When you have all those brands it enables more channels and more retailers to get into this space.”
Young also cited as a contributing factor a price war that broke out last May between leading players Sony and Samsung. In the seasonally slow period, Sony cut prices twice in one week, Young said, “and that certainly puts a lot of pricing pressure throughout the rest of the field, when that happens.”
“If you remember last year’s conference, Sony was sitting very pretty. They had a $3,500 40-inch LCD TV and said ‘We’re not moving on price. We’re Sony. We have a tremendous position in this market and we don’t need to move on price,’” Young said. Then Samsung came in with a very nice product, started taking share and led to a price war between Sony and Samsung with both companies reducing MAP to protect their share."
Similarly, Young cited Panasonic’s suspension of its MAP program during Black Friday, “when we saw $999 zero-percent channel margin pricing at Best Buy. Clearly, this space has become very, very price competitive.”
Further fuel to the fire came when heavy supplies of sets shipped to Europe in preparation for World Cup demand failed to achieve the desired results, leading to the U.S. market being stuffed with third- and fourth-quarter goods, and the requisite price declines.
Young offered 10 steps that could lead to market recovery:
Identify the problems. “There are too many players in the supply chain and too much supply. Too many brands and too many retailers.”
Reduce supplies. “The thing the industry would benefit the most from would be a shortage of displays,”Young said. “The merchant panel suppliers need to determine if it makes sense for them to go to larger and larger sizes. It seems that vertically integrated panel suppliers like Samsung and Sharp have been the winners so far at the larger sizes. Scale matters, but it's not just the size of the fab any more but the size of the internal demand. Internal demand is really important for minimizing panel inventory, which leads to rapid price reductions.”
“Find your own sandbox,” said Young. “In a market with a lot of other players, there is not a lot of profit to go around. If you are in your own sandbox you can enjoy all the profits. We’ve seen Sharp do a very good job of that in game displays and other applications.”
Learn from the market leader, vertical integration works. “Look at what Samsung has done in LCD TVs. Through their partnership with Sony, they have huge internal demand, estimated at 75 percent to 80 percent in certain sizes. Those customers are buying the largest panels, the highest resolution panels and the highest spec panels. So they are able to sell their internal, very predictable volume at a higher price than their merchant volume.”
Enjoy the benefits of differentiation. Manufacturers need to profit from new features for as long as possible, he said. “One of the biggest concerns we have is that if you diffuse your 1,080p 120Hz technology to low-end brands, you are going to depress margins throughout the supply chain. There are not going to be any premiums for anyone to enjoy.”
Retailers need to limit SKUs that can reduce the margins.
Set flat-panel fabs and manage inventory levels with the recognition that 55 percent of shipments of large panel displays come in the second half of the year. “Any time we’ve seen inventory grow quite a bit we’ve seen faster price reductions the following month,” he said.
Don’t make price reductions when inventory is at its lowest levels.
Identify related opportunities. “Retailers are doing that now with TV mounting, cables and in-wall speakers, home networking and connectivity. There is a lot of opportunity for retailers,” Young said.
Understand new technology disruptions and be prepared to leverage them. “If we see significant improvements in low-temperature poly silicon mobility and they can integrate more circuitry, flexible displays are another opportunity as are solar cells,” said Young.