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Get Ready For CE Holidays In Hell

Well-regarded economic expert Steven Platt, of the Platt Retail Institute, recently told attendees at the DisplaySearch Flat-Panel Supply Chain Forum that the economy is definitely in a recession, and while it is showing some signs of bottoming out now, CE retailers are looking at “an extremely weak Christmas” selling season this year.

He also said that as conditions grow worse, before starting to recover in early 2009, CE specialty dealers are likely to suffer the heaviest blows.

Platt noted that consumers have more debt than ever, and rebates from the government’s economic stimulus package will likely go more toward paying energy bills and debt payments than buying many consumer electronics products, particularly pricey ones, like flat-panel TVs.

“We believe we entered a recession in October and November of ’07 — a lot earlier than most. That’s when employment topped out,” Platt said, adding that his institute predicted a weak holiday season last year, and it turned out to be the weakest in five years.

Platt said the recession occurred for all the reasons retailers are familiar with including the housing slump, banking crisis, inflation, high energy prices, unemployment and consumer debt.

The good news is the economy “is bottoming out now, but the consumer won’t realize it for another six months,” he said. He said employment levels are still somewhat “iffy,” but should trend up 5 to 6 percent, while the real estate bubble “will take a good two or three years to work its way through, but we are starting to see signs of a potential bottoming out there.”

The biggest risks to the economy are food and energy inflation, he said.

“Normally it is the consumer that leads us out of a recession and has always [done so] for many, many years. We believe that is not going to happen this time, but we do believe corporations will,” Platt said.

While in the past consumers have been able to spend the country out of a recession, either by loosening the purse strings to cash on hand or by borrowing, Platt said he believes the consumer “really is tapped out this time.”

He noted the following:

·         The average percentage of consumer income spent on servicing debt is up to 14.5 percent.

·         Consumer spending vs. disposable income shows consumers are spending 96 percent of what they make.

Meanwhile, the consumer price index shows inflation has risen from about 1.2 percent in 2007 to about 4 percent, he said. Contributing to that are the following:

·         Gas prices are up 21 percent from April ‘07 to April ’08.

·         Food prices are up 5 percent year on year vs. 2007, the highest levels since 1990.

“That puts a lot of strain on the 96 percent of incomes we are already spending,” Platt observed. “Consumers are worrying about how they are going to cover all of these extra expenses.”

In addition to income, consumer spending, he pointed out, is also affected by consumer assets (perceived wealth).

Platt said figures show slightly negative equity levels as housing values have plummeted 15 percent.

“If 30 percent of your net worth is your house, and 3 or 4 percent of that drives spending, and that has gone down 15 percent, what you are talking about is a 1 to 1.5 percent hit in consumer spending attributable to the decrease in the value of your house alone,” Platt said. “That might not sound like that much, but when you multiply that across a trillion, trillion, trillion-dollar economy, you’re talking about real money.”

He said the 10 year average of overall retail sales year on year is 4.8 percent. Sales during last year’s holiday season were 2.6 percent and this year “we are looking at about 2 to 2.5 percent growth.”

The CE retail sector specifically has been showing “a real deceleration” through April of 2008 in spending, he said.

“We’re thinking you’ll probably see about a 5 percent, plus/minus, decrease in CE sales this holiday season, compared with a 25-year average growth of between 8 and 9 percent – that is a fairly significant down draft we are looking at,” Platt said.

As for changes in distribution, Platt warned specialty CE dealers to really watch out.

“You all know that there is a huge shift in consumer electronics [distribution] headed to the mass market, no secret there. What that means is that as the economy gets tougher, consumers trade down and become more price sensitive,” Platt continued. “As long as people believe that mass merchants have better prices, they are going to continue to spend their money at mass rather than specialty electronics stores.”

Platt pointed to a recent Wal-Mart report for March showing “triple-digit same store comps in sales of flat panel and GPS.”

“That means Wal-Mart is doing okay, even in a declining market, and will continue to take even more share from the CE specialty stores,” Platt said.

In response to the conditions, Platt said to look for retailers to have Christmas breaking early this year, offering heavy promotions “(free is always good)” and easy credit terms – “none of which will be enough to salvage this holiday season. I’m looking for that one retailer to come up with something creative and different in trying to stimulate demand in a down economy, but we sure haven’t seen that yet, and we are probably not likely to.”

Platt said there are regional variations in the impact of the economic downturn due to the varying degrees of run up in real estate and sub-prime lending in different markets. As a result, heavily hit real estate markets such as Las Vegas, Arizona and Florida, are likely to see a more dramatic drop off in flat-panel TV sales this year than less impacted areas, such as Chicago.

He said he “wouldn’t put it past” some big national accounts like Wal-Mart, which have impressive analytical tools to make adjustments in supply cycles on a market by market basis.

“But most retailers are typically very slow to react. Many of them have their holiday orders in already anyway and everyone probably thinks they will out perform their competitor. So I would say most of them, quite frankly, aren’t smart enough” to make regionally weighted supply adjustments in time.

Merry Christmas.