CE retailers, no shrinking violets when it comes to price promotions, expressed shock over the depths that Black Friday deals fell to last month and concern for their impact on profitability.
“It was a stunningly promotional environment with collapsing price points,” observed Joe McGuire, president/CEO of Tweeter Home Entertainment Group. “It was without a doubt more severe than we thought back in August,” when the company was already preparing for steep early-bird specials.
Nevertheless, McGuire told analysts during a conference call that Tweeter “competed along with everyone else,” and watched as TVs “walked out of my stores at zero margin.”
As a result, the chain enjoyed “a busy, vibrant Black Friday,” he reported, but is now “spending December trying to make up gross margin dollars lost over the weekend.”
“As a good friend of mine says, there’s no nourishment in a bowl full of volume,” he said.
McGuire said the margin-choking holiday promotions will likely “hurt a lot of people,” and that non-CE merchants who used electronics products as door-buster specials will be surprised by the high rate of returns.
Among those impacted was Best Buy and Circuit City, whose shares fell over 6 percent respectively in the hours following the release of Best Buy’s third quarter results last week. Profits came in below analysts’ estimates, due in part to increased sales of low-margin notebook computers and game consoles, but also due to steep “Red Friday” discounts, the company said. CEO Brad Anderson acknowledged that “a very competitive climate put pressure on our margins, resulting in earnings below our original expectations.”
Tweeter’s McGuire said the discounting was exacerbated by “two warring technologies, LCD and plasma, that are beating each other over the head.” But Stuart Rose, chairman/CEO of Rex Stores, placed the blame squarely on Wal-Mart, which put pressure on dealers and prompted Best Buy’s “surprising” response: a $999 special on Panasonic’s benchmark 42W-inch plasma HDTV, an action that downgraded the model to “a very low profit item.”
Black Friday proved to be “a big day” for Rex, Rose told analysts during a conference call, although price promotions, particularly in plasma, would likely pinch margins.
“It was an ugly day,” he said. “Retailers have to give away more and more, and the customer is getting smarter and smarter. They know we give stuff away and they wait all year for it.”
Steve Baker, VP/industry analysis for The NPD Group, concurred. “Consumers knew what they were looking for,” he said. “They came, they saw, they conquered, and they went home with basically what was on their lists and not much else.”
According to NPD data, CE sales for the week that included Black Friday rose 11.8 percent year-over-year to $2.1 billion but came up shy of 2005’s 15.4 percent gain, attributable, Baker said, to price erosion. Top revenue generating categories included LCD TVs ($275 million), notebook PCs ($205 million), digital cameras ($182 million), plasma TVs ($148 million) and MP3 players ($123 million).
Rose said pricing has now stabilized although Rex’s traffic has slowed since the Thanksgiving weekend, and he fears that the promotions — and margin pressures — will return if the customers don’t.
“The Panasonic plasma is back to $1,799,” he said. “Even $1,499 is reasonable, but $999 is not.”
Tweeter’s McGuire believes the pain inflicted over the Thanksgiving weekend will help mute price moves next year. “I think the price declines will be a little less dramatic,” he said.
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