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Economy Casts Pall Over Holiday Season

New York — Retailers and distributors said the global financial crisis is putting added pressure on CE sales, which were already squeezed by high fuel costs and the weak housing market.

The pain varies by trading area and product category, a cross-section of re-sellers told TWICE, with flat-panel TVs faring best and home-related sectors, including custom install and white goods, taking the biggest hit.

Of greatest concern is the rapidly approaching holiday selling season and the impact the historic economic upheavals will have on consumers’ willingness to spend.

“No question business was very tough during September,” said Bill Trawick, president and executive director of NATM Buying Corp. “We are just not seeing people come into our take deep margin hits to make the sales. It is tough. The TV business is kind of holding its own. Volume is up in TV … but overall it is tough.”

Robert Weisner, executive VP of the $11 billion Nationwide Marketing Group, is also seeing an overall increase in flat-panel TV demand due to the upcoming digital broadcast conversion, although major appliance sales remain soft.

Henry Chiarelli, president of DBL Distributing, similarly painted a mixed picture. “In meeting with retailers in the past couple of weeks the common word they use for their business is ‘spotty.’ They can’t make last year’s numbers in two or three days of the week but then by the weekend they are okay,” he said.

Product-wise, TV “continues to sell like crazy,” Chiarelli said, and sales of portable audio are fine. But “anything that has to do with housing is hurting, anything custom-installation related. Mounts, cables, remotes, in-wall speakers … there are four or five categories there and they have been hurt by the housing crisis. That is a segment that is under performing.”

For retailers that have built their businesses around custom install, like members of the Home Theater Specialists of America (HTSA), the effect has been deadly.

“Have you ever driven a manual transmission in fourth gear and then popped it into reverse?” asked Richard Glikes, the buying group’s executive director. “You can destroy the mechanism. That’s where we are. There has been little traffic in two weeks. Jobs have been cancelled. This [slowdown] has been worse than the time after 9/11. Then it was bad for two weeks and then came back. This time it has been as bad as I have seen it.”

Murray Huppin, president of Huppin’s/OneCall agreed. “Folks have lost a lot of value in their homes, and their stock portfolios have taken a huge hit,” he said. “They have money, but they’re being very careful with it. Consumers are waiting and seeing how this plays out, and in the meantime things are lean.”

Likewise, September was “off a bit with traffic lighter,” reported John Flanner, president of Flanner’s Audio & Video, a member, along with Huppin’s, of the Progressive Retailers Organization (PRO) Group. “At least for us [in Brookfield, Wis.], the wheels did not come off. We kept custom jobs and [business] activity is stronger than what you’d expect if you listen to all the news.”

Jim Ristow, executive director of Home Entertainment Source, a unit of the Brand Source buying group, said he told his membership to “try and be realistic” and “brace themselves for what will happen, manage their debt wisely, make tough cuts and use our Expert Warehouse.”

Ristow added that store traffic, “has been affected in the past few weeks… where you have to work harder to maximize every sale.”

And Ristow noted the “good news for our members” is that independent retailers are “the most resilient and nimble entrepreneurs around and can act fast” in their markets.

Business also remained on track through September for Nationwide Marketing Group. The buying group reported a record 9,500 orders shipped to members from its distribution partner, DSI, during the third quarter as dealers laid in inventory for the holiday season. DSI said an additional $45 million in inventory has been set aside to support members through the fourth quarter.

But more recent reports from industry analysts are less upbeat. David Strasser, a retail analyst for Banc of America Securities, told TWICE that the difficult economy will likely accelerate the shift in CE market share from weaker retailers to Best Buy and Wal-Mart.

But Matthew Fassler, who follows retail for Goldman Sachs, cut earnings estimates for a dozen leading chains, including Best Buy, Home Depot, Lowe’s and the top three office-supply stores. His reason: recent stagnation in big-ticket purchases in reaction to market turmoil, and a tightening of consumer credit.

Even well-heeled shoppers are tightening their purse strings as anxiety over financial well-being saps spending. More than half of the 4,000 business, technology and medical professionals surveyed by ChangeWave Research in late September said they’ll spend less money over the next three months, down 8 points from August, while a separate ChangeWave study in early September showed that only 14 percent plan to spend more on CE products, down 7 points from August.

Nevertheless, most merchants appear to be taking a bullish approach to the holidays and beyond. Best Buy, for one, is opening more new stores “in a challenging environment that finds many of our competitors retrenching,” president/COO Brian Dunn said in a statement last month. “We believe it’s prudent for strong companies to distance themselves from their competitors during tough times. We know that when the world’s most resilient economy rebounds, we’ll be well-positioned to benefit from it.”

Even HTSA’s Glikes believes there will ultimately be a Christmas, albeit after what he foresees as “probably the worst October I’ve ever seen.

“The good news,” he added, “is that the election will be over in November and the anxiety over that will end.”

John Flanner agreed. “People will have gone through a lot between the election and economy,” he said. “Once the election is over and the bailout becomes established hopefully we can get back to normal.”

In the meantime, Flanner said he is approaching the fourth quarter “with a sense of caution. We are going to have to work harder to find business. We will ask, reach out, to existing customers and new ones to find business.”

In contrast, Huppin of Huppin’s/OneCall said he is planning a “very robust fourth quarter. We’re aggressively going after business — we’re going to make the business happen — because if we don’t try, we won’t do it for sure.

“We still have exciting products, and people love the things we sell,” he said. “Once we get past the pause we’re all experiencing, there will be a lot of pent-up demand, but I’m not waiting for it.”

Some dealers expect that increased competition for consumers’ disappearing disposable income, plus the prospect of a wounded Circuit City, will lead to even steeper-than-usual holiday promotions. DBL’s Chiarelli has heard talk, but has seen no evidence, of a 42-inch flat panel TV that may hit $500 or $600 on Black Friday, while Flanner said promotional activity has already picked up in the marketplace now that Circuit City has entered “a reactive mode.” — Additional reporting by Colleen Bohen